Total demolition of the existing building for use as parking by neighborhood businesses.

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Juliet Long
7 years ago
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1 1. ECONOMIC FEASIBILITY Three redevelopment scenarios were considered in determining the financial feasibility for re-use of the property at 2032 Main Street in Three Rivers. These scenarios evolved as information became available from the architect, environmental engineer, market analysis, the Palmer Redevelopment Authority, and the Office of Community Development. Scenario 1: Complete renovation of the property for use as retail or restaurant on the first level and for affordable housing on the upper levels. This scenario is supported by the market analysis, by possibility of grant funding for façade improvements, and by the possibility of money for creation of affordable rental housing units. Scenario 2: Demolition of the existing building to the top of the foundation wall, reconstruction of a new single story commercial building of approximately 960 square feet. Scenario 3: Total demolition of the existing building for use as parking by neighborhood businesses. Projections of income and expenses for Scenarios 1 and 2 are presented on the following page. There is no income associated with parking in Three Rivers, so the creation of seven off street parking spaces would be a public amenity that would be owned and maintained by the town. The following assumptions are incorporated into the analysis: Scenario 1 Renovations Costs: The architect s cost estimates were considered to be the worst case while information from the town s rehab specialist were considered as the best case. We carry an estimate of $330,000 for the rehab of the building. Façade Grant: See our discussion of funding sources available for the project in the Appendix. We estimated that $28,000 of the total renovation expenses would be eligible for funding as façade improvements. Residential Rehabilitation: See our discussion of funding sources available for the project in the Appendix. Rental Income: Commercial rents in Three Rivers are depressed because of the high vacancy rate among first floor commercial properties. If the property were newly renovated, it would command a premium rent because of its condition and energy efficiency and we have projected a rent of $800 per month, net of heat and electricity, but which would include property taxes. Residential rents are similarly low, but a newly renovated two-bedroom apartment made restricted to low income rental would have a subsidized fair market rent of $924 per month including heat, but net of separately metered for electricity.

2 Vacancy and Bad Debt: Although the local commercial vacancy rate is 40-50%, the newly renovated property is assumed to have tenants when completed. Low income rental apartments in new condition would not likely be vacant, but over time there would be some turnover in tenants with the necessity for reconditioning the apartment at the end of the lease period. A 5% vacancy rate is projected for the property. Heat: Three Rivers does not have natural gas but propane, is competitively priced with fuel oil, and it provides a great deal more flexibility and a lower cost for the capital cost of the heating unit. Electric: Electricity is assumed to be paid by the tenants. Insurance: The cost of casualty and liability insurance for the property is estimated at $1,200 annually. Property Tax: Palmer s tax rate is $21.35 per $1,000 of valuation and the assessed value for the renovated building is projected to be $180,000. The market value represents a capitalization rate of 7% applied to the projected net operating income of $12,776. Accounting and Legal Expenses: Annual accounting and legal expense are estimated to be $800 annually. Miscellaneous Expenses: Miscellaneous expenses of $1,034 annually, include costs associated with maintenance and replacement of items. There is no off street parking and the commercial tenant would be responsible for snow removal at the front of the property. Annual Debt Service: A 30 year loan for $177,000 at a fixed 5% interest rate is assumed for the conventional financing portion of the project. The project s net operating income just covers the debt service at a 1.05 ratio. Unless the lender would make the loan to fulfill its Community Reinvestment Act requirements, the lender would likely require additional equity from the borrower. Conventional commercial loans have a debt coverage ratio requirement more in the 1.2 to 1.3 range. Scenario 2: Demolition Cost: The cost of trash removal, asbestos removal, and demolition of the building to the top of the brick foundation wall is estimated at $28,000. New Construction: A new wood frame single story commercial building would be built on the 960 square foot foundation at a cost of $225 per square foot, for a total of $216,000. Typically there are no grants available for projects of this type. Rental Income: As discussed in Scenario 1, commercial rents are depressed in Three Rivers, but a small scale retail location in new condition would command a rent of about $800 per month. A monthly flat rate is used in the Three Rivers market in place of the concept of rent per square foot. Heat, Electricity, and Snow Removal are the responsibility of the tenant. Insurance for the newly built 960 square foot commercial building is estimate at $800 annually.

3 Property taxes are based upon an assessed value of $140,000. Accounting and Legal Expenses are estimated to be $500 annually. Annual Debt Service: It is assumed that 80% of the project cost would be financed at a rate of 6% with a 20 year amortization period. The resulting annual debt service of $17,018 is well above the project net operating income of $4,351 and the project probably could not be financed under the set of assumptions that we have made. Scenario 3 provides 7 parking spaces as shown on the sketch shown on the following page. This scenario was developed as a default in the event that it was impossible to carry out the renovation of the property as discussed in Scenario 1. The total cost of demolition and construction of $45,000 would probably exceed what either of the adjoining property owners would pay for additional off street parking for customers and tenants.

4 Financial Feasibility Analysis 2032 Main Street, Three Rivers, MA Scenario 1 - Complete Building Renovation Scenario 2 - Demolition and New Construction Complete Building Renovation $ 330,000 Demolition Cost $ 28,000 Demolition Cost $ 28,000 Less: Façade Grant (28,000) New Construction 216,000 Removal of Foundation 5,000 Less: Residential Renovation Grant (125,000) No Grants Available No Grants Available Project Cost After Grants 177, Project Cost $ 244,000 Income & Expenses Monthly Annual Expenses: Scenario 3 - Demolition/Construction of Parking Lot Income 0 Income Income Construction of 7 Parking Spaces 12,600 Rent of Commercial Unit $ $ 9,600 Rent of Commercial Unit $ 9,600 Plowing and Maintenance 500 Rent of Two Bedroom Apartment ,088 Gross Potential Income $ 1, $ 20,688 Gross Potential Income $ 9,600 Total Expenses 46,100 Less Vacancy & Bad (1,034) Less Vacancy & Bad (480) Effective Gross Income: 19,654 Effective Gross Income: 9,120 Expenses: Expenses: Heat (Apartment) 624 Heat Net Electric Net Electric Net Insurance 1,200 Insurance 800 Property Taxes 3,843 Property Taxes 2,989 Accounting & Legal 800 Accounting & Legal 500 5% 1,034 5% 480 Total Expenses (7,501.40) Total Expenses $ (4,769) Net Operating Income $ 12,152 Net Operating Income $ 4,351 Annual Debt Service $ 11,514 Annual Debt Service $ 17,018 Amount Financed $ 177,000 Amount Financed $ 195,200 Annual Percentage Rate 5.0% Annual Percentage Rate 6.0% Term of Loan 30 years Term of Loan 20 Debt Coverage Ratio 1.06 Debt Coverage Ratio 0.26

5 Potential Funding Sources Possible Uses EDF - Deferred Payment Loans Conventional Financing Total projected Project Cost Façade Improvements $28,000 Single Unit of Housing $125,000 $153,000 $177,000 $330,000

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