Portfolio Strengthening Application FY15-2 Instructions

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Hilary Powell
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1 Portfolio Strengthening Application FY15-2 Instructions Purpose: This resource opportunity is intended to strategically leverage NeighborWorks America resources in alliance with other resources to achieve sustainability or to substantially strengthen the parent organization through portfolio performance. The funding awarded from this resource opportunity is NOT intended to fund operational deficits. It is also understood that NeighborWorks America will not fund a full portfolio plan. Portfolio strengthening is about a creating a portfolio to sustain the organization over time, so please think BIG. Over the past three years this program has become more rigorous. To be considered for funding, prior Portfolio Strengthening grant recipients that did not attend the Portfolio Strengthening clinics (years ) must update earlier plans and describe the results of prior grants. To compete for this grant, all organizations will devise and submit a general comprehensive Portfolio Plan that achieves operating sustainability within a three year period or demonstrates substantial increased cash flow or decreased risk to the parent organization. Your application should include a narrative Portfolio Plan, Portfolio Strengthening Grant Application Template (Excel spreadsheet), and a copy of your organization s Asset Management Plan. Please download the Portfolio Strengthening Grant Application Template (Excel file) from the application page. The narrative Portfolio Plan should clearly explain how its required sources will produce the projected portfolio strengthening outcome. Additional details of the Narrative Portfolio Plan components are outlined below. Objectives should be specific, measurable and set forth with their projected timing. The pro formas should clearly demonstrate how the subject properties operations and the organization s bottom line would be affected WITH and WITHOUT the grant and plan. (When considering impact on the organization, take into account any restriction on the distribution of surplus cash; however, do not include discretionary or voluntary retention of cash by the property unless it is specifically needed for capital repairs/replacements to be made in subsequent years.) Eligibility: NeighborWorks organization participants in the Portfolio Strengthening Clinics of , and recipients of prior NeighborWorks Portfolio Strengthening grants, are eligible to apply for this resource opportunity if they have received less than three capital grants under this program. Narrative Portfolio Plan Components Please include the following details in your Narrative Plan. Attach that document AND the completed Portfolio Strengthening Grant Application Template (Excel file) and Asset Management Plan to your application in GrantWorks. I. Organizational Structure/Plan How your real estate line of business currently operates and changes that you envision does your Real Estate department make or lose money? Does your portfolio make of lose money? Will your plan impact this? A. Briefly indicate the source of the challenges or opportunities the portfolio is facing. If the portfolio problems are limited to certain properties, indicate if the issue is project specific and not organizational. If your plan is oriented more toward opportunity, be sure to demonstrate the financial impact on the properties and the organization (including property management). 1

2 Note: When responding, remember portfolio sustainability includes how future deals are structured. B. Indicate how you plan on using Portfolio Strengthening Grant funds as an incentive or lever to attract additional resources and stakeholder participation. C. If you received a prior Portfolio Strengthening grant, indicate any changes that have taken place as a result of that funding. D. Outline the organization s plan to address the identified problem sources. Key Organizational items might include: 1. Market (competition) 2. Market (neighborhood, economic and demographic challenges) 3. Optimistic underwriting 4. Property Management capacity 5. Asset Management capacity 6. Excessive organizational debt 7. Capital deficiency of the organization Note: An item such as vacancy is not a cause; it is a consequence. II. Portfolio In addition to including this information in the narrative Plan, all applicants must attach the completed Portfolio Strengthening Grant Application Template which summarizes current operations and projections and prior plans and results. Instructions for the template are located in the 1 st tab titled Instructions. The template is ordered as follows: Plans & Funds This summarizes the plans, use of funds, and projected results for the grant opportunity. NWO Tracking & Prior Results- Summarizes the current grant request and properties for which a Portfolio Strengthening Grant is being requested that have also received previous NWA grants (since 11/01/2006). Pro Forma Summary & the tabs titled PROP-1, PROP-2 etc.- are to be used to complete the Plans & Funds and the NWO Tracking & Prior Results tab. Summary instructions are contained in the labeled tab labeled Instructions and extended directions on using the PROP-1, PROP-2 tabs are below. A. What is a rough estimate of total amount of funds for the portfolio (or sub portfolio, including the two target properties) to create a sustainable portfolio? B. Using the same portfolio or sub portfolio briefly describe how: 1. The organization plans to improve all underperforming properties. 2. What the total cost estimates might be to bring the properties up to sustainability. Enter detailed financial information in the Portfolio Strengthening Grant Application Template spreadsheet. You may include properties that have a positive cash flow but could be improved to provide a larger cash flow to the organization. C. For each Target Property 1. What is the total grant amount request for target property? a. Identify the key issues that are affecting the target property; quantify when possible. Example: High vacancy 5% above underwriting assumption; comparison to comparable in portfolio and area. 2

3 b. If applicable, identify the Capital Investment required to meet capital needs analysis. c. Identify costs to make the property competitive in the market place and/or energy efficient. d. If existing debt reduction or modification is a target of your plan, include information on the existing debt (current balance, interest rate, amortization period, due date, and required monthly payments) as well as your assumptions for the new or modified/restructured debt. 2. Provide the general outlined plan, including costs and outcomes for the target property (specifics of the plan should be included in the attached spreadsheet). D. If your plan is oriented more toward opportunity for growth than management of risk, be sure to specify and quantify the opportunity for your organization - and also risk that may be entailed. PROP-1, PROP-2, Extended Instructions Overview of Model This model is designed to support your explorations into the operating characteristics of your properties, and your search for opportunities to improve, re-work and restructure them for improved outcomes. The workbook contains ten sheets (named PROP-1 through PROP-10), permitting you to model and explore outcomes on up to ten assets. The first worksheet (PRO FORMA SUMMARY NO INPUTS!!) aggregates key data on each of the sheets (assets). In addition, for illustration purposes there is a sheet called SAMPLE 01, which should help you to see how to complete the worksheet. Each PROP worksheet is self-contained. You will need only to fill a PROP sheet out for each asset you want to explore. While the sheet is large, it is set up to print onto six landscape-format sheets, with identifying footers. The general approach will be to set key assumptions and parameters concerning an asset, then to explore the impacts of rents, expenses, and refinancing. The approach will be intricate and detailed for certain key assets (your most likely candidates); however the same worksheet can be used in an abridged fashion, if you input only category-level expense data. The results of these analyses should be used in filling out Plans & Funds and the NWO Tracking & Prior Results. The PROP Worksheet Note, references are to Excel rows (numbered), columns (lettered), or cells. Only the orange-shaded, blue-text cells are for user-input. All other cells calculate automatically. (Color may appear pink or peach). The instructions below will be limited to areas we believe require explanation, only. Self-evident inputs and outputs are not discussed. If you have questions, please contact us. The sheets are password-protected, to prevent inadvertent changes that corrupt the calculations. If you are experienced with Excel, and desire to make changes, the password is a single blank character. Rents and Income This section permits you to input your unit- and affordability-mix, your utility allowances, and your estimate of maximum market rent potential, and will calculate the maximum applicable rents. You may be charging less, however. The sheet is interested in the rents to which you are legally and regulatory bound. 3

4 person VLI and 2014 AMI Input these amounts into B8 and B9, respectively AMI is a hyperlink which will take you to the appropriate resource for identifying these limits for the County or MSA in which the property is located. Vouchers % FMR If tenant-paid rental assistance vouchers are based on a percentage of Fair Market Rents (FMR), make that setting at B13. U/A Input the applicable utility allowances at E8:E12. If utilities are property-paid, enter $0 in all cases FMR Click on the title cell for (F6) to go to the appropriate resource for identifying these limits for the County or MSA in which the property is located. Input accordingly. Project-Based 8 Rents if there are project-based Section 8 units at the property, input the rents from the Housing Assistance Payments Contract, accordingly. ESTIMATED Market Rents Always (even if you do not have market units), input your best data on what the market rent potential is for each unit-type. If you have a variety of outcomes because you have multiple floor plans, you will have to calculate and input average rents for each unit type. The worksheet does not support that calculation. If you do not have market rent from comps, please take your best guess. If you put in a 0, the calculations will not be useful. Unit Mix At this table (rows 15-22) input the unit mix. Each unit should appear only one time. If a unit is serving double-duty (i.e., it is both High-HOME and 60% LIHTC), then input it under type with the more-restrictive rent. Note that there are columns for High HOME, Low HOME, Vouchers, Project- Based Section 8 (PB 8), 30%, 40%, 50%, 60%, 80%, and 100% of AMI. If you have other restriction levels, there are two special columns (120% and 33%, at Cells L16 and M16, respectively) where you can input those AMI-based rent restrictions. For example, if you have units restricted at 45% of AMI (and because there is no pre-set 45% of AMI category), you can set that percentage in Cell L16 or M16. Rent calculations will correspond. Note additionally that there is a column for unrestricted units ( Market Rent, Column N). Put any units which are not bound by a rent restriction here. Your internally-imposed restrictions do not apply for this exercise. Actual Rents At this table, (rows 24-30), the applicable rents will be displayed. The table displays the lesser of the AMI-based rent restriction, or market rent (except for vouchers and PB 8 units). If the HOME or AMI-based rent is being limited by the effective market rent, the cell will appear with a red background. If the rent is being limited by HOME or the AMI-based limit, the amount displayed will appear with a standard, orange background. All rents in this table have subtracted the utility allowance, if one has been input. Lastly, note that the amounts can be overridden by you. If you believe the calculation is wrong, or a different amount should apply, input that. Remember, however, these are net rents, after utility allowances. Maximum Rents These three tables (rows 32-57) display the maximum gross rents (before utility allowances, maximum net rents (after utility allowances) and effective maximum rents (the lesser of the net rents or the market rents). These are for reference only. Historical Income + Income Loss This (short) section requires that you input the GPR and rent loss for the three prior years. Historical GPR Input the GPR for the three prior years. This should be the amount earned in each year if all of the units paid all of the rent charged in that year. Later, in the proforma, the As-Is Proforma relies on the 2013 GPR as a starting point. 4

5 Historical Vacancy Loss The actual amount lost to vacancy, in each year. Historical Bad Debt -- The actual amount lost to bad debt, in each year. If you do not write off bad debt, you will have to estimate the amount of bad debt that was incurred in each year. Estimate of Operating Expenses This section allows detailed inputs on historical operating expenses (or permits you to short-cut those by inputting only category level data). Use your audits to input actuals for 2012, 2013 and The worksheet provides helpful data on the average amounts for these years, trended to That is, in column G, the amount is the average of 2011 trended four years, 2012 trended three years, etc. In column H, the output is only the 2012 amount, trended forward two years. Columns G and H are for reference, to help you make a budgeting decision about You can use either of these numbers or neither (and input what you believe to be the correct number if these trending s do not represent an appropriate amount for the budget item. For example, if your budgeted amount is projected to be lower than the historical, trended amount because of you propose an investment in more efficient mechanical systems, or tax abatement, input a budgeted amount accordingly. The purpose of this section is to derive a concluded 2014 operating budget for the asset. If you already have a conclusion or if you do not which to granularly input all these items, you may use category-level inputs in the available rows (e.g., Administrative: Other/No Category ). Operating Cash Flow Projection AS IS This sheet requires certain inputs regarding assumptions, and illustrates the corresponding proforma. Note that the proforma is truncated to show years 1-5, 10, 15, 20, 25, and 30. The As-Is Proforma is driven by certain inputs: Gross Potential Rent the starting GPR is the amount from your inputs at the Rents and Income section. Rents Inflation Factor the default rate is 2%. If you feel that a different input for this asset is appropriate, revise the assumption. Vacancy Loss (Historical is XXX %) the default is the average historical from Cell I105. If you believe for the As-Is Proforma that the historical average should be overridden, do so. Bad Debt (Historical is XXX%) The default is the average historical from Cell I107. If you believe for the As-Is Proforma that the historical average should be overridden, do so. Comm'l Income Inflation Factor The default rate is 2%. If you feel that a different input for this asset is appropriate, revise the assumption. Allowance for Comm. Rent Loss The default rate is 10%. If you feel that a different input for this asset is appropriate, revise the assumption. Other Income Inflation Factor The default rate is 2%. If you feel that a different input for this asset is appropriate, revise the assumption. Rsrvs & OpEx Inflation Factor The default rate is 3%. If you feel that a different input for this asset is appropriate, revise the assumption. R4R Deposit PUPA Input the required reserve for replacement deposit (expressed in terms of dollars per unit per year). Req d Op Rsv Deposit PUPA If the property is required to make deposits from operations into an operating reserve, input the required operating reserve deposit (expressed in terms of dollars per unit per year). 5

6 Current 1st DS (Enter Neg) Enter the annual payment requirement for required, 1 st Lien Debt Service here. Enter as a negative number. Current 2nd DS (Enter Neg) Enter the annual payment requirement for required Other Lien Debt Service here. Enter as a negative number. The resulting proforma (rows ) illustrates the EGI, NOI, CF, DSCR and Cushion (cash flow as a percentage of operating expenses) for the As-Is Scenario. That is, this Scenario shows current GPR (adjusted for inflation), 2014 budgeted operating expenses, current debt, projected vacancy loss and bad debt, trended as indicated. Sensitivity Analysis This section allows you to explore the impact of changes to the rents, expenses, and debt. Rent Increase (Decrease) Compare the 2015 GPR in the As-Is Proforma (which should be your maximum achievable GPR based on your inputs in the Rents and Income Section) with your historical GPR. For example, in SAMPLE 01, the 2015 GPR is $469,416 (Cell D192). This is based on the amount at O24, trended to the first year of the proforma (one year, at 2% in SAMPLE 01). In SAMPLE 01, the user has assumed that the GPR can be higher than historical ($365,000 in 2013, Cell F103), but can t quite rise to the maximum permissible GPR ($469,461 in Cell E231), so the user has input a reduction of (1%), resulting in GPR of $492,887 (Cell E232). Current Rents (Trended) % AMI The 2013 GPR (F103), trended to 2015, expressed a percentage of the GPR at rents equal to 100% AMI. That is, if GPR at 100% AMI were $1M, and actual GPR was $550K, then actual GPR would be equal to rents at 55% of AMI. This provides a view into the overall affordability level. Proposed Rents % of AMI As above, but comparing the proposed rents after adjustment, to AMI. Vacancy Loss (Historical is XXX%) The default is based on what you entered in the As-Is Scenario. Leave, or revise if you have a basis for anticipating a change (e.g., new management agent). Operating Expense Increase (Decrease) Just as you can model percentage-based increases and decreases to income, you can make a similar, wholesale revision to OpEx. Use this for explorations into the outcomes from various reduction strategies. Bad Debt (Historical is XXX%)-- The default is based on what you entered in the As-Is Scenario. Leave, or revise if you have a basis for anticipating a change (e.g., new management agent). Replacement Reserve Deposit PUPA The default is based on what you entered in the As-Is Scenario. Leave, or revise if you have a basis for anticipating a change (or to explore the impact of changes). Analyze with Refinancing of Debt? Select Yes to see what happens when you refinance, select No to use the debt service amount you input at Cell B207 and B208. Proposed Hard Debt This only applies if you have selected the Yes to the question Analyze w/ Refinancing of Debt?. Either input the amount of debt, or use the amount at F222, which results from the DSCR you input at Cell F221. Current Hard Debt Balance Input the outstanding balance on your hard debt. Refinance Rate input the likely rate you would get on a refinancing of the mortgage. Refinance Term (YRS AMO) input the amortization term (in years) you would likely get on a refinancing of the mortgage. 6

7 Resulting DS, pa This is the debt service on Proposed Hard Debt, at the indicated rate and amortization. This amount goes into the proforma based on the Sensitivity Analysis inputs, if you have selected Yes to Analyze with Refinancing of Debt? Cash Surplus (Deficit) on Refinancing if you refinance, at the indicated amount and terms, you may either have a (shortfall) relative to your existing debt (Cell C223), or a surplus. Operating Cash Flow Projection WITH ADJUSTMENTS FROM SENSITIVITY ANALYSIS ABOVE This section has no user inputs; it shows the outcomes of your inputs in the section above. For example, in SAMPLE 01, the outcome is as follows: Current rents ($365,000 GPR in at Cell F103) are 36% of AMI (I226), but can be raised to $469,416 (E192). However, they will be underwritten at 5% above (C215) that achievable outcome to $492,887 (D232). This results in rents that are 48% of AMI, overall (I227) Historical expenses in were $353K, $301K, and $342K, respectively. The trended average of those three years is $342K, and 2013 trended is $300K. The property is underwritten at $300K (Row 188). The property is projected to operate in 2014 at a 2.48 DSCR (E211). At a 1.30 DSCR (F221), the property can support a $1,797,500 loan (F222). This property could conceivably access $1,047,500 in equity (I225). Again, if you have any questions please feel free to contact us. Contacts: Harold Nassau, hnassau@nw.org, Erika Brice, ebrice@nw.org,

Portfolio Metrics Impact on the Owner

Portfolio Metrics Impact on the Owner Harold Nassau Director of Asset Management NeighborWorks America CHAM TOTAL OPERATING REVENUE TOTAL OPERATING EXPENSES NET OPERATING INCOME/(LOSS) CASH FLOW TO/FROM