SILK STREET APARTMENTS

Silk Street Apartments1 Hogg AvenueKansas City, Mo

A Substantial Rehab 221D-4 project180 units, 21 Buildings, with retail space

A revitalization project

A direct-to-firm application

MAP Training Material

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SILK STREET APARTMENTS

1 HOGG AVENUEKANSAS CITY, MO

CASE MATERIALS INDEX

1.WHEELBARROW SUMMARY REPORT*2.WHEELBARROW LENDERS DOCUMENTS REPORT*3.HUD NARRATIVE (AKA LOAN COMMITTEE SUBMISSION)*4.SLIDES

*MATERIALS TO BE HANDED OUT FOR REVIEW BEFORE TRAINING;OTHER MATERIALS TO BE DISTRIBUTED DURING THE TRAINING

SILK STREET APARTMENTS

SILK STREET APARTMENTS

WEAKNESSES

SPONSORSHIP HAS NO EXPERIENCE WITH SIMILAR REHAB/TURNAROUND PROJECTS

THE PRINCIPALS HAVE LIMITED EXPERIENCE

COMPLEX REHAB INVOLVING A COMPLETE LEASE-UP

SOME OF THE PRINCIPALS HAVE LOW CREDIT SCORES

THE OVERALL AMOUNT OF WORKING CAPITAL IS LOW

CONTINGENCY IS CITED AT THE MAX, BUT THIS IS ONLY TRUE UNDER THE PRE-RISK MITIGATION GUIDELINES.

REHAB SCOPE OF WORK IS LIMITED

PROPERTY IS FUNCTIONALLY OBSOLESTE , UNATTRACTIVE AND UNDER-MAINTAINED

“AS IS” OCCUPANCY IS LOW (48%)

“AS IS” NOI IS NEGATIVE

ALL EQUITY IN THE DEAL COMES FROM THE “AS IS” VALUE

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SILK STREET APARTMENTS

Weaknesses (continued)

ENVIRONMENTAL ISSUES - MOLD AND ASBESTOS

LOW OCCUPANCY IN PMA (80% OCCUPIED )

DETERIORATED AND UNMAINTAINED SURROUNDING PROPERTIES

SUBMARKET PRIMARILY 30+ YEAR OLD PROPERTIES, SOME WITHSIGNIFICANT DERERRED MAINTENANCE.

NO PMA POPULATION GROWTH PROJECTED

UNRELATED & DETERIORATED COMMERCIAL PROPERTY ON THE FRONTAGE

NOT PART OF THE OWNERSHIP, LEGAL DESCRIPTION, OR SUBJECT MORTGAGE.

NEGATIVE NOI AND THE “AS-IS” VALUE IS MORE THAN THE EXISTING INDEBTEDNESS.

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STRENGTHS

OWNERSHIP HAS $3.2 MILLION IN LIQUIDITY

GENERAL CONTRACTOR HAS PREVIOUS EXPERIENCE IN REHAB PROJECTS.

GENERAL CONTRCTOR IS STRONG FINANCIALLY.

UPON COMPLETION OF THE PROPOSED RENOVATION, THE SUBJECT WOULD

BE IN MANY RESPECTS SUPERIOR TO MOST OF THE APARTMENT COMMUNITIES

IN THE PMA.

THE PROJECT WILL HAVE NO ADVERSE AFFECT ON OTHER HUD INSURED

APARTMENT PROPERTIES IN THE MARKET AREA.

THE MANAGEMENT COMPANY AND CONTRACTOR ARE CONSIDERED TO HAVE

THE FINANCIAL CAPACITY EXPERIENCE, MOTIVATION AND INTEGRITY TO BE

SUCCESSFUL IN THE LONG-TERM OPERATION OF THE SUBJECT PROPERTY.

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MORTGAGE CREDIT MODULE

OWNER EXPERIENCE

RESUMES?

OWNER HAS LIMITED EXPERIENCE

NO EXPERIENCE WITH SIMILAR REHAB OR DISTRESSED

PROJECTS OF THIS SIZE

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MORTGAGE CREDIT MODULE (CONTINUED)

FINANCIAL CAPACITY:

WOKING CAPITAL ANALYSIS: (EXAMPLE)

CURRENT ASSETS/CURRENT LIABILITIES = 2% OR

GREATER

Current Assets = $1,525,500 (FROM STATEMENTS)

Current Liabilities = 525,500 (FROM STATEMENTS)

Working Capital = 2.9%

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VALUATION MODULE

THE PROJECT HAS NEGATIVE NOI AND WILL CONTINUE TO OPERATE AT A NEGATIVE NOI DURING CONSTRUCTION.

WHAT ARE THE ACCEPTABLE TECHNIQUES TO VALUE A NEGATIVE CASHFLOW PROPERTY?

RESIDUAL NOT PREFERRED, BUT ACCEPTABLE IF NO DATA

DIRECT COMPARISON WITH SIMILARLY DISTRESSED PROPERTIES PREFERRED METHOD

IS THE INCOME & SALES COMPARISON “AS IF STABILIZED” APPROACH USEFUL?

IS THE PURCHASE PRICE A RELIABLE INDICATOR OF VALUE?

ANSWER: APPRAISER DID MORE THAN HE NEEDED TO, AND SUPPORTED THE CONCLUSION MORE THAN ADEQUATELY

WILL THE LIMITED REHABILITATION SCOPE OF WORK CURE THE FUNCTIONAL OBSOLENSCENCE?

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VALUATION (CONTINUED)

MARKET RELATED ISSUES:

EMAS OPINES INSUFFICIENT GROWTH IN DEMAND TO

ADDITIONAL UNITS IN PMA.

THE PROJECT IS LOCATED IN A MARKET WITH A

VACANCY OF 20%, YET THE MARKET STUDY IDENTIFIES

PENT-UP DEMAND. IS THIS POSSIBLE AND CAN YOU BASE

DEMAND SOLELY ON PENT-UP DEMAND?

WILL THE REHABILITATION AND CHANGE IN OWNERSHIP

OVERCOME A PROPERTY STIGMATIZED BY A BAD

REPUTATION?

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VALUATION (CONTINUED)

COMMERCIAL PROPERTY NOT PART OF THE PROJECT:

LACK OF CONTROL MAY NEGATIVELY AFFECT THE PROJECT

UNDESIRABLE OR UNSAVORY COMMERCIAL TENNANTS COULD BE A PROBLEM

DEFERRED MAINTENANCE COULD BE A PROBLEM

PARKING AND TRAFFIC RELATED ISSUES COULD BE A PROBLEM

POSSIBLE MITIGANTS:

BUILDING DESIGN COULD POTENTIALLY MINIMIZE THE COMMERCIAL PROPERTY’S IMPACT

LANDSCAPING OR SITE DESIGN TO SEPARATE OR OTHERWISE MINIMIZE THE POTENTIAL IMPACT

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VALUATION (CONTINUED)

LOCATED IN AN OLDER, FULLY DEVELOPED PART OF KANSAS CITY:

MAJORITY OF SURROUNDING PROPERTIES ARE 30+ YEARS

OLD, CLASS B & C PROPERTIES

MAY BE AN OVER-IMPROVEMENT FOR THE MARKET.

DOES IT MATCH IT’S SURROUNDING ENVIRONS?

COMPARABLES WILL LIKELY BE FROM OUTSIDE OF THE PMA

BY NECESSITY, THEIR RELEVANCY MUST BE SCRUTINIZED.

MITIGANT:

NO NEW PRODUCT PLANNED, THE SUBJECT WILL

LIKELY HAVE LITTLE COMPETITION DURING LEASE-UP.

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VALUATION (CONTINUED)

MEDIAN HH INCOME IN PMA IS LOWER THAN THE

KANSAS STATE AVERAGE, AND GROWTH HAS BEEN

SLOW.

AFTER REHAB, RENTS WILL INCREASE. THE PROPOSAL

INDICATES A RISE OF APPROXIMATELY $50/MO/UNIT. IS

THIS SIGNIFICANT?

WILL THE ANTICIPATED 86 CURRENT TENANTS REALLY

STAY AFTER COMPLETION? WILL THEY BE ABLE TO

AFFORD THE NEW RENTS? HOW WILL THIS IMPACT THE

ABSORPTION ANALYSIS?

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VALUATION (CONTINUED)

ENVIRONMENTAL ISSUES:

ASBESTOS, LEAD BASED PAINT AND MOLD

IDENTIFIED ON SITE.

OLD FEMA FLOOD DATS. (AND FLOOD ZONES ON

THE NORTH AND WESTERN EDGES OF THE SITE

INDICATE FLOODING IS AN ISSUE)

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DECISION

WHAT WOULD BE YOUR DECISION?

WHY?

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SILK STREET APARTMENTS

The Answer  

THE NATIONAL LOAN COMMITTEE WAS UNABLE TO APPROVE THE ISSUANCE OF THE FIRM COMMITMENT FOR SILK STREET APARTMENTS. THE NLC RECOMMENDED THAT PRIOR TO FURTHER CONSIDERATION OF THIS PROJECT, THAT THE LENDER TAKE INTO ACCOUNT THE FOLLOWING: 1. THE ANCILLARY INCOME IS TOO HIGH IN PROPORTION TO THE RENTAL INCOME.2. THE DEVELOPER DOES NOT APPERR TO HAVE SUFFICIENT INVESTMENT IN THE PROJECT.3. THERE IS NO EVIDENCE THAT THE DEVELOPER HAS SUFFICIENT EXPERIENCE TO REHABILITATE A PROJECT THAT HAS SUCH A TROUBLED HISTORY.