B1. Tips for Generating Proformas

Producing a comprehensive pro forma for a single-family development project is an evolutionary process where the role of the Project Manager is to gather information from a range of sources that may include:

Hard bids from contractors and professional service providers Quotes from contractors and professional service providers Experience of other developers, lenders, funders and housing professionals Requirements of funder or lenders (such as cost of lender's legal services, inspections or caps on certain fees) Personal professional experience and judgment

Each line item in a pro forma (Latin: according to form) is a collection of assumptions and/or calculations of how your project will be developed and will perform in the marketplace. Your role as the Project Manager is to know the rationale for every single line item and/or calculation in the entire proforma. The "buck stops" with the Project Manager in terms of knowing the plan for exactly how the project will be developed.

Assumptions expressed in financial terms in the pro forma should reflect the programmatic goals of your homeownership development project. For example, if the mission of your organization includes preservation of the housing stock and development of homeownership housing for low-income families, then in financial terms the project pro forma might include:

Rehabilitation of older, blighted houses Home sales targeted to families earning no more than 80% of area median income Subsidies to buy down mortgages so that families earning no more than 80% of area median income can afford a mortgage payment that does not exceed 28% of their gross income Down payment and closing cost assistance that limits the buyer's total cash for closing to 3% of the sale price or $2,000, whichever is less.

The proforma is the principal vehicle to help the Project Manager conduct a "What If" analysis. Therefore, it is revised often as assumptions are tested, feasibility is analyzed and issues are clarified.

The following are some tips to consider as you design and generate pro forma for your single-family housing development projects.

1. Target Home Buyer Affordability Analysis

A. Do Not Maximize the Housing-to-Income Ratio Even though most first-time homebuyer mortgages allow housing-to-income ratios of up to 33% of a household's gross income it is prudent for the affordable housing developer to estimate the maximum families can pay for their housing payment (principal, interest, taxes and insurance) at 25 to 28%. The costs of education, childcare, healthcare and cars have risen faster than the prices of houses in communities targeted for revitalization. A lower housing-to-income ratio does not over-extend the finances of first-time homebuyers and set them up for failure. By not maximizing the housing-to-income ratio, there is some discretionary cash available for savings, maintenance and the many unforeseen costs of homeownership. B. Set the Range of Affordability at 5% to 10% Below the Maximum Target Income The following are reasonable ranges of "Minimum Qualifying Incomes" necessary to set sale prices that meet the income restrictions of your homeownership development program.

Income Limit Area Median Income ("AMI")	Minimum Qualifying Income to support home loan to purchase house	Range of Affordability for prospective buyers in target income group
50% of AMI	40% of AMI	10%
80% of AMI	50% of AMI	30%

If your goal is to serve buyers who earn no more than 50% of Area Median Income, then your Homebuyer Affordability Analysis should show a "Minimum Qualifying Income" in the range of 40% of AMI so that you have a range of incomes that can qualify to support the necessary first mortgage and in turn have flexibility in qualifying prospective buyers. The Homebuyer Affordability Schedule in Section IV. B2 " Pro Forma Template" shows that the range of affordability for families earning 50% of median income or below on a $60,000 sale price and 97% home mortgage is between $28,650 and $24,440. Families earning over $28,650 exceed the 50% of AMI limit (for a family of 4) and families earning below $24,440 cannot afford the debt service on the home loan (unless the terms of the financing are modified with a reduction in interest rate or higher housing-to-income ratio). C. Sale Prices Should Be Set Based On As-Completed Appraisals The cost of financing a home should be subsidized, not its value in a neighborhood market. Therefore sale prices should be set based on the market values of houses produced. The tool for making a house more affordable to a low income buyer is a mortgage write-down subsidy that travels with the income-qualified buyer, not the house. D. Provide Buyers With Choices of Affordable and Accessible Mortgages Programs A good home mortgage involves more than just a low interest rate. The developer should research which banks and mortgage companies offer the best mortgage terms that can be used as an incentive to sell the houses your organization produces. The Ohio Housing Finance Agency, banks looking to meet their Community Reinvestment Act ("CRA") obligations and mortgage companies looking to develop a niche in affordable housing offer first-time homebuyer mortgage programs that might include:

Reduced down payment requirements through underwriting criteria that place greater emphasis on good credit and stable employment history than on the amount of buyer's equity Options to finance a significant portion of closing costs No requirements for Private Mortgage Insurance Flexibility on credit record with mitigating circumstances and successful completion of rigorous homebuyer education training Dedicated mortgage processors who are sensitive to the needs of lower-income first-time homebuyers and provide prompt service.

2. Project Development Budget

A. Save On Architects Fees By Seeking Opportunities to Use Pre-Designed House Plans There are many high quality house plans that contractors use in the marketplace that are often less expensive that using an architect to design houses from scratch. The key is to make sure the contractor has used the stock house plans before and that an experience engineer is used for locating the houses appropriately on the lot and for related functional issues. Manufactured or modular homes are also cost saving options. It is essential, that the Project Manager find a house manufacturer that has a house plan that meets the needs of your market and is cost-effective. Therefore, a cost-benefit analysis between manufactured housing and "stick-built" construction must be completed. B. Generate More Detailed Supplemental Budgets for Construction The Project Development Budget should have a summary of only hard construction costs. The Project Manager with the contractors should generate supplemental construction budgets that detail scope of work, line item costs and timing. Contractors can uses these supplemental schedules as the reference for submitting vouchers for work completed and developers can verify that work vouchered for has been completed on time and on budget. C. Require Contractors to Provide Breakdown of Costs In their bids and in their performance contracts, contractors should be required to provide detailed itemization and timing for payment for the following charges:

Mobilization and/or General Requirements Contractor Fee/Profit Contractor Overhead

D. Never Show Contractors Your Budget For Contingency When a contractor knows how much is budgeted for contingency, there may be a temptation to rationalize requests for change orders. E. Budget Aggressively for Marketing Pre-sales are paramount to the financial success of a homeownership development project. Unsold houses accrue interest on construction financing, which is wasted money, as well a risk for vandalism. Marketing, either through Realtors, contracted homebuyer education providers or in-house, needs a healthy budget so that substantial traffic of interested and qualified prospective buyers look at your product.

3. Permanent Sources of Funding

A. Seek Opportunities To Leverage Funds Affordable single family homeownership development does not benefit from a plentiful direct subsidy. Therefore subsidy must be raised in small amounts from several different sources. It is most important to get your local government-housing department to support your project first with local HOME, CDBG or related housing subsidy that you can use as leverage to ask other funders for matching funds. B. Seek Early Payment Of Subsidy Funds To Save On Construction Loan Interest The construction loan amount can be calculated by subtracting funding sources that are available for expenditure during construction from total development costs. The principal source for repayment of the construction loan should the proceeds from the sale of the houses. The higher the amount of permanent subsidy that can be used during construction, the smaller the amount of the construction loan, which results in less interest accrued. Try to use subsidy funds to pay for predevelopment cost as much as possible.

4. Project Development Cash Flow

A. Research and Estimate Risk and Benefits of Building Houses All At Once or As Each House Is Pre-Sold Building houses that may not sell for several months after completion presents risks of high construction loan interest costs and vandalism. Many affordable housing developers first build a model unit for marketing purposes and then build new houses as they are pre-sold. The risk for the "build as houses are sold" approach is that construction costs may increase because the contractor may not get any economies of scale and labor and materials prices may increase. B. Be Conservative With Timing of Sales Absorption Projections It is prudent to add extra time for home purchase closings and budget accordingly. There are a multitude of actors in the home construction, home purchase sales and financing process, who you may be dependent on for services, yet not have control over what they do and when. It is safe to add 20-25% to the time frame the contractors give you and 20-25% to the time the home mortgage originators and subsidy providers give you as time frames. C. Never Run Our of Cash During Construction Review your Project Development Cash Flow with contractors, subsidy providers, lenders and marketing professionals to make sure all interested parties understand the challenges of the development schedule and will perform on time and on budget. As your organization grows, secure a credit line collateralized by the assets of the organization (rather than a specific project) as a back-up source of cash to fund construction, if money is needed for unforeseen reasons.

Download: B2. Pro Forma Template

Next: C. Checklist of Resources to Keep on File for Funding Applications

OHIO CAPITAL CORPORATION FOR HOUSING