Saturday, May 30, 2009

Sources and Uses

Everyone would agree that the proposed NorthSide project is a project of scale. "Getting to scale" is development terminology for having impact. It takes a lot of small projects to get to scale. Larger projects have the potential to drive change at a faster rate.

The public is getting its first look at the proposed development budget for the Northside project. Here are the numbers as provided in the original TIF application (link)

Every project gets down to the numbers. The numbers make or break any project. Sources must equal uses. If not, the project is financially infeasible. The developer's budget, as described in the TIF application and shown below, balances sources and uses.

Sources of Funds

Debt - $6,043,621,986
Equity - $1,686,440,886
Distressed Area Land Assemblage - $83,600,000
Brownfield Tax Credits - $25,666,039
Historic Tax Credits - $149,700,000
Other Incentives - $69,133,737

Total Sources - $8,058,162,648

Uses of Funds

Studies and Professional Services - $1,343,027,108
Property Acquisition and Relocation - $174,900,000
Site Improvement Costs - $998,800,000
Building Rehabilitation Costs - $299,400,000
New Building Costs $3,733,800,000
Civic Capital Costs $161,500,000
Financing Costs $1,011,164,184
Contingency - $335,571,355

Total Uses - $8,058,162,648

Revenue and Expenses

Looking at the NorthSide budget from a revenue and expense standpoint, projected profits are shown.

Total revenue - $8,309,493,543
Total expenses - $8,058,162,648
Profit before TIF - $251,330,895

TIF funding is necessary in order to increase the profit on the project into an industry standard range.

Profit before TIF - $251,330,895 (3.12% of project cost - better to put money in the bank)

TIF - $409,917,496

Net Profit After TIF - $661,248,391 (8.21% of project cost - within industry standard)

Nothing on the cost side of this budget stands out as particularly unusual. The numbers are big, but percentage wise, all of the costs appear to be proportionate to the scale of the project. Adding the $410 million TIF, the project return on cost is 8.21%, which is typical for real estate developments.

What is noteworthy about the budget are the numbers on the sources of funds side of the budget. Adding the $410 million TIF brings the public financing total to $738 million, or 9% of the total development cost.

Looking at it another way, the project generates just under $11 in private investment for every $1 in public financing. That is leveraging on a huge scale.


  1. Doesn't the project only have something like $100,000,000 in bank financing?

    Where does the $6 billion in debt figure come from?

  2. Debt commitments at this stage would likely by conditioned on a number of things happening such as leasing commitments, TIF approval, zoning approvals, site control, personal guarantees, environmental testing, approval of architectural plans, title work and more.

    Until more of the project information is firm, the developer would likely have to front a high percentage of costs, with hopes to recoup funds once other debt and investments starts to flow into the project.

  3. Rick, from my knowledge of projects this size a 3% profit is the norm. I know other professions such as architects also drop their percent return into the 3% range on large projects.
    Also the professional services amount seems high. In any case 221 million is a nice return no matter what.
    The 6 billion in debt is over 20 years,(according to TIF documents on Ecology of Absence) so the amount is revolving. When homes or commercial structures are sold the money will be recirculated. Six billion will not be borrowed at one time to do the project, but instead a fraction of that amount according to the needs in that time span. It is a bit misleading to see figures over 20 years.

  4. Greg -

    How could you ever get an investor to risk millions and millions for a return that is borderline passbook savings?

    The return should be a reflection of the risk, and the risk on a project of this magnitude far exceeds the risk of 5 or 10 year certificate of deposit.

  5. I'm just saying what I know to be industry standards. Plus how much of his money does he really have at risk? His equity to profit ratio is more like 14% according to some quick calculations. He can't get that in pass book savings.

  6. One way or another, the developer is on the hook for pretty much the whole thing.

    In these tough economic times, banks and even investors are looking for personal guarantees of repayment/return.

    The developers on this project will be risking a lot and if the project isn't successful, won't be making a thing.

  7. Making $661 million in profits on $1.68 billion equity is not chump change but it's the land he doesn't own which is the key to the plan.

  8. Development profits are not based on equity only but total project costs. It is pretty much the same with any business.

    That is why the banking/financial sector is so key to a thriving economy.

    Part of the project cost is financing charges. Banks earn fees and interest for their participation. However, without their lending, no projects can happen.

    Paul McKee is no doubt good for many tens of millions of dollars, but there is no way he would be able to do a project like this using his own cash to fund 100% of the costs.

    Rick Bonasch