inclusionary zoning project to not adversely impact the return of the developer or the inherent value
of the land. This effort was done to understand the feasibility of a non-financial incentive (additional
units) could be applied to minimize impact to the local real estate market and return expectations.
Interpreting Results
The financial model calculates the basic go/ no-go decision a developer must make about a potential
project. The decision to pursue a project comes down to overall financial return and risk exposure. If
there is confidence that the desired returns will be reached, then the project will be pursued, otherwise
the project will not be undertaken.
From a financial perspective, the model calculates outputs that can be helpful when determining
whether a developer or a lender will choose to go forward with a project. Of these outputs, both the
Internal Rate of Return (IRR) and Net Present Value (NPV) are industry standard financial viability
metrics for a given project. While these are important metrics, they are not the sole arbitrators of
financial viability, as project risk assessment and developer track record are also important factors.
The IRR and NPV when examined together, offer significant insight to both a lender and developer.
The IRR is the calculated annual return on investment, taking into consideration net operating income,
investment holding period, and sales value. The NPV is the present value of all future cash flows (both
revenues and expenditures) for the project based on an expected return rate (discount rate) and over
the course of the determined holding period.
Based on the size of the initial upfront capital investment in a project, small percentage changes in the
IRR can have dramatic effects on the net present value. The decision factor for not pursuing a project
is if the IRR does not meet the required rate of return, or if the NPV is below zero. It is possible that a
project results in a positive NPV and a lower than desired IRR. In cases such as this, the decision
process becomes more nuanced as the developer would have to get comfortable with realizing a lower
return. Within the development industry, IRR return thresholds of 15% for a new construction rental
project and 20% for new construction ownership units.
Analysis Limitations
The undertaken analysis is not without limitations. The financial model is based upon assumptions
which were collected through developer interviews, market research, and professional judgement.
These assumptions are the main drivers of the financial model. The developments that are modeled
in this analysis are prototypical developments that could potentially be found in Nashua, and not
actual developments. While all the assumptions that drive the model can be customizable, RKG
calibrated the model such that the base assumptions are the default. There are countless permutations
that can be modeled, but RKG in consultation with the city, chose to model prototypical developments
with relatively standardized inputs.
The model is not able to test every variable or possibility, rather it can be used as an ordinance tool to
help inform the decision-making process. The model output helps show the relative impact of
ordinance changes on development financial feasibility.
