Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism 41 Sentinel Road Washington Crossing, PA

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism For Prospective Communities Financing Strategies Financing Source Access Development Costing & Phasing Feasibility analysis Business Plans Marketing Plans For Ongoing Developments Oversight Financial Reporting Preparation of Control & Operating Reports Cash Flow Management Lender & Investor Relations Assessment if Housing Product Monitor Construction Costs & Timing

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism Tools for TND Profitability and Capital Sourcing Congress for the New Urbanism CNU XII June 24, 2004

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism Todays Presentation 1.Purpose Establish 7 Principles for TND Economic Success Describe The Business Plan Three powerful uses of the Business Plan 2.No pictures or graphics or dramatic renderings. Todays topics are more like a root canal. No fun to experience, but demonstrably beneficial in the long run.

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism SEVEN PRINCIPLES FOR SUCCESS

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism Seven Principles to Achieve a Financially Successful TND Land Strategies 1.Buy the right land 2.Buy the land right Marketing Strategies 3.Identify and exploit competitive advantage 4.Maximize early sales absorption 5.Emphasize housing strategy to create Neighborhoods

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism Seven Principles to Achieve a Financially Successful TND (Contd) Cost Control Strategies 6.Understand and control all of the 5 cost categories 7.Apply phasing principles to reduce inventories

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism Why are these principles so important? 1.Represent basic blocking and tackling – fundamentals for success in any real estate project. 2.The Seven Principles create a level playing field in the TND challenge to suburban sprawl. 3.Source of most TND difficulties? Lapse in Housing Strategy Knowledge and Control of Costs Phasing

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism THE BUSINESS PLAN

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism Business Plan - Primary tool to implement the 7 Principles 1.Provides clarity - vital & versatile, but often misunderstood 2.Demonstrates broad overview of Marketing, Financial, Cash Flow Expectations, providing credibility to potential lenders or investors 3.Serves equally well as a Project Control Tool after operations have commenced

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism When To Prepare the Business Plan? 1.Assembled prior to land closing 2.Business Plan is the primary due diligence tool Created in tandem with the Design charette Gauges overall feasibility of the project, before financing is obtained

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism Three Key Uses of the Business Plan 1.Shows-Multiple applications of the Strategic Cash Flow Pro Forma Model 2.Explores- Capital Financing alternatives 3.Controls the Project- When things are upside down

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism STRATEGIC CASH FLOW PRO FORMA MODEL

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism The Strategic Cash Flow Pro Forma 1.Three basic purposes Planning and control tool, using modeling capabilities Provides analysis of what if scenarios Prediction of financial returns 2.It is a Long Term Cash Flow Model. Often confused with a cash flow budget. Metric Cause and Effect Relationships Formula driven Segregates Operations from Financing Other top down review features 3.Starting Point and Major Tool to Analyze Capital Financing Options

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism Example of a Cash Flow Budget (Request Spreadsheet from Tucker & Associates, Inc.)

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism Example of Strategic Cash Flow Pro Forma Model (Request Spreadsheet from Tucker & Associates, Inc.)

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism CAPITAL FINANCING OVERVIEW

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism Capital Financing Strategic Goals 1.First Goal: Finance the project 2.Second Goal: Meet needs of owner/developer in 3 ways: No loan guarantees Minimum up front cash investment Maximum cash flow returns from the project 3.Starting Point: annual projected cash flow from the project itself, before financing (separate operating cash flow from financing issues)

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism Capital Financing Strategy: many possible choices In order of need: 1.Pursuit or Predevelopment Capital 2.Land Purchase Financing 3.Conventional Development Bank Financing: 4.Infrastructure/offsite Bond Financing 5.Alternative Equity Sources: Outside investors of many kinds 6.Developer Equity Investment: Injected by the project owner

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism Pursuit Capital 1.Seed money to pay for due diligence before closing land purchase Predevelopment needs, such as Charette and Business Plan Entitlements and engineering Land option payments 2.Frequently over $500,000, plus any land options/earnest money 3.Highest risk capital. Cannot borrow it because entitlements not in place 4.Typically funded by the developer

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism Land Purchase Financing 1.Phased land purchase program is primary form of land financing Typically a Joint Venture with the land owner who contributes land as a project investment Ideal land sellers: Institutions and deep pocket individuals who are captivated by Smart Growth 2.Bulk Purchase with a non recourse note can achieve the same results

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism Infrastructure/Offsite Development financing 1.Publicly sponsored special purpose bonds (CID or TIF) 2.Requires a governmental sponsor and eligible project costs 3.Cost of servicing bonds passed on to homeowner 4.Typically non recourse to developer, but May require credit enhancement Secured by project performance (developer must fund shortfall caused by inadequate sales).

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism Conventional Bank Financing of Development 1.Sole purpose of the loan Smoothes/Reduces front-end cash deficits. Defers loan retirement until project generates cash. 2.Reduces need for equity investors in early deficit years Loan interest cheaper than yields required by equity investors Smoothing improves the project IRR – making project more attractive. 3.Downside: developer guarantee or cash equity demanded, unless land seller will subordinate to the bank.

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism Alternative Equity sources Land Owner or other passive Joint Venture partner Institutional (Smart Growth Oriented REITs or Foundations) Retail Private Placements - marketed to Limited Partners by brokerage firms. Individuals with high yield/high risk appetites Developer/Owner cash, e.g., pursuit capital

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism Typical deal structure for equity investors Investor Commitment: Fund all annual project cash deficits, up to predetermined cap. Investor receives (or accrues) annual priority interest on amounts invested to date from available project cash flow. After receiving all priority interest and original investment, investor shares remaining available annual cash with developer, at a predetermined ratio, until minimum investor yield is met. Ratio of cash to investor and developer then changes in developers favor.

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism TURNAROUND REMEDIES

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism When Things Go Upside Down 1.Good News: When overall demand softens, a good TNDs market share increases relative to suburban projects 2.Caution! Rise in interest rates is imminent, so drop in overall residential demand is still likely to erode TND sales. 3.Only four other causes of cash flow shortfalls – all project specific: Poor Demand (Low Sales) – competitive positioning or housing program mistakes. Bad timing – phasing or delays Cost overruns Inadequate capitalization 4.When cash flow is short, developer must think and act outside the box

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism Strategic and Operating Remedies 1. Operating Remedies Most fertile ground: changes in housing strategies or policies, based on review of the 7 Principles Review operations, head counts and expense controls Reduce size and pace of new phases, including amenities, Town Center Re bid development costs 2.Cash Flow Pro Forma Model can simulate impact of each contemplated change.

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism Strategic Remedies Resist a Site Plan Overhaul Introduce More Courtyard or High Density SFD Types to Increase Density/lower Prices (but Maintain Overall Project Integrity) Maintain TND Design Standards, Despite Pressure to Reduce Housing Prices Perfect More Entitlements – With a TND Overlay Over Conventional Zoning

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism If More Radical Surgery Required 1.Create a Hybrid TND, by Selective Bulk Sales or Introducing Selective Production Housing 2.Try to Increase Density, While Renegotiating Debt/equity Payback Terms. 3.Defer or Re-design High Cost Infrastructure Such As the Town Center

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism So When Trouble Comes, Can Your TND Survive? Since Mid-90s, Most TNDs Have Proved Fixable, Without Abandoning New Urbanist Principles We Have Managed 3 Turnarounds and Numerous Shaky Start Ups. None Have Failed So Far. The Main Ingredient: Developers Courage to Consider Radical Changes More Importantly, Build a Credible Business Plan in the First Place.

Tucker & Associates, Inc. Financial and Development Strategies for New Urbanism