01. Fargo Property Tax Incentive for Roosevelt Family Lofts, LLC

City of Fargo, North Dakota 711 10th Avenue North “But-for” Report|4 Return Analysis In calculating the internal rate of return, PFM first analyzed the Developer’s assumptions including expected monthly rent, vacancy rate, and the operating expenses. The Developer is proposing a rent of $1,175 per month for each unit. The Developer provided estimates of annual operating expenses, as follows; Maintenance - $12,000, Administration - $25,168, Property Tax (PFM adjusted estimate) - $40,450, Utilities - $10,062. The total expenses, assuming the Developer pays full real estate taxes, are approximately 35% of gross operating income. PFM used the given assumptions for Year 1 and, using a 1.5% inflationary factor for expenses and 1.00% for revenues, developed a 10-year cash flow. PFM assumed a vacancy rate of 8% for each year the project is operating. The second step in determining the internal rate of return is to determine the earned incremental value of the property over the 10-year period. That value, along with the net operating income cash flows, was used to calculate the internal rate of return. PFM determined that without PILOT assistance the Developer would have about a 3.90% internal rate of return. The Developer would have about a 7.15% internal rate of return if it received the public assistance for the full 10years. A reasonable rate of return for the proposed project is 10% - 15%. Another measure of feasibility and project viability is the debt coverage ratio. PFM has projected a maximum debt coverage ratio of 1.01x without assistance in the first 10 years with a Year 4 coverage of 0.97x. If the City provided assistance to the project the maximum debt coverage is projected to be 1.20x with a Year 4 coverage of 1.19x. The minimum coverage of 1.08x occurs in Year 6 when the exemption drops from 100% to 50%. Debt coverage is important to developers when securing financing for their projects. Many times banks will require a minimum coverage in the range of 1.10x – 1.50x. The debt service coverage is low for this project due to the minimum, upfront equity contribution which results in more debt. Using PFM’s “without assistance” cash flow as the base scenario, PFM ran sensitivity analyses in order to determine if the project would be likely to occur without public assistance. For the first sensitivity analysis, PFM analyzed how much project funds would have to decrease in order to produce a reasonable internal rate of return. We also looked at how much the rental rates would have to fluctuate in order to achieve a reasonable internal rate of return. Lastly, we looked at a combination of the two scenarios. For the sensitivity analyses, we assumed a minimum internal rate of return of 7.15%. Sensitivity Scenario 1 – Project Costs The project would have to be reduced by $224,999 or 6.96% in order for the project to become viable without assistance. This reduces the amount to be financed from $2,426,249 to $2,257,500 and reduces the annual debt service payment from $172,148 to $160,175. In order to obtain a higher IRR of 10% without assistance, project costs would have to be reduced by $416,999 or 12.89%. This scenario would reduce the amount to be financed from $2,426,249 to $2,113,500 and reduce the annual debt service payment from $172,148 to $149,958. It is somewhat unlikely that a reduction in project costs of this magnitude would occur at this stage in the process, especially in the current inflationary market. Sensitivity Scenario 2 – Rental Rates In order for the project to be viable without public assistance, the rental rate would have to increase by 11.00%. This increases annual revenue from $261,386 to $289,992 in Year 5. In order to obtain a higher IRR of 10% without assistance, the rental rate would have to increase by 20.25%. This increases annual revenue from $261,386 to $314,046 in Year 5. PFM believes this is a large increase to rents and is unlikely to occur.