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200-UNIT MULTIFAMILY (PODIUM) RENTAL DEVELOPMENT ..........ccssssssssssssssesssseesesesseees 28
POTENTIAL HOUSING TRUST FUNDING STRATEGIES... ccc ssscsssssessessseessesssessssesssseseeseees 31
APPENDIX 1 occ ccesssstsssssssesssssessssesessseesssessssessessssssssessssessssesssessssesesseseesssessssessseesecsssessssessseesesessssesseeesens 33

GLOSSARY OF TERMS... cc secsssssssssesecsssssseesssessssessesssessssessssessssseesssesssseesecsssessssessseeseesesessesessesesees 35

EXECUTIVE SUMMARY

Scope of Work

The scope of this analysis is to determine the financial impact resulting from incorporating
inclusionary zoning requirements into the City of Nashua’s zoning ordinance. RKG Associates Inc.
(RKG) constructed a financial feasibility model to test specific scenarios chosen by the City of Nashua
and determined the relative impact in relation to developments constructed under the existing zoning
requirements (by-right). The importance of this analysis cannot be understated, as setting the
appropriate parameters for an ordinance is key to ensuring housing development accommodates
various income levels across the city while minimizing impact on existing development activity.

Process

The process undertaken was collaborative and included engaging City staff, local and regional
housing developers, local debt and equity investors, and other real estate professionals to understand
the market dynamics and performance indicators unique to Nashua. RKG utilized information gained
from market research and interviews to construct an adaptable financial model. The model enables
the City to test prototypical developments to understand the financial implications of creating an
inclusionary ordinance.

Summary Findings

The City of Nashua historically has found success in attracting
..new development has

targeted lower income
households and _ higher
income households, leaving
the ‘middle incomes’
without options in the city.

traditional suburban development patterns. Almost all the
city’s development over the past 20 years has been for single
family detached housing. The city has experienced very
little multifamily or non-residential development during
this time frame, except for a few 100% income-controlled
housing projects. Recent efforts to jumpstart reinvestment
and revitalization of Nashua’s downtown by attracting higher
income residents have been effective but rely upon the city
leadership providing zoning relief and providing substantial financial inducements. Further, these
projects have exclusively targeted the highest earners. As a result, new development has targeted
lower income households and higher income households, leaving the ‘middle incomes’ without
options in the city.

This analysis focused on understanding how an inclusionary zoning policy that targeted that middle
income cohort would impact the financial feasibility of new residential development. While the
results of the analysis are based upon a financial model driven by assumptions, the model utilizes
local-market relevant analysis to forecast the financial return to a developer and compares the change
in financial return between current market conditions and the adoption of a model inclusionary
zoning policy intended to create a true continuum of affordability in Nashua. The following section
highlights the findings.

Current policies make an inclusionary zoning policy challenging. The most immediate challenge to
implementing an inclusionary zoning policy is the City’s current practices of maximizing density
and/or providing financial incentives for pure market-rate projects. The impact of this practice has
been two-fold. First, market return expectations (reported

to be above 20% IRR) are substantially higher than other,

similar-risk marketplaces in New England and throughout Given the analysis indicated

the United States. While RKG recognizes the delicate the average market value
the | differential between a

market-rate unit and a unit
priced for a household earning
80% of AMI is over $36,000.

balance of desiring investment activity and
requirements of those willing to make that investment,
these inflated return expectations will require even greater
financial investments from the City to make an IZ policy
work. Given the analysis indicated the average market
value differential between a market-rate unit and a unit
priced for a household earning 80% of AMI is over $36,000, the cost to subsidize a larger multifamily
development likely will exceed $500,000. Second, this practice maximizes the physical capacity of
these parcels (based on parking requirements, open space requirements, etc.). Allowing full
development potential from the outset eliminates the use of bonus density.

Location impacts financial feasibility. The financial modeling indicates that the need for podium
parking (most prevalent in downtown Nashua) adds substantial cost to a development. This
additional cost impacts profitability, and thus indicates any inclusionary zoning policy (and potential
subsequent bonus density policy) needs to consider location. From an execution perspective,
requiring a lower percentage of units in areas that require structured parking and/or having higher
bonus density ratios are recommended. In addition, location also affects revenue potential. RKG
Associates research indicated that values/rents are highest in Downtown and in the Amherst/Exit 1
areas of the city. Overt time, disparities between these two areas may develop as new investment/job
creation occurs. To this point, any inclusionary zoning policy should reflect market differences and
be reviewed regularly to ensure those polices do not become barriers to new investment.

Target income levels will heavily skew modeling results. For the purposes of this analysis, RKG
Associates was tasked with modeling an inclusionary zoning policy that targeted the 80% of AMI
income. The results detailed in this report reflect that assumption. Changing the target income
threshold will affect the scale of impact. For example, targeting 50% of AMI will create greater
negative financial impacts for adevelopment. It also would require a much higher bonus density ratio
due to larger loss of revenue between market rate and the income-controlled units. The City should
thoroughly assess any potential policies through the financial model before establishing income
thresholds, inclusionary requirements (% of units required), and bonus density ratios.

Creating a payment in lieu provides fair relief for ‘partial’ units. Some communities follow a ‘round up’
approach to inclusionary zoning policies. In these cases, the developer is required to deliver the next
whole unit when the formula creates a fractional unit (i.e., deliver 6 units when the formula results in
a 5.5 unit calculation). This approach creates greater negative financial impacts, particularly for
smaller (less than 25 units) projects. The payment in lieu of fractional units provide relief to the

developer by only making them provide the market value equivalent to the policy formula while also
creating a new revenue source for a housing trust. Updating the market value differential formula
on a regular basis (typically every 1-2 years) ensures fairness to both the developer and the city.

A bonus density program could be effective, but only if maximum density is not by-right. As noted above, the
City’s current practice of allowing maximum densities for 100% market rate projects regardless of the
zoning rules limits the potential for a bonus density program. However, the financial analysis
indicates that a bonus density program would be highly effective for Nashua (ranging from a 1:1
to 2.5:1 ratio for 80% of AMI income targets) at mitigating the financial impact of an inclusionary
zoning program.

INTRODUCTION

The City of Nashua has decided to investigate the feasibility of implementing an inclusionary zoning
policy for new housing development. This effort was borne through the City’s Housing Plan, which
identified the potential to craft an inclusionary zoning ordinance which creates a public benefit from
private development occurring in the city. The City of Nashua hired RKG to build a financial
feasibility model to evaluate approaches toward incorporating inclusionary zoning.

RKG Associates is a multi-disciplinary real estate, planning, and economic development consulting
firm with more than 35 years of experience advising public-sector and private-sector clients on real
estate development and financial feasibility. The RKG analysis relied on conducting market research,
interviewing stakeholders, and working with the City to test a series of development typologies to
understand the financial sensitivity of introducing inclusionary zoning.

Inclusionary zoning is a way in which communities can generate affordable housing through
traditional market developments. Inclusionary zoning policies are typically based on a specific
percentage applied to new housing development. For example, if the inclusionary zoning percentage
were set at 10%, on a new 200-unit development then 20 units would be required to be affordable.
Additionally, affordable units can be required to be delivered at specific Area Median Income (AMI)
thresholds such as 50% AMI and 80% AMI. Traditionally, local housing authorities are responsible for
providing housing to households at 30% of AMI. Generally, for inclusionary zoning, having a lower
AMI requirement results in a greater reduction in financial return to a developer because costs are
harder to recoup due to lower revenue streams.

The following analysis details the approach RKG used to test potentially adopting an inclusionary
zoning ordinance, results of the analysis, and recommendations to minimize financial impacts of such
changes. The appendix section includes a glossary of terms used throughout this analysis.

MODEL

To perform the analysis, RKG Associates created a financial feasibility model based on traditional
proforma analysis standards for real estate development. The model was created in Microsoft Excel
to allow for the greatest functional flexibility and analysis transparency.

The RKG Associates model focuses on Internal Rate of Return (IRR) calculations to determine financial
feasibility. This measure is a standard approach to understanding the potential performance of a real
estate investment as it accounts for the construction, operation, and eventual sale of a real estate
investment. Real estate development is a risk-based venture that requires an investor to guarantee a
sum of money in exchange for the potential revenue and value created by that investment. Developers
seek to reduce the risk of a project (i.e., development duration and cost overruns) while maximizing
the revenue potential (i.e., rent payments and reversion for a rental project and sales pricing for an
ownership project).

IRR calculations are presented as percentages. A higher percent indicates the property will provide a
greater return for the investor. IRR is generally compared against an investors desired return rate (or
discount rate) to determine if an investment meets the perceived risk level. IRR calculations are much
more detailed than overall return calculations, and account for inflation, projected income escalators
and the reversion (or sale) of the property at the end of the study period (or hold period).

There is no universally accepted return rate to judge the return-risk of a real estate project. These
market thresholds are established in each market based on several factors including current and
projected demand, existing market supply, current and projected employment levels, and risk
tolerances of local investors. For this project, Nashua area development industry minimum standards
for a desired IRR were set at 20% for new construction ownership residential and 15% for new
construction rental residential projects. It is important to note that these thresholds, while aggressive
in most markets, are below the return expectations identified by local developers and investors for the
Nashua market. That said, the feasibility analysis is intended to compare the impacts of differing
scenarios (in this case, current market rate projects to similar projects subjected to an inclusionary
zoning policy). Thus, it is important to set a consistent return expectation. RKG used 20% and 15%,
respectively, because those are generally more industry standard returns, and should be a measure to
determine whether a project receives public incentives.

Once the expected return thresholds were established, RKG Associates was able to assess how an
inclusionary zoning policy would impact the return of the scenarios identified by the City (detailed in
Table 1). For this project, RKG Associates used an inclusionary zoning policy threshold that required
a minimum share of new housing units that are priced to be affordable for households earning at 80%
of the regional Area Median Income (AMI). AMI affordability thresholds are detailed in Table 3 and
4. Further, the percentage of units to be income-controlled varied based on the size of the project. For
this project, RKG modeled a 10% minimum requirement for projects sized at 25 units and under, 15%
minimum requirement for projects sized 26 to 50 units, and a 20% minimum requirement for projects
with 51 or more units.

Model Data Collection

Proforma development modeling, particularly IRR approach modeling, requires substantial market
data to generate the model assumptions needed to calculate financial performance. There are three
primary data categories needed to run a proforma model, [1] construction/development data, [2]
revenue/expenditure data, and [3] finance/investment data.

= Construction and development data include the costs of land, the costs to develop the
structures, and the basic assumptions of types of units, size of units, and unit amenities.

«= Revenue and expenditure data includes prevailing rent rates (both market rate and income
controlled), prevailing sales prices, and operation costs for rental housing. Operation cost data
points include direct operations (i.e., maintenance, marketing) and indirect costs (ie., real
estate taxes).

« Financial and investment data include prevailing lending rates, debt/equity requirements,
capitalization rates, and discount rates.

RKG used several tools to gather this information, with a preference to gather locally relevant
information specific to the City of Nashua. In areas where local data was not available or not
appropriate, RKG relied on regional data (i.e., Nashua Metro). The primary data collection method
was capturing primary and secondary data about the Nashua housing market. RKG gathered current
rent rates (per month) and sales prices (by unit type) for owner and renter housing within the city to
determine potential revenues. RKG gathered sales data from the city to understand current pricing.

RKG also interviewed several for-profit and non-profit residential developers, and commercial
lending bank professionals to garner greater understanding of the local marketplace. Finally, RKG
used nationally recognized secondary data sources, such as Marshall & Swift Valuation Services, to
verify data provided by the local real estate community. The results of this effort were used to create
the baseline market assumptions for the financial feasibility model.

The following section provides details on the results of the data collection and provides the underlying
performance metrics used to test the financial impacts of inclusionary zoning on specific development
examples.

Components of the Model

As mentioned, the model functions on a traditional proforma analysis platform, measuring the
potential revenue of a real estate investment and comparing it to the costs and expenditures to
construct, operate, and sell the asset. The modeling efforts compared the financial performance of
eight distinct residential development scenarios without inclusionary zoning against the financial
performance of those same scenarios under inclusionary zoning. The eight development scenarios
reflect various small, medium, and large-scale ownership and rental development projects that may
occur within Nashua. The results were compared to understand the impact of inclusionary zoning on
the financial feasibility of each scenario. Table 1 identifies each of the scenarios modeled.

INC WUSIO NARY ZO NING ANALYSIS 8

Table 1. Modeled Scenarios

Unit Size and Type Suburban Exit 1 Downtown
10-unit Single Family Xx

25-unit Multifamily (Stick/Podium) X X

50-unit Townhouse Xx

125-unit Multifamily (Stick/Podium) X X

200-unit Multifamily (Stick/Podium) X X

Source: City of Nashua and RKG Associates Inc., 2021

The eight development scenarios include:

* 10-unit single family ownership development in the Suburban subarea

» 25-unit multifamily (stick construction) rental development in the Exit 1/Amherst Street
Downtown subarea

* 25-unit multifamily (podium construction) rental development in the Downtown subarea

= 50-unit townhome ownership development in the Suburban subarea

* 125-unit multifamily (stick construction) rental development in the Exit 1/Amherst Street
subarea

* 125-unit multifamily (stick construction) rental development in the Downtown subarea

* 200-unit multifamily (stick construction) rental development in the Exit 1/Amherst Street
subarea

* 200-unit multifamily (podium construction) rental development in the Downtown subarea

The model has three primary components that drive the financial performance analysis: development
assumptions, financial assumptions, and affordability assumptions. Each component influences the
revenue and expenditure efficiencies of the development.

= Development Assumptions — The development assumptions focus on the ‘bricks and mortar’
facets of the proposed residential developments. Factors such as total unit count, unit breakout
by bedroom count, average unit size by bedroom count, type of parking, and the cost of land
to accommodate the development. These factors influence construction costs, potential
operational revenues (for rental housing) and sale values (for ownership housing).

= Financial Assumptions — The financial assumptions include factors relating to debt and equity
requirements, the cost of development financing (i.e., mortgage rates), inflation and
appreciation rates (for operational costs and revenues), and project return expectations. The
financial data directly affects the project’s financial performance by adjusting the timing and
amount of capital outlays (both debt and equity).

= Affordability Assumptions — The affordability assumptions include the market performance data
such as market rent rates, target income thresholds for the IZ units, assumptions about the
size of the Inclusionary units, and the percent requirement of IZ units of the total development.

INC WUSIO NARY ZO NING ANALYSIS 9

These assumptions further impact potential revenue levels as well as overall construction
costs.

The following section details the individual assumptions used to run the model, and how those data
points were collected. As mentioned, RKG collected primary and secondary data about residential
development in Nashua. RKG also performed several interviews with local real estate professionals
to verify those findings. That said, the model was constructed to enable the city to customize the
proforma analysis through data overrides. This flexibility in modeling allowed RKG to perform
sensitivity analyses on incorporating inclusionary zoning. This effort informed RKG’s findings.

Income Tiers — To assess an inclusionary zoning policy, determinations regarding household income
are required. Table 2 details the 2020 HUD Area Median Income by household size for the City of
Nashua. Household income limits were used to calculate affordable rents in Nashua. Area median
incomes in Nashua are high due to the inclusion of communities in Hillsborough County, which have
significantly median higher incomes than the City of Nashua. The higher income limits affect
affordability because the affordability thresholds are higher due to the higher incomes. For the
modeling exercise, RKG used the 4-person household income as the default for conducting the
analysis.

Table 2. FY 2020 Income Limits Summary - Nashua, NH

Household Size

Income Level 1-Person 2-Person 3-Person 4-Person 5-Person 6-Person
30% of AMI $23,050 $26,350 $29,650 $32,900 $35,550 $38,200
40% of AMI $30,720 $35,080 $39,480 $43,840 $47,360 $50,880
504 of AMI $38,400 $43,850 $49,350 $54,800 $59,200 $63,600
60% of AMI $46,080 $52,620 $59,220 $65,760 $71,040 $76,320
654 of AMI $49,920 $57,005 $64,155 $71,240 $76,960 $82,680
70% of AMI $53,760 $61,390 $69,090 $76,720 $82,880 $89,040
80% of AMI $55,950 $63,950 $71,950 $79,900 $86,300 $92,700
100% of AMI $76,800 $87,700 $98,700 $109,600 $118,400 $127,200
110% of AMI $84,480 $96,470 $108,570 $120,560 $130,240 $139,920
1204 of AMI $92,160 $105,240 $118,440 $131,520 $142,080 $152,640
140% of AMI $107,520 $122,780 $138,180 $153,440 $165,760 $178,080
Source: HUD, RKG, 2021

Rent Thresholds — The model calculates potential gross income by applying the market rate threshold
to market rate units, and a rent threshold equivalent to 30% of gross income (utilities included) for
income-controlled units. The market rate rents were calculated through RKG research of current rent
levels for new apartments built in the city over the last five years. The affordable rents were calculated
based on the HUD AMI thresholds. Table 3 details the thresholds for each income level used in the
financial model. What can be seen from the table is that the market rate rent falls between 80% and
100% of AMI, indicating that the market is building affordable units without an inclusionary zoning

policy.

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INC WSIO NARY ZONING ANALYSIS

10

Affordable Rents (Utilities Included

Unit 40% 50% 60% 65% 70% 80% 100% 110% 120% 140% Market
Type AMI AMI AMI AMI AMI AMI AMI AMI AMI AMI Rate

Efficiency | $711 $889 | $1,067 | $1,156 | $1,245 | $1,422 | $1,778 | $1,956 | $2,134 | $2,489 | $1,779
1BR $829 $1,036 | $1,243 | $1,347 | $1,450 | $1,658 | $2,072 | $2,279 | $2,486 | $2,901 | $1,860
2BR $998 | $1,248 | $1,498 | $1,622 | $1,747 | $1,997 | $2,496 | $2,746 | $2,995 | $3,494 | $2,316
3BR $1,154 | $1,443 | $1,732 | $1,876 | $2,020 | $2,309 | $2,886 | $3,175 | $3,463 | $4,040 | $2,688
Source: HUD, and RKG Associates Inc., 2021

Sales Price Thresholds -The sales price thresholds were established by using New Hampshire
Workforce Housing 2020 Workforce Housing Purchase and Rent Limits to determine affordable sales
prices. As seen in Table 4, home purchase income-controlled price thresholds are substantially lower
than the market rate sales price levels identified by RKG. The market rate data was compiled by

parsing the city’s property assessment and sales database over the last ten-years to determine average
sales values.

Table 4. Maximum Affordable Rents (Utilities

Unit | 40% 50% 60% 65% 70% 80% 100% 110% 120% 140% Market
Type | AMI AMI AMI AMI AMI AMI AMI AMI AMI AMI Rate
1BR $94,560 | $118,200 | $141,840 | $153,660 | $165,480 | $189,180 | $236,400 | $236,400 | $262,800 | $330,960 | $300,000
2BR $126,080 | $157,600 | $189,120 | $204,880 | $220,640 | $252,240 | $315,200 | $315,200 | $350,400 | $441,280 | $350,000
3BR $157,600 | $197,000 | $236,400 | $256,100 | $275,800 | $315,300 | $394,000 | $394,000 | $438,000 | $551,600 | $550,000
Source: HUD, and RKG Associates Inc., 2021

Inclusionary Thresholds — The model built by RKG allows the user to select three different AMI
percentages to test the impact of inclusionary zoning. These percentages can be set for both rental and
ownership projects, the tables below illustrate the default settings of the model. To measure the impact
of inclusionary zoning, RKG scaled the inclusionary zoning percentage with the size of a development
— the larger the project the higher the inclusionary percentage. For example, projects greater than 100
units would be required to have 20% of the units designated as affordable, which would be spread
across three tiers of varying income limits. Additionally, the model allows the user to identify the AMI
thresholds to apply the inclusionary units. For the purposes of this modeling exercise, RKG used 80%
of AMI as the baseline for all tiers in the financial feasibility model. However, the model allows for
the city to test any variation of income thresholds ranging from 50% AMI to 120% AMI.

Table 5. Modeled Inclusionary Zoning Percentages for Both Rental and Ownership Developments

Tier Tier 2 | Tier 3
Rental Units 50% - 120% AMI 50% - 120% AMI 504% - 120% AMI Total
1-25 new units 5% 5% 0% 10%
26-50 new units 10% 5% 0% 154
51+ new units 5% 10% 5% 20%
Source: City of Nashua and RKG Associates Inc., 2021

Development Revenues

RKG collected rental rate data for relatively new luxury developments which included efficiency
(studio), one-bedroom, two-bedroom, and three-bedroom apartments. The market rental rates were
used as a baseline for the analysis and compared to information obtained from developers. Generally,
new units rent for between $2.24 and $3.38 per square foot depending on the unit type. Within the
model the rents can be modified by the user. For more information about rental rates, see Appendix
1.

The sales values of housing units were determined through a combination of market research and
utilizing the City Assessor database to parse the most recent sales values by bedroom count. The
results are used for the baseline assumption in the model. For more information about sales values,
see Appendix 1.

Income streams outside of traditional rent and sales value stem from parking revenues. For rental
units, it was assumed in the model that parking revenues of $75 per space were attainable. No parking
revenues are included in ownership units because the parking space is inherently included in the price
of the unit.

Development Costs

The amount of money a developer can pay for a piece is land is a critical component to the financial
feasibility of a project. The higher the land value, the more a developer needs to offset their costs
through things like higher density, lower parking rates, or increased sales prices and rents. The price
of land is one of the key factors that can affect financial feasibility; and this is especially true for projects
on the financial margin. From a cost perspective, the cheaper a developer can obtain the land, the
greater the potential financial return. This is because in terms of development, construction and
financing costs are relatively fixed. Whereas the price of land and its developable potential can
significantly impact the viability of a project.

The price of land in Nashua has become high in recent years and fluctuates based on the underlying
zoning and the total number of units which can be developed. An example being that a single-family
home with a double lot can easily sell for $400,000 as a tear-down project which is then replaced with
two units each selling for $500,000. This indicates that developable land is in scarcity in and around
Nashua.

Developers typically calculate the residual value of the land to determine what they would be willing
to pay for the land on a per unit basis. This calculation considers construction costs, financing
expenditures, and expected returns. The general approach towards determining the land value is to
calculate the income expectations for the developed land, subtract all expenses associated with this