Overview of the Financial Feasibility Review

The need for a thorough project feasibility and sustainability review is just as important for a project with HOME and LIHTC funding as it is for a project only funded with HOME. Even if the state allocating agency has already reviewed the project and allocated credits, the PJ should undertake its own review of the project application. The state allocating agency’s review assesses the project in relation to the state’s needs and standards. The PJ can never assume that the state’s standards accurately reflect current local construction costs and building standards, include all the costs that may be associated with compliance with HOME financing, and meet the PJ’s local housing and cost policies.

The review of the project’s feasibility and long-term sustainability is referred to as underwriting.

  • Project feasibility refers to the process of analyzing and evaluating the likelihood that a proposed project will be successfully completed. For the PJ, it involves analyzing a project’s eligibility, site, financing, and development team, in order to determine whether the project can be initiated, completed, and successfully opened for business.
  • Project sustainability refers to the project’s ability to generate affordable rental housing for the duration of the affordability period, without additional public subsidy. Projects are sustainable when the underwriting is based on realistic and conservative cost estimates, the market for the unit mix is strong, the financing structure of the deal is viable, construction is sound, and, once operational, the project is maintained and managed effectively.

Through the underwriting process, the PJ assesses the risks of the project, and decides whether or not to finance the project based on its assessment. Projects that are based on sound underwriting and realistic financial projections are far more likely to succeed in the long term than those that are based on poor underwriting or unrealistic financial projections.

The underwriting process is comprised of four key areas of review:

  • Preliminary screening of the project, sometimes referred to as a “threshold review” (see Introduction)
  • Market risk assessment
  • Borrower risk assessment (review of the project development team qualifications)
  • Project risk, feasibility, and sustainability analysis.

Projects that are funded with FY 2012 HOME funds and later 2 are subject to new underwriting requirements imposed by the Consolidated and Further Continuing Appropriations Act of 2012 (P.L 112-55). The Act requires PJs to underwrite each project, assess the developer capacity and fiscal soundness of the developer being funded, and examine the neighborhood market conditions to ensure that there is an adequate market for the project. When it makes a project commitment, the PJ must certify that it has taken these actions. The Act also requires that any ConPlan submitted after November 2012 must be based on an assessment of the local market that helps the PJ specify the types of housing, locations, and target populations that will be eligible for funding.

2 These requirements apply to any development project that receives FY 2012 HOME funds, including all 2012 CHDO set-aside funds. A FY 2012 HOME–funded project is defined as any HOME activity set up in Integrated Disbursement and Information System (IDIS) under a 2012 Consolidated Plan/Annual Action Plan Project.

Underwriting addresses elements of the project beyond regulatory compliance; however, complying with HOME and LIHTC requirements are integrally related to underwriting and the financial and operational viability of the project.

Attractive new affordable housing projects -- home to responsible tenants and recognized as major improvements to their neighborhoods – make all of the PJ’s efforts worthwhile. It is especially satisfying to see the same projects - ten, fifteen, and even twenty years later - continuing to meet the community’s affordable housing needs. Long-term success in HOME-LIHTC projects is rarely an accident. It is a function of good up-front planning and project review that emphasizes both feasibility and sustainability.



Consulting Services We Provide

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