What Does This Mean?
At this stage of the development process, it is now time to do your financial analysis. This Financial Analysis Tool can help identify your project’s financial potential. The tool also helps to leverage grant opportunities and prioritize developments based on challenges. (This Glossary of Terms may also be helpful.)
What Can the Tool be Used For?
The Financial Analysis Tool can be used in a number of ways including:
- Developer fee and building equity can be used as a local match for grant purposes.
- Consider building the financial model with property owners who are interested in investing in their buildings.
- Be prepared to discuss where Main Street can fill the gap with grants and other funding.
Financial Analysis Tool Guide
Cost Tab
The Hard Cost Worksheet identifies and documents the hard costs. This includes the cost to acquire the property, environmental remediation, site work, and other construction costs.
At this stage, you are developing preliminary cost estimates based on the existing conditions. Remember, you don’t have to be perfect and as more information becomes available, you can update the spreadsheet as needed. As you work through this example there are a couple of tips to help you dial in your estimates.
Total Development Cost Budget Tab
The Total Development Cost Worksheet (“TDC”) totals up the hard costs and adds in the “soft costs.” Soft costs are all the non-construction related items, architects and engineering, legal costs, financing, insurance, and marketing. Soft costs are typically around 20 percent of the total development costs, but they can vary. This also includes additional costs you should expect from the General Contractor including overhead and profit along with permit fees and performance bonds.
In the spreadsheet tab provided, the percentages for each area are included in the Excel spreadsheet to help guide you in building the estimate but feel free to adjust as needed. Hard costs refer to all construction materials, labor, equipment, site, and structural work. Permitting fees are also usually included in hard costs. Soft costs are the design, financing, and marketing elements of the project. They include architectural and engineering fees, financing costs, as well as marketing and developer fee.
Pro Forma Operating Statement Tab
The Operating Statement is where you show the future potential revenue from the project. This includes rental income, income from the sale of housing units and leasing income from commercial properties as well as expenses. The goal is to demonstrate sufficient cash flow to fund project debt and investment.
The operating statement includes the following sections:
- Revenue - This is the total income generated from rent payments, fees, or future sale of the property. The total will yield the Effective Gross Income. (“EGI”) Vacancy loss is also factored into the calculation.
- Operating Expenses - Operating Expenses are the cost associated with managing the properties. This includes Fixed Expenses, Variable Expenses, and Operating Reserves.
- Sources & Uses of Funds Tab: The Sources and Uses statement bring together total Development Costs (Uses) with the revenue from the Operating Statement (Sources.). With the total uses of funds totaled at the top of the page, the Sources are then added in to create a financial picture.
- Under the Financing Section, this is where you add in grant dollars, fee waivers and land costs. Remember, you can also add back in a partial deferral of the Developer Fee from the Total Development Cost worksheet. This becomes a contribution that can be credited as a match for grant purposes.