Laying the Foundation: Strategies for Real Estate Development and Financing

Transcription

1 Strengthening nonprofits and the communities they serve Laying the Foundation: Strategies for Real Estate Development and Financing 2014 Nonprofit Finance and Sustainability Conference February 25, 2014

2 Who We Are Serving Midwest nonprofits from offices in Chicago, St. Louis, Milwaukee, Indianapolis and Detroit. Funded through investment and support from banks, insurance companies, religious investors, foundations and government Provides significant experience with staff backgrounds in: commercial banking, community and economic development, nonprofit operations, real estate, planning, engineering, green design, and architecture 2

3 Strengthening Nonprofits Through our loans and real estate consulting, IFF helps nonprofits in the Midwest plan, find, finance, and develop their facilities. We have also created comprehensive solutions in the areas where innovation was needed most. Building stronger schools Revitalizing communities through affordable housing Improving health care facility design and finance Providing energy efficiency solutions Increasing access to fresh, healthy food 3

4 Key Strategies to Contain New Facility Costs 4

5 Budget Project Parameters 5

6 Sample Space Plan PROGRAM SPACE # of rooms SqFt. per room Total SqFt. needed Classroom/Training ,600 Counseling rooms Conference room ADMINISTRATION # of employees # SqFt. per employee Total SqFt. needed Executive Director Director of Counseling Social workers Reception Area/Admin Area MISCELLANEOUS # of rooms SqFt. per room Total SqFt. needed Kitchen/Pantry Toilet Rooms Maintenance % 1,340 TOTAL SPACE NEEDED 5,805 Square Feet 6

7 Full-Scale School Classrooms/Program Space Minimum Allowance Workable Allowance 8,500 14,500 Administrative Offices Misc. Support Spaces (Gym, lunch, etc) 26,842 33,108 Circulation 9,015 12,127 TOTAL 45,077 60,635 Phase One School Minimum Allowance Workable Allowance Classrooms/Program Space 4,800 8,400 Administrative Offices Misc. Support Spaces (Gym, lunch, etc) 13,275 19,525 Circulation 4,699 7,206 TOTAL 23,494 36,031 7

8 New Operating Budget Components Mortgage or lease/ taxes/ insurance Utilities Maintenance Payroll Administration Capital Reserves 8

9 Sample Operating Proforma Scenario A Continuing to Rent Year 1 Year 5 Year 10 Revenue 908, ,304 1,085,647 Expenses 885, ,904 1,073,858 Net Operating Income/ Cash Flow 22,804 20,399 11,789 Scenario B Purchasing new site Year 1 Year 5 Year 10 Revenue 908, ,304 1,085,647 Expenses 851, ,167 1,018,146 Net Operating Income 56,435 61,137 67,500 Debt Service 49,074 49,074 49,074 Cash Flow After Debt 7,361 12,063 18,427 9

10 Lease or Buy? Lease No upfront costs Flexibility for future Less responsibility for maintenance Landlord pays for improvements Adds to landlord assets Renovation costs Buy Long term solution More control over property Adds to agency assets Real estate appreciation Significant upfront costs Renovation costs 10

11 Project Development Budget Property Acquisition Construction ( Hard Costs) Soft Costs Architecture/Engineering Financing, legal Developer/project manager Furniture and Equipment Other Contingency Construction Interest Organizational/ramp-up costs Technical Assistance Worksheet #8: Creating a Project Development Budget 11

12 Sample Development Budget Acquisition $1,382,327 Hard Costs $373,038 Soft Costs $78,469 Furniture, Fixtures, and Equipment $72,000 Contingency $78,526 Total $1,984,360 12

13 Know What You Are Buying Zoning/code review Building systems Layout/fit of the program Renovation cost estimate Title search (for purchase) Appraisal (for purchase) Further environmental testing Conversations with funders 13

14 Key Members of the Project Team Owner s Representative / Project Manager Guides the agency through each step of the process Negotiates prices and coordinates the activities of involved parties Architect Prepares the design documents Prepares the contract documents (drawings and detail on actual work to be completed, materials to use) General Contractor On site management of entire construction process Performs actual work or hires subcontractors 14

15 Where s the Money? Short term liquidity working capital Operating cash reserves from Net Assets Operating grants from Government/Foundations Lines of credit from Banks Facility investment Capital grants from Government/Foundations Loans from Banks and CDFIs (Community Development Financial Institutions) Other financing options Bonds, New Market Tax Credits 15

16 Financing: Sources Project financing can be as simple as securing a single loan or grant Project Costs $ Amount Sources of Funds $ Amount Acquisition 275,000 Agency equity 300,000 Renovation 300,000 Loan 275,000 Total $575,000 Total $575,000 16

17 Financing: Sources Or more complicated involving many layers of financing. Project Costs $ Amount Sources of Funds $ Amount Acquisition 1,900,000 Loan 1,300,000 Construction 10,950,953 LIHTC equity 8,071,727 Soft costs 1,486,083 HOME loans 3,250,000 Reserves 339,050 Ground lease 1,900,000 Developer fee 1,574,844 Bank legal equity 50,000 Foundation grant 600,000 Government grant 239,082 Donation tax credits 258,000 Energy tax credits 36,632 Federal loan 252,000 Deferred developer fee 293,489 Total $16,250,930 Total $16,250,930 Coordinating the timing of financing sources and construction timelines is critical to project success. 17

18 Important Five Factors Organizational Capacity 1 Financial Capacity 2 Capital 3 Collateral 4 Conditions 5 18

19 Important Five Factors 1. Organizational Capacity Management experience and track record Board composition, structure and engagement Business model and program outcomes Industry reputation and standing Policies, procedures, systems and controls 19

20 Important Five Factors 2. Financial Capacity Revenue mix, operating costs and profitability Liquidity and Cash Flow Leverage and Capital Adequacy Credit experience and track record 20

21 Important Five Factors 3. Capital Cash Investment or Contribution to Project Sourced from existing reserves Sourced from grants (government/foundations) Cash or other resources to support project risk Cash to support start up expenses 21

22 Important Five Factors 4. Collateral- Second Way Out Building site and new project Equipment Other assets (buildings, pledges, cash) 22

23 Important Five Factors 5. Conditions Market demand Competitive landscape Legislative concerns Sector risks Demographic served Economy 23

24 What s My Capacity? How much do I need to borrow? Facility expansion project costs Start up expenses operating losses What are the Uses and Available Sources? USES SOURCES LAND ACQUISITION 500,000 BORROWER CASH? CONSTRUCTION/ EQUIPMENT 1,750,000 GRANTS/ FUNDRAISING? SOFT COSTS/OTHER 250,000 DEBT? TOTAL $2,500,000 TOTAL $2,500,000

25 What s My Capacity? What are the drivers of borrowing capacity? Cash flow to support debt payments Net assets to support total debt Collateral to secure debt

26 What if I m not ready? Assess your strengths and weaknesses from a lender s perspective using the five factors Determine what steps can be taken to strengthen your organization s application Seek specific input and guidance from your bank or lender to acquire potential resources or external expertise Work with your board and leadership team to establish benchmarks to achieve access to capital 26

27 Am I talking to the right lender? Capacity: What is my lender s willingness to lend in my sector/business? Can they provide access to a variety of credit solutions? Understanding: How well does my lender understand my business? Will they be a long term partner? Community/Market Expertise: Do they understand my community/market? Terms: Do they have competitive terms? Response: Is the application process adequately responsive? 27

28 Online resources Additional information available at iff.org: iff.org/tools-and-resources for podcasts and technical assistance worksheets The page also hosts a list of links to dozens of other websites to reference! 28

29 Strengthening nonprofits and the communities they serve Questions? Lucy Tuck VP of Capital Solutions Heather Heaviland Director of Real Estate Services