Home Ownership Development Toolbox
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B. What To Include In a Single-Family Pro Forma

The Community Developer should be prepared to generate two types of project development pro formas - one for the lender and/or subsidy funder in the format listed in the lender's or funder's application package and one for yourself in a format and level of depth that helps you keep track of how every dollar flows in and out of a project. Many lenders, funders and project managers (as they develop their expertise in single family housing development) use their own standardized formats. The bottom line numbers must be the same for all formats generated.

The following is a list of schedules that should be included in any comprehensive pro forma for single-family development. This applies for single unit or multi-unit projects:

1. Target Homebuyer Affordability Analysis

2. Project Development Budget

3. Schedule of Permanent Sources that includes analysis of:


bulletAs-Is And As-Completed Appraised Values
bulletRange Of Sales Prices And House Types
bulletPer Unit Subsidy From Each Prospective Source



4. Project Development Cash Flow that helps calculate:


bulletHome Sales Absorption
bulletConstruction Loan amount
bulletInterest to be paid

The following are some descriptions of components of each of these schedules in the Project Development Proforma.

1. Target Homebuyer Affordability Analysis
In Section IC2 of this Toolbox a Homebuyer Pre-Qualification Template is provided that helps calculate answers to the questions from the buyer's perspective:


bullet"How much of a house purchase price can I afford?"
bullet"What will be my monthly payment?"
bullet"How much cash do I need for down payment and closing costs?"

Answers to these questions are calculated based on the income of the prospective buyer. The Target Homebuyer Affordability Analysis answers similar questions, but from the developer's perspective. The answers are based on either the affordability parameters of target income groups or a targeted sale price that the developer needs to reach. Therefore the developer is looking to answer the questions:

bullet"What is the maximum house sale price that can be charged within the range of affordability of the targeted income groups (for example households earning 40% to 80% of Area Median Income)?
bullet"What variables can be modified to make the sale price more affordable to the target income groups?"

The following is a list of variables that can be modified to improve the affordability of a targeted income group:

Housing-to-Income Ratio:

Mortgage industry maximum for conventional home mortgages is 28% of a household's gross income. This can be dedicated to payment of principal, interest, taxes and insurance (PITI). For first-time buyers special programs extend the Housing-to-Income Ratio to 33%, which allows the buyer to dedicate a greater portion of their income to servicing a home loan, which results in the ability to afford a larger loan amount.

Loan-to-Value Ratio (LTV):

Mortgage industry requires a minimum down payment of 20% of the appraised value of a house, which results in a loan-to-value ratio of 80% for conventional home loans.

LTV requirements can be increased up to 97% (Fannie Mae/Freddie Mac) and even 100% (bank CRA Portfolio) when first-time buyers do not have great sums of cash, but do earn steady incomes and are purchasing modestly priced homes.

For loans sold to the secondary market through Fannie Mae or Freddie Mac that carry an LTV of more than 80%, an extra charge for private mortgage insurance is required since the lender will take what is considered a higher level of risk with a lower down payment coming from the buyer.

Mortgage Interest Rate:

The cost to borrow money from a lender.

Interest rates are set based on the term of the loan (the longer the term the higher the interest rate and the LTV (the lower the LTV the less risk and the lower the interest rate). Loans funded through Mortgage Revenue Bonds from the Ohio Housing Finance Agency often have interest rates below market rates.

Mortgage Term:

The longer the term for repaying a loan the smaller the monthly payment.

All conventional home loans have a maximum repayment term of 30 years. The longer the repayment term, the more interest paid over the life of the loan. Therefore, some buyers choose shorter repayment terms in order to own a home free and clear in a shorter period of time.

Secondary Financing:

Traditional bank or mortgage company lenders are in first lien position and will be paid back first from any foreclosure proceedings. Many housing subsidy providers provide second mortgages that offer lower interest rates that increase the purchase power of the homebuyer.

Real Estate Taxes:

Payment of real estate taxes in housing and community development can often be a major political issue in terms of all citizens paying their "fair share" for government services. In order to provide an incentive to move to a targeted area, a City or County may provide an abatement or waiver of real estate taxes. The reduction in tax payments means there is more of the buyer's income that can be dedicated to home mortgage debt service which can increase purchase power.

Down Payment and Closing Cost Assistance:

First-time Homebuyers, especially those earning lower incomes, can access loans or grants from public or private sector subsidy sources that reduce the amount of cash they must provide at settlement.


2. Project Development Budget
The Project Development Budget answers the question: "How much will it cost to build the project?" The Project Development Budget should model the line items that your City, County and/or State housing department use. Most development budgets are divided according to the following sections:



A. Predevelopment:
Costs associated with professional services inspections such as environmental, survey, architectural & engineering, market analysis and appraisal that help determine the feasibility of the project.

B. Building or Land Acquisition:
Costs to acquire building(s) and/or land for development. This can also include settlement costs and relocation.

C. Hard Construction:
Costs of labor, materials and services that are directly associated with building construction. While "bricks and mortar" costs such as building materials and labor are standard hard costs, the costs of building approvals, permits, bonding, environmental abatement and contractor profit are considered Hard Costs. Prudent developers include a Contingency for unforeseen construction costs in their Hard Construction Cost budget.

A separate and more detailed Scope Of Construction Schedule should be generated with your general contractor, which forms the basis of the construction line items that will be used to monitor requests for contractor payments.

D. Soft Costs:
This can include the costs of professional services such as legal, accounting, title and marketing for the sale of houses as well as carrying and financing costs such as taxes and insurance paid during construction, inspections, bank fees and construction interest. The amount of interest accrued from a construction loan can best be calculated by generating a Project Development Cash Flow Schedule. Predevelopment and developer fees are also soft costs, but for analytical purposes they should be separated. With experience, the developer should develope a per unit percentage as a rule of thumb.

E. Developer Fee:
This is the fee for the developer's project management services and return on their investment of money and professional expertise. Most lenders and funders require the Developer Fee to be paid after all other interim financing is repaid. If there is a shortfall of project funds, the Developer Fee is the first to be proportionately reduced.

 


3. Schedule of Permanent Sources
This schedule answers the questions:


bullet"How much is the funding Gap?"
bullet"At what price should houses be sold?"
bullet"How much additional subsidy needs to be raised to make the project feasible?"

A. Sources and Uses:
As mentioned in Financial Feasibility, Section IVA, the process of financial feasibility analysis should begin at the end in terms of making sure permanent sources equal uses. If uses (development budget) exceed sources the project has a funding gap. All permanent sources such as homebuyer proceeds (sale price, or home mortgage amount plus down payment) plus any additional sources of subordinate financing and subsidy are totaled and subtracted from total project development costs to calculate how much is the gap.

B. Appraisal Analysis:
This section includes a listing of the "as-complete" (after construction) appraised values for the houses under development, which provides the basis for setting the sales prices for the properties.

C. Sales Proceeds Based On Product Mix:
If several different types of houses are being developed and/or at different scattered-site locations, then each house should be listed with its targeted sales price. The sum of all of these sale prices totals homebuyer proceeds. This schedule helps the developer determine the mix of houses targeted to specific income groups. For example:


In a 10-unit project in order to maximize subsidy, four houses are targeted to families earning 30% to 50% of area median income and six houses are targeted to families earning 50% to 80% area median income.


Sales prices are set based on their appraised values. However, the final home mortgage amounts are set based on the affordability needs of the targeted homebuyer groups. If the appraised sale price is too expensive, then the amount of the mortgage needs to be reduced to meet the housing-to-income affordability ratios. A direct subsidy either in the form of a grant or below-market interest rate subordinate loan is often used to write down the amount of the buyer's purchase costs.

4. Project Development Cash Flow
The Project Development Cash Flow Schedule answers the questions:


bulletWhat is a reasonable schedule for the sale of the houses (Sales Absorption)?
bulletHow much of a Construction Loan amount is needed?
bulletHow much interest will be accrued on the Construction Loan?


The Project Development Cash Flow is another extension of "Sources equals Uses" analysis where the element of time is added. It tracks what money (sources) go into the project and when. It tracks how much and when money is spent (uses). The Cash Flow asks whether Sources equal Uses each month during the development of the project.

The Cash Flow tracks the draws, interest accrued and repayments on the construction loan. A prudent developer tries to spend grant funds or equity first and then draw on interim and/or construction financing last. The greater the construction loan and the longer it is outstanding, the more interest accrues on the project.

The primary source of repayment on a construction loan is the proceeds from the sales of houses. The Cash Flow establishes an estimated schedule of home sales absorption. The faster a house sells, the sooner the construction loan can be repaid and the less interest accrues.

At the end, Cash Flow Sources must equal Uses and the construction loan balance must be reduced to zero.

Next: B1. Tips for Generating Pro Formas for Single-Family Homeownership

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