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.
