ULI Philadelphia hosted a pilot two-part series with the Philadelphia Housing Development Corporation’s (PHDC) Minority Developer Program (MDP) on October 10th and November 14th. MDP is a hands-on, business assistance program for small developers and contractors in Philadelphia to promote wealth creation and business growth. As part of the program, sixteen MDP participants completed a Foundations of Pro Forma Modeling course provided by ULI Learning. Available online and on demand, these educational series, courses, certificates, and programs leverage ULI’s publications, content, and research, as well as the practical and theoretical insights of our member leaders.

The classes were led by ULI Learning instructor Luke Koczela, an associate at EJF Capital LLC. Through his work at EJF, he focuses on joint venture equity partnerships and opportunity zone developments.

During the first part of the workshop, he provided participants with a more acute understanding of key terms and concepts related to the financing of development deals. The participants then had a month to complete the course and met for a second time where Luke facilitated a conversation around multifamily pro-forma analysis. Some key themes pertinent to the workshop included:

1. Pro Forma is the financial model that shows the projected outcomes for major metrics in the potential development. These metrics include Net Operating Income (NOI), Net Present Value (NPV), and Internal Rate of Return (IRR). Along with the developer, debt financiers and other institutions involved with the transaction create their own pro formas to determine project profitability.
2. Capital Stack is a mixture of capital investments that will contribute towards financing a development project. The structure of a capital stack allows for one to see how much each investor is contributing along with their expected return. Additionally, what level of risk each position has in relation to their priority position.
3. Internal Rate of Return (IRR) is one of the most common metrics used to evaluate the performance of an investment opportunity. It is a challenge to evaluate development deals that have various inputs. The IRR provides a single number that is consistent and understood across comparative deals.
4. Weighted Cost of Capital (WACC) is a metric used to see what the average cost of capital is considering the various costs of financing in a transaction. The WACC can be multiplied against the total amount of capital to get an annual debt payment. It can also help identify the cost of each source in relation to its total percentage of the debt.
5. Debt Service Coverage Ratio (DSCR) is the ratio institutions use to evaluate a borrower’s capacity to pay back borrowed money. It shows how much more the cash flow is in comparison to the debt service payment.
6. Cap Rate (Going in/Reversion) gives a performance metric based on the percentage of net operating income divided by the property value. Generally speaking, projects with higher cap rates are more unstable, but have high potential and upside. Furthermore, stabilized and well performing properties have lower cap rates. Developers look to sell properties when stabilized and should anticipate a reversion cap rate that is slightly higher than going in cap rate.

ULI Philadelphia is very appreciative of the contributions of Luke Koczela and PHDC and is looking forward to hosting similar workshops that build essential knowledge amongst minority developers. Participating companies included: Agile Development Corp, ATM Affordable Homes, BDFS Group, Benchmark Construction Group, BFW Development, Charles K. & Company, Fine Print Construction, Flow Temp 368 General Contracting, Girl Contracting, Lux 8 Investments, Oval Project Management, The Prime Corporation, TMG Development, West Powelton Development Corp, Wilson-Drake Development, and Yarmouth Construction Group.
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This article was contributed by Christopher Carver. Christopher is a Development Specialist at Delaware State Housing Authority and member of the ULI Philadelphia Young Leaders Group.