Phase 2: Planning and Predevelopment

The planning and predevelopment phase moves your project from a general idea to a more detailed project. By the end of this phase, you will have:

• a specific development scope, including a site for your development and the ability to build on it;
• a development team;
• a development site plan;
• and an understanding of the financial feasibility and anticipated costs for your project.
• back-of-the-envelope sources of financing for your project.

Predevelopment is a lengthy, often years-long process, with several different components. Layered over this process is the time, thought, and due diligence that accompanies transactions with Native Tribes and  communities.[i] A development action plan can guide this phase and future phases in the development process. This plan, which is discussed more below, can keep you and your project team organized, including as adjustments are needed, and on schedule.

In the Native context, many tribes use inclusive, deliberative decision-making structures, and decisions affecting your ability to move your initial project concept forward, such as the ability to build on tribal lands or approval of site or building plans (among those tribes that regulate land use and building codes), may be subject to these decision-making processes.

What does it mean to minimize risks and maximize benefits for homes for Native peoples and on tribal lands?

Minimizing risks and maximizing benefits in a Native context requires a holistic lens that seeks to understand the interconnectedness of life across social, economic, physical, and spiritual and cultural dimensions, and by extension, the far-reaching consequences of decisions. Although some of the approaches to thinking about operating costs, competitive financing, and building design may feel foreign, looking at your project through a holistic lens may feel closely connected to traditional teachings. According to the seventh-generation teaching, we have great responsibilities that come with opportunities that impact our family or community’s future.

During the predevelopment phase, you will need to weigh various options and make tradeoffs as you add more specificity and detail to your project. While seventh-generation thinking is applicable across the entire development process, it can be especially useful in thinking about the interrelated impacts during this phase and where you may be willing to make tradeoffs and where you are not. You may also have to continually look ahead to operating costs, project financing, and construction, and as always, this guide is meant to be fluid.

In this section we will cover:

Creating a development plan

A development plan outlines the path to realizing your project and serves as a guide to help you stay organized over the course of the development process.

A development plan should articulate the goals of your project; your development model; key phases and steps to complete your development; and who will be responsible for these steps. The graphic below outlines the key components of a development plan with sample timelines. These timelines are intended for general reference. You can update the template provided with the specific steps, schedule, and roles for your proposed project.

You should treat your development plan as a living document—something to revisit and revise as more information becomes available or the project progresses. In addition to keeping key tasks on track, it can also serve as a communication tool across your project team. Your development plan can highlight how and when different members of your project team will be engaged in the project and build awareness about the key dependencies across the phases of your project.

A note about the timeline
In creating your development action plan, you will need to both understand and account for all the timelines related to your project, including tribal approvals; state and local funding applications; and engagement of tribal leaders and members.

Evaluating housing development models

Though this guide focuses on the development of multifamily housing, TDHEs and other tribal housing developers would benefit from a complete understanding of the development models available. Building off your housing assessment, capacity assessment, and priorities for development, you will have a good baseline for understanding what types of housing development to undertake.[23] A few questions to ask to get started:

• How does each option relate to the housing needs in our community?

• Will each option advance our organizational goals? Is each option consistent with our values and direction?

• What financial implications might each option have for our organization? For the people who will live in the housing we develop?

• What additional zoning and regulatory burdens might each option create?

• Will each option be valued by the broader community or will some be more likely to face opposition or lack of support?

• Do we have experience with any of these options that we could build on? If not, do we feel we could develop the needed expertise to pursue this option?

• Do we know of specific location, site or relationship opportunities that could favor one option over another?

Some key decisions to make when defining your development model include tenure and structure type.

Will your development be rented to tenants or sold to homebuyers?

For-sale. When considering a development that will be sold to homebuyers, the relationship between the expected sale price and the cost of development will be a critical feasibility concern. Loan eligibility requirements for the targeted population and the estimated time the house will be on the market before sale should also be considered. Housing and financial counseling services, including first-time homebuyer training, may also be warranted if your organization is focusing on first-time homebuyers. See Enhancing and Implementing Homeownership Programs in Native Communities

Rental. For a development that will be rented, the financial feasibility will depend on the cost of development, rent levels, taxes, maintenance, and other costs associated with operating the development (see Financial Feasibility). You will likely consider zoning with rental developments, since multifamily rental buildings can be higher density and/or taller than other residential structures, which may impact the areas they can be built in or the related approval process.

Single family structures are those designed for only a single family or household to occupy the building. Many single-family homes are developed to be sold, but they are also an important source of rental housing in many communities. Single family structures can be attached to other adjacent buildings or detached. They can be developed individually or together with other housing as part of a multi-building development.

Multifamily structures have multiple housing units within the same building and on the same lot. Multifamily units can be renter-occupied (apartments) or owner-occupied (condominiums) and can range from small (two- to four-unit buildings) to large (50 or more units). Multifamily buildings create more housing units on a single site and typically result in greater density compared to single family construction. Multifamily buildings larger than four units will likely require different types of financing than single family and one- to four-unit multifamily buildings.

It is important to note that multifamily projects that take advantage of the scale often needed to bring in financing sources like LIHTC are not limited to large box buildings. Multifamily projects could be designed as single story or with independent entry, like townhomes, which might speak better to the landscape and surroundings (See Wa-Di Case Study).

Single-use residential buildings are devoted solely to housing. A single-family home or an apartment building are examples. These are the most straightforward approaches for developing affordable housing. There are fewer actors and public service provisions required. The feasibility assessment and financing will likely be more straightforward than if the building has other uses, as those uses will also generally need some assessment of feasibility to secure funding.

Mixed-use buildings or developments combine housing and other uses within the same building or site. A common example is a residential building with retail or other commercial spaces on the ground floor so that businesses are accessible from the street. Mixed-use developments involve a range of factors that go beyond the scope of this guide relating to commercial real estate development. (See Sail River Case Study)

The chart below outlines key decisions that will help guide your development model decision.

Tenure

• For- Sale

• Rental

• Lease-to-own

• Co-housing

Existing Site Use

• New construction

• Redevelopment

• Rehabilitation

• Adaptive reuse

• Accessory dwelling units

SRUCTURE TYPE

• Single-family
• Multi-family

Building Use

• Single-use residential only
• Mixed-use buildings

Site selection also plays into the housing development model. See Phase IV for more information about project site selection and approvals.

Assessing project feasibility

The next step in the predevelopment process is to assess your project’s feasibility. At this point in the process, you should be investing time and resources into additional study and reviews to demonstrate the viability of your project. This “due diligence” helps ensure your project can move forward with as few disruptions as possible. It’s worth noting that as you invest more time and resources, the less flexibility you may have to make changes to your project.

This section focuses on two areas of due diligence: 1) environmental, focusing on site selection and a project’s surroundings and 2) market feasibility, which includes consideration of affordability needs and costs. Some reviews are required as part of site selection, so you may have already completed some of the analyses and studies highlighted below.

Site selection refers to the process of examining and assessing different land (or existing developments in the case of preservation or adaptive reuse) to determine which site(s) best meet your goals in developing affordable housing. Site selection influences other aspects of your development project, including the overall financial feasibility, design, and ability to align with community needs. This section provides a brief overview of factors that need to be considered: physical and environmental, regulatory, and locational. For a deeper look at these, please see the Design and Approvals Section.

Physical and environmental factors

In addition, if any existing buildings on the site are currently occupied (by residential or commercial tenants), you will determine how to relocate them. If federal funding will support your development, your plan for relocation must comply with the Uniform Relocation Assistance and Real Property Acquisition Policies Act (URA), which establishes standards and requirements for property acquisition and current resident displacement. Depending on the nature of the displacement involved, compliance with this requirement may add significant costs to your development.

Regulatory factors

Locational factors

In addition to evaluating the characteristics of the site, you should also consider where the site is located with respect to your development model, the people it will serve, and your organizational values. For example, the proximity of the site to key services and amenities such as healthcare, childcare and education services may be relevant for the residents you plan to serve.

Your development model should account for your housing affordability goals. Although you may need to make some adjustments based on the results of your feasibility assessments, having targeted affordability ranges will ensure you remain aligned with your goals and help you make other development model decisions.

Affordable housing for your target income ranges can be achieved using a variety of approaches described throughout this guide, but your targeting will influence the tenure and help you determine if you will need a subsidy to achieve and maintain affordability.

Calculating Affordability

Calculating what affordability means for your tribe is important. What level of affordable housing is needed to meet community demand? How do we calculate that affordability?

Housing is generally considered affordable if housing costs represent no more than 30 percent of a household’s gross income on an annual basis. If a resident is paying more than 30 percent of their annual income on housing costs, they are considered cost burdened. For renters, housing costs are generally captured as the total annual costs of rent plus any utilities the tenant pays out of pocket. Capturing these costs annually as opposed to monthly is important because it levels out seasonal or other variations that may occur.

For the purposes of assessing the market and understanding project feasibility, affordable housing developers and practitioners often use a metric known as Area Median Income, or AMI, and express affordability as a percentage of the AMI.

AMI is important to understand because it includes local context in the numbers. Housing affordability can mean very different things in different parts of the United States, and AMI allows us to understand levels of housing need across communities with different market conditions.

For example:

• Someone earning $25,000 per year in a region where the AMI is $50,000 would have an income level of 50 percent of the AMI.

• If that same person lived in a region where the AMI is $31,250, they would have an income level of 80 percent of the AMI.

• Someone earning $25,000 per year in a region where the AMI is $25,000 would have an income level of 100 percent of AMI.

In cases where a development is supported by a subsidy, such as LIHTC, the subsidy may impose restrictions on who can live in the unit based on the percentage of the AMI they earn. In order to provide housing for families at different income levels but still in need of housing, the development could, for example, have 20 apartments affordable to families earning 30 percent of the AMI and another 20 apartments affordable to families earning 50 percent of the AMI. All of these units are considered affordable but include families at different levels of need.

For LIHTC units, rents are usually set at 30 percent of either 50 or 60 percent of the AMI, depending on whichever limit was selected when the credits were awarded. Though this may appear to exclude those families earning incomes below 50% of the AMI, approximately 70 percent of LIHTC households with incomes at or below 30% AMI receive some form of additional rental assistance, according to the National Low Income Housing Coalition. [25] Families that fall below 30 percent of the AMI are typically referred to as extremely low income (ELI). Other categories like very low-income, low-income, and moderate-income are also common.

Housing programs also adjust income thresholds based on household size, accounting for the fact that larger families will need larger units that will cost more. HUD publishes these thresholds based on bedroom size at the county and metropolitan statistical area (MSA) levels. They are updated each year in the HUD Income Limit Tool.

Tribes may adopt a maximum rent policy that sets rents lower than what is allowable by state and federal funding sources (and often these maximum rents are not determined based on a percentage of family incomes, unlike state and federal rent limits).

On the other hand, some tribes may want to provide housing to their community, but struggle to comply with AMI limitations due to gaming per capita payouts, high frequency of public-sector jobs with cost of living adjustments, or a misalignment of average data in remote rural areas. Incorporating housing into community-wide strategic plans early on can help anticipate these problems, as well as early market studies.

We discussed the technicalities of affordability above as it is laid out by federal funders and is required for grants, but often what is top of a tribal leader or member’s mind might be more specific issues related to the community. Issues such as poverty, poor living conditions, addiction and day-to-day hardship for the most vulnerable community members might have surfaced in a Housing Needs Assessment or in community conversations. Native cultures value caring for the community, respecting elders, and healing from trauma and these factors can be addressed with housing. It is important to consider these factors when determining the affordability structure.

Here are some factors to consider when determining what type of project you want to pursue:

• 60 percent of AMI or higher (market rate – rental or homeownership)

• 50 percent of AMI or higher (affordable homeownership)

• 30 percent to 60 percent of AMI (affordable rental)

• Permanent Supportive Housing (PSH) (generally below 30 percent of AMI)

Market Study

A market study examines the housing demand for your development, as well as how your development relates to the overall real-estate environment. A market study demonstrates the “market” for your development: Will there be consumers to live in it and will homes be offered at prices they can afford to pay? Funders will require that you hire a third-party firm to complete a market analysis. While you may hire a third-party to undertake this study, it will be helpful to familiarize yourself with the key components of a market study and how it can strengthen your project. A market study also serves as a risk management tool for your development. It will help you understand project feasibility and highlight areas to refine your project concept for better alignment with local needs and market conditions.

Find common market study terms to know here, and check out our Sample/Example documents for more assistance with requesting a market study! 

Market studies include common pieces of information and analysis. However, as you undertake your market study, there are two key considerations to account for upfront:

• Alignment with funder requirements – Most public and private funding sources require a market study and outline specific requirements for what to include in it. Prior to undertaking your market study, it is important to understand these requirements. Some state housing finance agencies outline them in their Qualified Allocation Plans and issue lists of approved market analysts. Many state housing finance agencies reference the National Council of Housing Market Analysts’ Model Content Standards for Rental Housing Market Studies. These standards highlight specific considerations for market studies for LIHTC and senior rental developments.
   

• Alignment with your housing development model – A market study should be tailored to your housing development model. For instance, subsidized affordable housing may require more detailed analysis to ensure there will be enough households with incomes to qualify to live there and that your development model can sustain enough cash flow from rents or supplemental sources.

Native context issues related to market studies

For development on tribal land, it is especially critical that you have a high-quality market study. Conducting a market study in rural areas and Native contexts pose challenges that will need to be factored into the methods used to conduct your study and selection of a third-party consultant.

Limited data availability

Real estate markets are often assessed based on a comparison approach, which uses recent sales transactions and existing or planned comparable projects to understand market conditions and housing demand. Tribal housing markets with few rental properties; limited development activity; and lack of data availability or uniformity about existing properties may pose challenges for your market analysis and other steps later in the development process, such as gaining an appraisal as part of closing your financing. To overcome this challenge, you may be able to engage tribal planning or housing staff to help provide data and information or arrange tours of tribal lands to help your market analyst understand the context better.

Experience in rural and Native markets
You should strive to work with a market analysis firm with experience in rural and Native contexts. This experience is important for a range of reasons: ability to address lack of data availability and reliability; accurate data trend interpretation; and awareness and comfort of engaging tribal staff. However, additional experience understanding the unique issues facing homes on tribal lands will aid in ensuring common market indicators are not misinterpreted. For instance, vacancy among single-family homes may be due to fractured ownership due to land tenure status rather than lack of demand.

Experience and willingness to work on tribal lands
A market exists for professional real-estate services on tribal lands—with demand for these services projected to grow as more homes are built on them. Yet, many developers working on tribal land experience challenges attracting these services, especially those that may require an analyst to travel to assess a site or gather local perspectives. Recent studies attribute this challenge to the remote locations of many tribal lands, and strong demand for these services outside of tribal communities. Given this challenge, you may want to consider ways to minimize or incentivize travel. You may also want to conduct outreach to other partners to identify opportunities to engage a firm in multiple market studies.

Elements of a market study

• Project description – This description should include information about the building (total buildings, unit mix, utilities, etc.); intended residents; and project-specific information (construction dates, architectural plans). For developments financed using LIHTC, this description should also include unit mix (i.e., bedroom size) by income; minimum and maximum income limits of intended occupants; and any project-based rental subsidies (such as vouchers), including the number of units covered by the subsidy.
• Location – Location will describe characteristics of the project’s site, including its size, shape, and topography; land use (when applicable); locational factors, such as overall accessibility to the site and nearby services and amenities; and any adverse conditions affecting the site. In total, this component aims to assess overall suitability for the project on the proposed site. Supporting information to describe the project’s location may include photographs or maps of the site.
• Market area – The market area will be the primary geography used for market analysis (often referred to as the primary market area). This part of your market study will describe the primary market area for your project and surrounding jurisdictions for context as a secondary market area (such as city, county, or metropolitan area). A common geographic definition to use for a market area is the census tract (the U.S. census bureau’s approximation of a neighborhood). However, the scale and nature of the area where you plan to build will influence how to define your primary market area. For instance, on more rural tribal lands, larger geographic units may be used.
• Employment and economy – The employment and economy portion of your market study will examine the overall economic health of the primary market area. Common measures include total jobs in the market area; labor force participation; wages by occupation; major employers; and recent or planned expansion of employment opportunities. In some tribal communities, high unemployment and rates of poverty help to illustrate to potential funders the dire needs in your community. Tribal planning departments may have access to a lot of this information to pass along to market analysts.
• Demographics – Demographics will describe the population in your primary market area (and any secondary market areas). This portion of your market study will highlight who lives in the market area in terms of household size and composition; age; tenure; and income and any historical population trends. This analysis can also more closely examine population characteristics of your proposed project. For developments financed using LIHTC, this description should also include a more detailed breakdown of incomes among low-income households and data about housing problems, such as cost-burdened households; inadequate facilities; and overcrowding.
• Competitive environment – This part of your market study will analyze the existing rental market in your primary market area. This analysis typically includes an inventory of existing rental housing stock; building activity, including new rental developments; and a comparison of your proposed project to other similar rental developments (often referred to as comparable or “comps”). It also will examine rents and vacancy and absorption rates. For developments financed using LIHTC, your market study should provide a list of existing affordable housing developments in the primary market area and more detailed information about rents (i.e., how your rent structure compares to existing, comparable subsidized properties) and vacancy (i.e., rates by household income and among units with and without project-based subsidies).
• Demand analysis – A demand analysis establishes that there is demand for your development in the primary market area. This analysis would incorporate overall demand; number of income-qualified residents the development would serve; and penetration rate, which measures income-qualified residents relative to other competitive units (existing or proposed). For developments financed using LIHTC, you will need a more detailed analysis about household incomes and incomes by bedroom size. Additionally, some state agencies require demand estimates that account for specific measures or methods, so consult your state’s QAP (Qualified Action Plan) or agency staff to understand any specific needs for this part of your study.
• Local perspectives on rental housing – This component gathers and summarizes local stakeholders (tribal planning staff, tribal housing staff, tribal leaders, representatives from the group or groups who will occupy your project) views of the local housing market and the role of your proposed project relative to demand and need for homes. In addition to helping you understand the market context, this part of your market study can also help you understand overall local support and any potential resources for your project. For developments financed using LIHTC, you may want to do additional engagement of tribal housing organizations and staff to understand the impact of your project on the overall subsidized housing supply (including waitlists for it).

• Permanent Supportive Housing - If you are doing a permanent supportive housing project, your market study provider will need to collect additional data for the market study.  This would include things like: behavioral health utilization numbers, Indian Child Welfare Act cases and incarceration numbers.  This will ensure your market study is capturing the right community members who would benefit from the model.  

Financial Feasibility

The last step in the predevelopment process is to analyze, assemble and secure your project funding. This section highlights the different types of funding you could use; how to work with key partners, such as Native CDFIs; and how to structure your project’s financing using a pro forma.

Determining financial feasibility will help Native developers understand the viability of your project on tribal lands. For a project to be considered viable, the cost of building and operating it must be less than or equal to the income and other funding you anticipate the project to generate or receive. Similar to your assessment of your internal capacity, an initial analysis of financial feasibility will help you determine what you have available and what gaps you need to fill.

To get a baseline understanding of what gaps exist, you may only need to complete “back of the envelope” (BOE) calculations. These calculations can inform the development model that you select as well as the funding sources you decide to pursue. These estimated calculations are not perfect, but they provide quick insight into anticipated cash flow and needs. The simple way to complete a BOE calculation is to estimate expected project income relative to estimated project costs. There are a few online calculators that can help you with this process:

• Grounded Solutions calculator captures more varied building types.

• Urban Institute calculator Limited to rental buildings that are either 50 units or 100 units.

Putting your estimates to work: the pro forma

While estimation tools can provide a helpful starting point, there are three or four pieces of information that you will need to pull from your financial feasibility analysis and present to funders. Together they are generally referred to as a “pro forma” and consist of the following:

1. A development budget, where you detail the costs of building your project and get it ready for people to live in.

2. A sources and uses statement, where you summarize the funding you have relative to the development costs they will cover.

3. A pro forma schedule of income and expenses, where you estimate how your project costs and revenues will accrue over time.

4. In the event you are doing a housing project that will have supportive services such as Permanent Supportive Housing or Assisted Living, you will need to have a fully developed services budget that includes sources and uses.

You can use the pro forma package to test the impact of different components of your development model or different funding sources on your project’s financial feasibility. Ultimately, you will use the pro forma to demonstrate to funders that you need their investment and will be able to pay them back. When preparing your pro forma for funders to review, you may need to provide additional documentation to back up the information included in the package (e.g., if you say you have a certain amount of funding already secured, provide documentation that confirms this).

Types of estimates you will need to complete your pro-forma:

Key definitions

Debt is money you borrow from lenders and pay back at regular intervals; equity is money paid by investors in exchange for partial ownership of the project; and grants are money you do not pay back but are awarded because your project meets the goals of the grantees.

• Cost of land, labor, and materials for acquisition, site work, and construction (AKA “hard costs”)

• Other costs not related to labor and materials, like architect fees and insurance (AKA “soft costs”)

• Anticipated income from the project (residential and commercial rents collected; income from parking, laundry, or service fees; rental assistance) on an annual basis

• Anticipated vacancy rate

• Operating expenses (taxes, insurance costs, utilities that are not paid by tenants, repair and maintenance costs, and other administrative or management costs)

• Operating and replacement reserve budgets, in case there are shortfalls or larger items (like HVAC) need replacement during your building’s lifespan

• Debt service or other financing costs

In the pre-development stage, you will not know for certain how much things will cost or how much funding you will be able to secure. As a result, this analysis will be based on a series of estimates and assumptions about your development model, information from your Project Team, plus data collected for the market analysis. As you gather more information about costs and funding, you should revisit your feasibility analysis and adjust for accuracy. A prof-forma should be continually refined and returned throughout the development process.

Many affordable housing projects need to engage a consultant or technical assistance provider to perform a full financial analysis to demonstrate that a project is a sound investment. In many cases this will be your development partner who will fulfill this role. Engaging an expert to perform a financial analysis is another opportunity to learn from an experienced partner and build capacity for financial analysis in-house. All development partners should also be involved in the financial feasibility assessment process to ensure they understand and are able to communicate the results.

Development budget

A development budget captures all costs required to build your project and place it in service (or have it generally ready for occupancy). Link to pro-forma Tool

The development budget includes the following costs:

• Land and site work costs

• Construction or rehabilitation costs

• Professional fees, including consulting costs

• Interim construction costs

• Permanent financing costs

• Soft costs, which are costs not directly related to construction labor and building materials. This includes costs such as architecture, engineering, permitting, and legal fees. Some soft costs such as insurance may continue after construction is completed.

• Predevelopment costs (Development costs that are incurred prior to construction, such as those described in the predevelopment section of this guide. This consists mainly of soft costs but will not be the only part of the process where soft costs are incurred.)

• Basic furnishings and equipment if doing a project that will serve very low income residents with services.

• Developer fee

• Project reserves

The sum of costs across each category represents your total development cost (TDC).

 

What is the difference between construction financing and permanent financing?

Construction loans are shorter-term financing, only intended to cover project costs during the construction phase. After construction is completed, this debt is converted to a permanent loan to be paid back (or amortized) over a longer period. This period can range from 5 to 40 years.

Sources and uses statement

A sources and uses of funds statement is used to summarize your project’s financing and how that compares to your TDCs. In other words, do you have sufficient funding to cover the costs of building your project?

This statement should capture all sources of financing, their amounts, and what costs they will cover. You have already calculated your “uses” in your development budget. These are your costs within each category mentioned above. You may want or be required to include additional detail about each source of financing, such as the type (loan, grant, tax credit, in-kind support, equity investment, etc.) and whether the funding is private or public (federal, state, or local).

Have this statement prepared before you seek funding from a lender or additional funder and include documentation to demonstrate that the funding listed in the statement has been secured. This may include award and commitment letters or partnership agreements.

A sources and uses of funds statement does not include the details of when your costs and revenues will accrue over your project’s lifetime. Those details are included on your pro forma schedule of income and expenses (or cash flow analysis). See the Financial Modeling Tool and Guidance for more specific guidance and a template you can use for your own analysis. There are two sheets that help you analyze the short term and long term revenue and costs of the project in the Financial Modeling Tool.

Operating pro-forma

The Operating Pro-forma helps to assess the amount of square footage developed relative to the amount of revenue it will generate. Do your best to get accurate data, as inaccurate assumptions can lead to dramatic swings in actual property performance. There are several factors that need to be considered to derive an accurate Operating Pro-Forma.

15-year financing pro-forma

• Costs to Operate –

• Salaries: do you need to pay a full-time or part time property manager, is there a way to spread this position over a few properties?

• Trash

• Snow removal

• Property insurance

• Reserves

• Type of units (number of bedrooms and baths per units)

• Number of each type of unit

• Projected rents: You need to assess Fair Market Rents in your area. Make sure projected rents are reflective of current market conditions for comparable properties in your area. If you have project-based vouchers, you can assume full rent for residents at varying incomes. If not, rents should be scaled to remain affordable to the target income brackets you are setting out to serve. See calculating affordability.

The 15-year financing pro-forma will help you assess some key financial metrics for your development. The most common metrics lenders and funders will use to determine whether and how much debt they will offer to a project are the Debt Service Coverage Ratio (DCR, DSC, or DSCR) and loan-to-value ratio (LTV or LVR). Lenders use these metrics to evaluate how likely they are to be repaid for a loan. Recognizing financial analyses are built on assumptions, lenders look for additional cushion between your Net Operating Income (NOI) and the amount of debt they will authorize for your project.

The DCR, which is a ratio of your cash flow to debt payment, reflects the amount of this cushion a lender is looking for. Lenders often seek a 1.25 minimum DCR, meaning that your project cash flow must be equal to or greater than 1.25 times your required debt service. Some lenders will use lower DCR (e.g., 1.15) based on their risk tolerance or perception of risk.

The LTV reflects the maximum debt a lender can offer to a project as a percentage of the property value. A range of 0.7 to 0.8 (or 70 percent to 80 percent) LTV is common. The estimated property value used in this ratio is usually based on an appraisal. For instance, if your property’s appraised value is $100,000 and your lender has a 0.75 LTV standard, the maximum loan they can provide to your project is $75,000.

It is possible a lender will provide less than the maximum amount their LTV standard allows, depending on their assessment of your project’s risk, including whether your project meets their standard DCR and other funding sources you have secured.

With your pro-forma package estimates, you will be able to project how much of a gap you have between income and expenses (i.e., your “Net Operating Income” or NOI) and how much cash you may have on-hand after paying your debt service (i.e., your “cash flow”). If either of these figures are negative, you will need to find additional funding to close that gap and/or adjust your development model (number of units, square footage, design features) to reduce costs.