Board of Aldermen 09-28-2021 Page 5
Before we get into the results of that, | just wanted to give you a quick hopefully five minute primer on how this works,
right. So the inputs to a financial model, there's really what we call three buckets - there's the revenues that are created,
which on a for sale project easily enough is the purchase price of those homes; on a rental project is the rent that is
generated through the monthly rents for the units. If they charge for parking, the parking rents that are created, if they
have vending machines, that that sort of thing that creates the cash inside. Then there's expenses which is the
construction costs, its land acquisition, it's for a rental project it is the operation like maintenance, property taxes. On the
ownership side is the cost of marketing and the cost of the sale. All those needs to be considered and then finally, the
financials, right. It’s the equity requirements that that lenders and banks, for example, require the developer to put into a
deal. It's the debt financing whether it be bridge loans, or permanent financing if it's a rental project that have interest
rates and payback periods that create an impact on the cash flow project, which ultimately determines its financial
feasibility, and then particularly on rental side, there's capitalization rates which ultimately is used to understand what is
the value of the asset at the end, which is for rental project which is the multifamily development is what is the value of
that asset based on its cash flow? Capitalization rate, it's just a technical jargon of saying the market values the cash flow
that that investment is creating and then it says we're willing to pay you this much money for that based on the risk that we
are taking by buying it. That's a very quick run through the inputs that go into these models.
Ultimately, what we're trying to do to proxy is that “go no go decision” that an investor is going to make to decide whether
or not they're going to build a project. We use a dynamic analysis called “internal rate of return”, which measures the
investment efficiency of a deal whether it's you're building single family homes or townhomes and sell them, or you're
building a multifamily project to rent an operate. We're trying to understand how that asset is going to perform over the
series of time that you as the investor are going to hold on to it.
It allows us to measure these investments against other types of investments because in the real estate investment world
is all about opportunity cost. All that really means is if | can make, and just for the sake of the course of this conversation,
if | can make 5% investing in a savings bond, or a CD, or a treasury bond with very, very little risk, I'm not going to do a
real estate deal which carries substantially more risk without getting a much higher rate of return. So then the
conversation is okay well what is the return | can live with? Well the typical market as we've done these analysis
throughout New England is generally around a 12% rate of return for rental housing and a 20% rate of return or 20 to 25%
rate of return for sale housing. One point | do want to bring to your attention, and we'll talk a little bit more about
importance later, is through our research we learned return expectations in Nashua are much higher than that. While that
is not necessarily a good or bad thing on its surface, it creates a lot of challenges when you're trying to create an
inclusionary zoning policy that requires a low market price points or rental rates and still make the deal desirable or
interesting to the development community.
And so then the question becomes, okay, let's say we can't create a revenue neutral policy, what happens then? What is
the effect? Well, you know, it depends upon how far off we are. The initial reaction is the developer offered a lower value
for the land that they're purchasing to build the development on. In a real estate development generally the cost of the
land is really the only true variable - construction cost, the cost of bricks, the cost of plywood. If any of you have been
following the cost of those through the course of the pandemic that we've been dealing with, you know that those are have
gone up exponentially through this process because of supply chain issues. But they're fixed. You can't charge people
more in the market than they're willing to pay for the marketplace. So you really can't say well, we're just going to charge
double what the rest of the market is charging because there may not be a market for that. And so the land is really
where that value is created. So they'll offer less for the land. If they can't find someone willing to buy their land, they'll go
somewhere else. They'll decide to develop in another community that maybe is not requiring that or they'll sit on the
money for a while and say, well, we can't do the deal now maybe we'll wait a few years for the market to catch up to the
regulatory requirement or and in very unlikely cases, to be frank, they'll bite the bullet and do the development. You know,
like | said, opportunity costs are what they are which is if | can get a 15 or 20% return in Manchester and | can only get a
10% return in Nashua, then I'll just go make my investments in Manchester until the market recovers. So all of this is just
to try and lay the groundwork of understanding how we came to where we are and the recommendations we come to at
the end.
So very quickly, you know, this is what | always want to make sure that everybody's on the same page in terms of
understanding what is affordability because that term is used so much. | just want to make sure that we are all clear.
Affordability is relative. It is relative to your income and it is not absolute. If you make $50,000 a year, there is an amount
of house you can buy or an amount of an apartment you can rent on a monthly basis, which is less than someone who
makes $100,000 a year, which is less than someone who makes $200,000 a year. The US Housing and Urban
Development Department of Housing and Urban Development or HUD defines an affordability threshold at 30% of your
gross income. Spending more than that, they define as being cost burden. And so when we talk about “affordable
housing”, we talk about these different area median income thresholds. As you can see on the screen right now, that vary
by income level, and by even how many persons are in your household, it's truly trying to understand how do we create
