2008.07.21 EDA Packet - Laserfiche WebLink

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City of Hugo, Minnesota-Frenchman Centre Redevelopment July 18, 2008 Page 2 The Developer pro forma assumes a net rental rate of $16.80 per square foot, with the tenant responsible for all additional expenses, such as common area maintenance, insurance, and property taxes. The Developer has included a 10% vacancy factor in their pro forma. We assumed a 2% inflation factor for both revenues and expenses. It should be noted that higher than projected least rates, or lower than expected vacancy rates, will result in the Developer realizing a rate of return greater than what is indicated in our analysis. Springsted included a hypothetical sale of the asset based on the following assumptions: o A Fair Market Value of $4,631,206 determined using an 8.5% capitalization rate. (Based upon today's market,this is an acceptable rate for a potential purchaser of investment real estate) o Deduct 3%for the cost of the sale o Deduct$2,169,748 which is the remaining principal balance on the permanent loan o Results in net sale proceeds of$2,322,522 Three calculations used to determine a project's rate of return in order to address the but-for question include: (1) Cash on Cash Return (annual test) o measures the return on cash invested in an income producing property o calculated by dividing annual net cash flow(NO1 minus debt service plus reserve deposits plus TIF reimbursement)by the amount of equity invested and is expressed as a percentage (2) Internal Rate of Return(IRR) (tested for the term of the pro-forma) o measures the average annual yield on an investment o analyzes a series of cash flows based on the original equity to determine what the interest rate received for an investment consisting of payments (negative values) and income (positive values) that occur at regular(annual)periods (3) Return on Investment(ROI) (tested for the term of the pro-forma) o measures the amount of profit a property generates after a certain period of time Developers are typically interested in the cash on cash rate of return and return on investment to determine the profitability of income producing properties. The cash on cash method considers the net cash flow as a measure of the equity invested to determine the Developer's cash return. An investor is typically interested in the internal rate of return of the project to determine the return on their initial investment, generally over a longer period. In this case, the Developer and investor is the same party. The internal rate of return measurement is typically what is used by public agencies to determine the need for a subsidy. Our methodology is to estimate all three calculations to help measure the project's financial performance with and without the assistance in order to address the but-for question. Should a return lie below a reasonable range without a subsidy, we can assume the project will not move forward without such subsidy. Should a return lie within a reasonable range with a subsidy,we can assume the amount of subsidy tested is appropriate for the project.All such estimates should be viewed as general indicators of performance and not exact forecasts. The number of current and future variables affecting these estimates is great, and any variation in such estimates can have significant impact on the calculated returns. Specifically, a change in the Developer's permanent financing vehicle that reduces annual debt expenditures,all things being equal,would increase their returns. Cash on Cash Without assistance the project is expected to generate low cash on cash returns, after the first year ranging from 0.44% to 7.97% in year 11. With the assistance the project is expected to generate returns ranging from 4.25% to 13.88% in year 11. A projected sale of the asset is not considered in the calculation of cash on cash return.