Housing Services:
Investment & Return Requirements for Rental & Mixed-use Projects

Minimum Investment Requirement

The Project Sponsor (or the General Partner in case of Limited Partnerships) must invest an amount equal to or greater than two percent (2%) of the total project cost in the project, prior to or at loan closing. The investment must be documented to the PDC in writing. Investments may be phased in according to a schedule and method approved in writing by the PDC prior to loan closing. The PDC may require additional investments by the Project Sponsor or General Partner, if PDC’s estimate of the project’s IRR (see below) exceeds the maximum allowable.

In lieu of cash, a Project Sponsor may satisfy this investment requirement by contributing investment in the following forms:

1. Documented expenditures.
2. Land equity, as established by appraisal.
3. Volunteer labor, subject to PDC review of wage and hour equivalents. (Where the Project Sponsor shows volunteer labor as a source, the Project Sponsor must show a corresponding use of funds)
4. Grants to the Project Sponsor which are invested in the project, and
5. Deferred developer fees, if the portion of developer fee being deferred could have been capitalized as part of PDC’s maximum allowable capitalized developer fee calculation.

Contributions by the Limited Partner (s) of a partnership utilizing Low Income Housing Tax Credits may not be used to meet this requirement.

Allowable Income Return

The projected, before tax, Internal Rate of Return (IRR) to the Project Sponsor may not exceed 10%, as determined by the PDC. (For the purposes of this section and the Cash Flow Payment section below, Project Sponsor shall refer to the General Partner of a Limited Partnership.)

Determination of Internal Rate of Return

The PDC determines the IRR, based upon the Project Sponsor’s investment and the projected before tax return, over the first ten years of the project. The PDC estimates the before tax income stream to include the portion of the cash flow projected to be available to the Project Sponsor, plus fees paid to the Project Sponsor above and beyond normal management fees. Please note that the PDC does not include projected releases of reserves or payments to the Project Sponsor for deferred development fees allowed within the PDC maximum capitalized development fees in its IRR calculation. However, payments of development fees that exceed the PDC maximum are included in the PDC IRR calculations as projected income.

Cash Flow Payment Requirement

PDC may require Cash Flow Payments in addition to scheduled debt service payments. These payments will be made from cash flow splits of Excess Cash Flow. Excess Cash Flow is determined when a priority cushion* for identifiable project risks that can be mitigated by available cash is deducted from Net Cash Flow. Net Cash Flow is Gross Revenue less Allowed Expenses, Permitted Loan Payments, and Required Reserve Contributions. The remaining Excess Cash Flow, if any, shall be split between the Borrower and the PDC.

The priority cushion may be shared among pools of assets prior to determination of Excess Cash Flow, if the Borrower has sufficient asset management capacity and is able to provide specific details of project needs, funding levels and an acceptable maintenance/replacement program.

See definitions of Gross Revenues, Allowed Expenses, Permitted Loan Payments, Required Reserve Contributions, Net Cash Flow and Excess Cash Flow under the definitions chapter.

In summary, Cash Flow Payments are determined as follows:

Cost Savings

Project Cost Savings are determined at the end of the construction period and disbursed at the time of conversion of the construction loan into the permanent loan. Project Cost Saving is the difference between the uses of funds budget and the sum of 1) the actual development cost, 2) approved and permitted change orders and 3) the actual net operating income earned during the lease-up period. Project Sponsors may fund an operating reserve, approved by the PDC, before determining cost savings. Project cost savings shall be shared between the PDC and the Project Sponsor as follows:

1. Project Sponsor may first fund any deferred portions of the maximum capitalized development fees approved by PDC. Any remaining PDC direct financial assistance funds shall be applied first against accumulated interest on the PDC amortized loan, and then against outstanding direct financial assistance balances, as determined by the Project Sponsor or Project Sponsors.
2. As scheduled debt service does not begin until funding of the permanent loan, Excess Cash Flow may be equal to Net Operating Income (NOI).

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