2. Improving Communities Enhancing Lives NDC is the nation’s oldest non-profit provider of community development technical assistance and training

3. A Powerful Mission Increasing the flow of capital for investment, jobs and community development to distressed urban and rural communities throughout the U.S.

4. Partners in Community Development Since 1969 NDC works in partnership with local and state governments and non-profit organizations to help them build their communities and economies The Pub Group in Portland, OR

5. Partners in Community Development Technical Assistance NDC defines, designs and executes development and business finance strategies, programs and projects NDC identifies, secures and structures public and private financing and develops project from concept to completion Bijou Theatre in Bridgeport, CT

6. Partners in Community Development NDC Training & Professional Certification NDC offers courses designed to give participants the skills and knowledge they need to successfully facilitate housing and economic development in the communities where they live and work NDC’s Chuck Depew teaching Mixed-Use Real Estate Finance

7. Partners in Community Development NDC Corporate Equity Fund As an equity investor, NDC finances affordable housing and historic preservation Dublin Road Townhomes in Mankato, MN

8. Partners in Community Development NDC Grow America Fund NDC creates jobs and economic development with direct small business lending with a focus on women and minority-owned businesses Red Barn Pet Products in Long Beach, CA

9. Partners in Community Development NDC Housing and Economic Development Corporation NDC finances and builds community and public facilities on behalf of our client communities Redmond City Hall in Redmond, WA

10. Partners in Community Development HEDC New Markets As one of the leading non- profit participants in the New Markets Tax Credits program, NDC provides technical assistance and NMTC financing for economic and community development projects YMCA in Albany, NY

11. Evaluating A Project’s Need for Public Gap Financing 11

12. A project’s financing gap is defined as the difference between projected costs (uses) and the debt and equity (sources) it can reasonably attract as follows: Project Costs -Bank Loan -Equity =Gap 12 Evaluating A Project’s Need for Public Gap Financing

13. Project Costs – are they reasonable & adequate? -Bank Loan – maximized? -Equity – fair return without undue enrichment? =Gap – are there public sources available to close? 13 Defining the Financing Gap

14. Project Costs Often Greater Than Completed Value But...debt and equity are a function of value, not cost Where project costs exceed fair market value, there will likely be a need for federal, state and/or local economic development resources to get the project done 14 A Fundamental Problem in Real Estate Finance

15. Cost-Value Differential Example 15

16. Why Do Economic Development Projects Require Public Sector Assistance? Project Costs > FMV Investors see inadequate Return on Investment (ROI) Lenders see unacceptable Level of Risk 16

17. Investors are seeking to maximize economic benefits and minimize equity investment Looking to invest in projects yielding the highest Return On Investment (ROI) Concerned about the liquidity of the investment (can it be sold to free up equity for next opportunity) 17 Investor’s Perspective

18. Lenders are risk limiters, not profit maximizers Lending is a low-margin, high-volume business No “upside" for lenders Marginal return on investment (interest) Expected return of investment (principal) Fixed returns Will participate but want to mitigate all risks 18 Lender’s Perspective

19. Project Sources and Uses Structuring the Project Sources of funds must be equal to uses of fund Identify all project costs (uses) Acquisition Construction Soft costs and Reserves Identify all project sources Debt Equity Public Gap Financing If uses are greater than sources, find additional sources 19

20. Sources and Uses Sources Bank$ 6,000,000 Equity 2,335,000 $ 8,335,000 Uses (Project Cost Summary) Land $ 100,000 Site Improvements 200,000 Construction – Shell 5,000,000 Parking 50,000 Architect and Engineering 200,000 Tenant Improvements 1,000,000 Legal and Accounting50,000 Permanent Loan Fees 90,000 Construction Loan Fees 120,000 Organizational Expenses 40,000 Construction Interest300,000 Marketing 60,000 Property Taxes25,000 Lease-up Reserves 600,000 Developer Fee200,000 Contingency300,000 Total Project Cost $ 8,335,000 20

21. Lender Underwriting / Debt Capacity The maximum loan amount will be determined by the lender’s primary underwriting criteria: Debt Coverage Ratio (DCR) Loan to Value Ratio (LTV) 21

22. Permanent Lender Underwriting (cont.) Debt Coverage Ratio (DCR) DCR = NOI D/S Measures project's ability to repay loan from revenues (lender's "first way out“) Higher the DCR, lower the risk Typical DCRs: 1.10 to 1.35 22

23. Loan-to-Value Ratio (LTV) LTV = Loan Amount FMV (Fair Market Value) Measures project's ability to repay loan from sale of the asset (lender's "second way out") Lower the LTV, lower the risk Typical historical LTV: 75% Permanent Lender Underwriting (cont.) 23

24. Sizing Equity: Three Benefits of Investing in Real Estate Investors/developers seek three benefits when investing in real estate: Cash Flow Tax Benefits Appreciation Investors want all three benefits, but cash flow requirement is first because it is the most immediate and tangible benefit National Development Council

25. Cash Flow Income -Operating Costs -Debt Service =Cash Flow 25 Benefits of Owning Real Estate (cont.)

26. Tax Benefits – two main benefits Income tax deferral from depreciation Income Tax Reduction from Tax Credits (Historic) Rehabilitation Tax Credits Low-Income Housing Tax Credits New Markets Tax Credits (Renewable Energy) Investment Tax Credit National Development Council 26 Benefits of Owning Real Estate (cont.)

27. Appreciation Selling Price -Purchase Price =Appreciation in Value 27 Benefits of Owning Real Estate (cont.)

28. 28 Time Value of Money Investors demand a return on their money given their perception of: Risk Inflation Opportunity Costs These three factors determine the discount rate. The discount rate converts a future value to a present value The discount rate is the same as the investor's desired rate of return

29. 29 Valuing Investor Benefit 15% Discount Factor YearRTCLIHTCs After-Tax Cash Flow Total Benefits After Taxes Discount FactorPV 140014430574.870495 214428172.756130 314426170.658112 414424168.57296 514422166.49782 614420164.43271 714418162.37661 814416160.32752 914414158.28445 1014412156.24739 4001,4402102,0501,187 PV is what an investor who demands a 15 percent return would be willing to invest in equity to receive the prospective benefits stream outlined above.

30. Reduce Development Costs Discounted or donated properties Fund infrastructure and site work through general obligation bonds Reduce Cost of Capital Lower price and longer term Make Capital more Readily Available Subordinated (junior) financing Stretch debt Reduce equity Loan guarantees 30 Filling the Gap: The Public Toolbox

31. Decrease Operating Costs to Expand Borrowing Capacity and Equity Attraction Tax abatements or Payments in Lieu of Taxes (PILOTs) Utility savings Attract outside Equity State and federal tax credits in exchange for equity Types of federal credits Low-Income Housing Tax Credits Historic Rehabilitation Tax Credits New Market Tax Credits Investment (Renewable Energy) Tax Credits 31 Filling the Gap: The Public Toolbox (cont.)

32. Attract Grants Less commonly available these days Always tied to public benefit standards Monetize Tax Increment Tax Increment Financing (TIF) Using future tax increment to finance up-front capital costs, especially infrastructure 32 Filling the Gap: The Public Toolbox (cont.)

33. For More Information Tom Jackson, Director tjackson@nationaldevelopmentcouncil.org New York OfficeTraining Division 708 Third Avenue, Suite 710927 Dudley Road New York, NY 10017Edgewood, KY 41017 212-682-1106 0ffice859-578-4850 Office www.nationaldevelopmentcouncil.org