Financing Small Mixed Use Projects
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The document discusses the financing of small mixed-use projects, using the case study of 47 Railroad Street in Great Barrington, Massachusetts, to explore the perspectives of lenders, developers, and planners. Key elements of development economics, project feasibility, zoning considerations, and financial viability are highlighted, emphasizing the iterative nature of the feasibility process. The document also outlines strategies for successful project financing and addresses challenges faced in the development process.
Financing Small Mixed Use Projects
- 1. FINANCING SMALL MIXED USE PROJECTS A Case Study of 47 Railroad Street, Great Barrington Massachusetts Association of Planning Directors 2017 Annual Conference, Pittsfield, MA Chris Kinne, Vice President, Commercial Lending, Lee Bank Ian Rasch, Principal, Alander Construction & Framework Properties Angus Jennings, AICP, AG Jennings, LLC Christopher Rembold, AICP, Town of Great Barrington
- 2. • To understand the financial realities of successful development • To understand what lenders look for • To understand what developers do • To understand the planner’s role in a successful development By focusing on a case study in Great Barrington Objectives 2
- 3. A. Overview • The development feasibility process • Great Barrington’s downtown development goals and objectives B. The Lender: • The Lender’s perspective / the lending process: underwriting criteria, “bankability,” red flags they look for, and the process C. The Developer: • 47 Railroad Street mixed-use development • Meeting the Town’s goals, the Lender’s goals, and making it happen D. The Planner: • The Planner’s role in the development process • The role of zoning… including what zoning should and should not do Outline 3
- 4. • 4 Components • Physical Feasibility • Market Feasibility • Legal Feasibility • Financial Feasibility • Not a linear process. Rather, it’s highly iterative. Each of the above informs the other and happen more or less simultaneously. • Which components should the Planners care about? The Lenders? The Developers? • Which can we actually influence? The Feasibility Process 4
- 5. • Rental income must cover the cost of Operating Expenses + Debt Service + Debt Service Coverage • Development Budget: • Uses of funds • Preconstruction costs • Acquisition (including cleanup, etc.) • Design costs and permitting costs • Legal, project management, and other costs • Construction costs (the “bricks and mortar”) • Fees • Loan fees and interest • Developer fees • Sources of funds • Equity • your cash or (preferably somebody else’s), maybe a grant (investor’s need a return for their money) • Debt • The construction loan. Borrowing a sum up front, and paying it back over time – how much you can borrow depends on how much income you have to pay it back) Basic Development Economics
- 6. • Rental income must cover the cost of Operating Expenses + Debt Service + Debt Service Coverage • Operating Budget: • Expenses • All of the costs to operate a building, e.g. utilities, management, taxes, reserves, etc.) as well as the monthly payment on your debt (mortgage) • Income • Monthly rents (or proceeds from sales) • Ideally, income should be 1.25 more than expenses (if the ratio is lower, like 1.1, then your loan rates may be higher, or you might not get a loan) Basic Development Economics
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- 11. • Core Initiatives of our Master Plan • Character: • Direct development and growth into the village centers… • Protect the special places and features that contribute to downtown’s character… • Facilitate development of existing structures and redevelopment of built sites • Encourage infill… • Commerce: • Promote economic development appropriately scaled to downtown… • Our zoning implements these initiatives… 11 Downtown Great Barrington
- 12. • Downtown Business District zoning 12 Downtown Great Barrington
- 13. • Village Center Overlay District zoning 13 Downtown Great Barrington
- 15. • Looking for an experienced developer with a strong architect, general contractor, and legal counsel • Does the borrower have cash behind them? Does the borrower personally have “ skin in the game”? • Is there a market? Are the rents achievable? 15 The Lender’s Perspective
- 16. • Debt Service Coverage (DSC) is the main driver • A debt service coverage ratio is one of the most classic and most important underwriting ratios. It gives the bank a quick and easy way to look into the borrower’s cash flow thus their ability to service the debt. • Debt Service Coverage Ratio = Net operating income / Debt Service • minimum DSC of 1.25x for most mixed used properties. For more specialized properties like hotels, banks will want strong DSC ratios of say 1.40x or greater. 16 The Lender’s Perspective
- 17. • Factors Banks consider when looking at DSC and cash flow: • Beyond real estate taxes, insurance, etc. the bank needs to also make sure that vacancy, management fees and replacement reserves are considered • Vacancy – How much vacancy is applied to the rents really depends on the location, the market, etc. It can range from 3% to 15% depending upon the property with the most common being 6% vacancy rate. Conservative lenders will estimate on the high side and aggressive lenders will use a lower vacancy. (If they really want the deal) • Management fees – Another underwriting expense that is taken out even if a borrower plans to manage the property themselves. The amount depends on the leases and how they are structured but anywhere from 2%-5%. Again this is subjective based upon the lenders perception and risk/desire to lend • Replacement reserves- Another expense that needs to be considered. It covers general repair costs that may incur going forward. On multi-family properties it is usually a dollar amount per unit and on other properties, such as retail or office is 1% to 3% of gross rents. 17 The Lender’s Perspective
- 18. • RED FLAGS • Developer stretching in terms of expected rents to meet the 1.25X DSC ratio • Developer stretching in terms of expenses in order to meet the 1.25X DSC to obtain financing • Borrower puts very little of their own money into the deal “skin in the game” • Unwillingness to provide a personal guarantee • Not willing or unable to put funds aside to meet capital or reserve requirements 18 The Lender’s Perspective
- 19. • The Construction Process • Bank provides an interest only construction period which gives the borrower time to build and then time to get tenants into the project and begin paying rents. • The borrower is expected to inject all of their equity into the project before the bank begins to disburse the loan proceeds. This way the bank knows that they are holding enough money to complete project • Upon the request of the developer for funds and depending upon the size and complexity of the project the bank may send out a project supervisor to ensure that the works is coming along as planned. Approve of the advance of funds. • If any time there are cost overruns the bank and developer should have a discussion as to how this will be handled. COMMUNICATION IS THE KEY! 19 The Lender’s Perspective
- 21. • 47 Railroad Street case study 21
- 22. 22 Location
- 23. 23 Location
- 26. 26 Town Facades
- 27. 27 Storefronts
- 28. 28 Signage
- 29. 29 Lighting
- 31. 31 47 RR: Redevelopment Program • Gross Square Footage: 26,000 SF • Residential Area: 67% • Commercial Area: 33% • 1 Bedroom Units: 10 • 2 Bedroom Units: 3 • Retail Units: 4 • Total # of Units: 17 • Zoning and Use: B District, Village Center Overlay District • Permitting: Special Permit Required Substantial Renovation
- 32. 32 Site Plan
- 33. 33 Floor Plans
- 34. 34 Floor Plans
- 35. 35 Floor Plans
- 36. 36 Floor Plans
- 37. 37 Floor Plans
- 38. 38 Elevations
- 39. • Does the market need my project? • Will the municipality want my project? • Can I bear the cost of getting the project to the point of construction? • Scheduled tasks and costs • Sources of funding for each task • Will the project, if built, be profitable? • Overall profitability based on project value less project cost • Amount of debt, amount of equity • Project Return is expressed in many different ways • Gross Rent Multiplier • Cash-on-Cash • Return on Costs • Return on Equity • Net Present Value • Internal Rate of Return • Hurdle Rate 39 Key Project Planning Questions
- 40. 40 47 RR: Funding Program Conventional Financing Proposed • Acquisition $2,350,000 • Permanent Debt 70% $1,645,000 • Equity 30% $705,000 • Improvements $4,407,660 • Permanent Debt 70% $3,085,362 • Equity 30% $1,322,298 Total Development $6,757,660 • Total Debt $4,730,362 • Total Equity $2,027,298
- 41. 41 47 RR Development Budget Summary
- 42. 42 47 RR Operating Pro Forma & Income Statement
- 43. 43 47 RR Operating Pro Forma & Income Statement
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- 73. 73 The Developer’s Perspective • Town’s Goals • Village center zoning: • Pedestrian focus • Mixed use • Historic buildings • Economic revitalization • Meet the Planner early – do the back of the envelope proforma, initial “Go” or “No Go” decision • And then talk to the Planner again! • Lender’s Goals • Development capacity / Financial capacity / Viable project • No project without all three • Proforma: rent levels, vacancy, debt service coverage ratio
- 74. 74 The Developer’s Perspective • Things that make it feasible • Building was 75% vacant at purchase – converted to residenital/retail • Increased the density with 10,000 sf addition, 75% lot coverage • GB is a high rent market • Owner/developer/builder – a cost efficient “all in one shop” • VCOD zoning and a community lender • 100% market rate, and traditional debt/equity structure • Reasonable 2.5 year timeline from acquisition to lease up
- 75. 75 The Developer’s Perspective • Things that make it difficult • Low rent market: Howard and Onota buildings in Pittsfield • Tax credits: historic, new market, LIHTC, TIFF • Long timelines of 4 or 5 years • Levels of fees for Owners, Contractors, Design Team • Construction costs and Soft costs: relative stability across secondary and tertiary markets. The variables are the land cost and the rent • Rents are the biggest driver • Things that would make it better: • Increase in density to 4 or 5 stories • Less than 30 units – very tough to pencil out • More flexible zoning • Work with developers to make sure your zoning bylaws work
- 77. • Planner’s role before purchase, and during the feasibility process • Explaining the permitting process and the Town’s goals for the area • Helping developer understand the risks • Zoning • The importance of getting the zoning right • What zoning should do to increase possibility of small mixed-use projects / how good zoning can increase feasibility • What zoning should not do / how bad zoning can decrease feasibility 77 The Planner’s Role
- 78. Christopher Rembold, AICP Great Barrington Town Planner 413-528-1619. x7 crembold@townofgb.org Chris Kinne, Vice President, Commercial Lending Lee Bank 413-243-9295 ckinne@leebank.com Ian Rasch, Principal, Alander Construction & Framework Properties ifrasch@gmail.com Angus Jennings, AICP AG Jennings, LLC agjennings@icloud.com 78 Thank You!