Development Asset Management Quiz

Construction & Asset Management Oversight of Development

• The presentation is about construction and asset management oversight of developments, specifically the NEF Asset Management Development AM Program.

Session 5: Assessment, Rating, and Reporting Risk During the Development Period

• This session focuses on assessing, rating, and reporting risk during the development period.
• Key personnel involved include Bob, Carey, Peter, Baker Tilly, LM (Linn-Mathes), Vivian.

Phase I - "Qualified" Asset Manager Program

• Session 1: Program introduction (Bob, Carey, Peter)
• Session 2: Documentation and process during construction (Baker Tilly, Bob)
• Session 3: Third-party monitors and reports (LM, Bob)
• Session 4: SMT & Box Use, and process during construction (Vivian, Bob)
• Session 5: Assessing, rating, and reporting development risk (Carey, Peter)
• Session 6: Working in liaison with CRM (Bob, Vivian, Carey, Peter)

Today's Outline (Assessing, Rating, and Reporting Development Risk)

• I. Recap: Recap with CRM at closing
• II. Coordination with CRM at Closing
• III. Construction Risk Rating: Risk rating during development
• III. Lease-Up and Stabilization Risk Rating: Risk rating during development
• IV. Development Risk Power BI Report: Update
• IV. Q and A

Qualified Asset Manager Specialization

• Asset Manager: qualified in development oversight, active during construction; and with mixed portfolio of stabilized and non-stabilized projects. Member of regional asset team, liaison with assigned CRM
• Example: managing small number of projects under construction
• Development Asset Manager: specialized in all aspects of development; overseeing a mixed portfolio, primarily non-stabilized projects (>50%). Member of regional asset team, strong liaison with assigned CRM.
• Example: Portfolio may be mixed 1/3 under construction, 1/3 >PIS but non-stabilized, 1/3 stabilized.
• Program Goal 2023-25: 50-75% of projects under construction Qualified AM or DevAM portfolio, technically overseen by CRM.

Standard Monitoring Documents (Recap 2 of 3)

• Periodic Construction Payment Draw Packages
• Contractor's sworn statement and trade payment breakdown
• Payment Certificate ("G702")
• Change Orders
• Meeting Minutes
• Schedule Updates
• Owner's sworn statement/sources and uses
• Third-party construction monitor's report
• Coordination with CRM

NEF AMD Development Risk Ratings (Recap 3 of 3)

• Current Process: Construction risk management risk rates monthly (until PIS); Asset manager risk rates quarterly (relying on CRM); CRM and AM risk ratings coordinated quarterly.
• Under New Program: Qualified/Development Asset Managers will be rating monthly/quarterly for portion of projects under construction (with guidance from and in partnership with Construction Risk Management).
• Projects will be monitored/rated by both CRM and AM ("Either/Or and Sometimes Both"). Goal 50-75% (2023-2025). CRM will be assigned to all projects under construction; roles vary between AM and DevAM involvement.

Pre-Investment Closing Coordination

• CRM performs due diligence and mitigates risk prior to investment.
• Initial CRM role limited to pre-investment monitoring.
• Bulk of CRM resources remain involved with pre-investment.
• CRM IRC/Closing Risk Reviews & recommendations
• Available at IRC and closing, uploaded to SMT
• CRM engages third-party construction monitor.
• CRM determines need based on review; engages or approves.

CRM Review in SMT

• Document overview with Construction Checklist, features like viewing details, Effective Date, and Year.
• Document display with fields for Doc Date, Recv Date, Apprv Date.
• Includes functions for printing/exporting data.

CRM Pre-Investment Due Diligence and Final Closing Review

• Overall project risk rating is 3, C- (moderate).
• Risk areas include environmental (low hazardous materials), soil/site (inadequate bearing capacity), architect (new), contractor (new), construction budget (price escalation impacting cost), and construction contingency (only 3% vs. NEF standard of 5% for new construction).

Pre-Investment Coordination and Post-Closing Coordination

• PM: Issues from UW and Closing Process
• CRM: Construction Risk and Monitoring Program
• AM: Market, Sponsor, Property Manager, Equity
• ORG: Sponsor, Sensitivities
• Investment Relations -- Especially for SIF
• Utilize and expand scope of PM-to-AM handoff

AHIC Development Risk Rating-Construction Risk, Lease-Up, and Conversion Risk

• Presentation on AHIC (American Housing Investment Corporation) development risk ratings, focusing on construction, lease-up, and conversion risks.
• Detailed guidelines and categories for rating these aspects of development projects.
• Including how to utilize them for practical application during the projects life cycle.

AHIC Development Risk Ratings – Nuances

• Categories for rating construction, financial, GP/Sponsor/Management, and program compliance issues (GOTG),
• Construction/Lease-up includes issues with delays and sequencing, quality/scope impact
• Financial includes issues with cost overruns and sources for covering shortfalls, reduction of scope of work, and reduction of quality
• GP/Sponsor/Management includes issues with replacement and financial strength, capacity, staff, and responsiveness.

AHIC Development Risk Ratings – Nuances

• Covers specific situations where projects fall between standard categories like "missed PIS, within allocation period", and "less-than-straight-forward" projects.
• Also addresses issues arising from general contractors, GP/Sponsor/Developer management, and program compliance.
• Highlights how specific data issues can impact ratings.

SMT PBI Development Risk Report

• Includes reports on various projects, showing details like Construction Risk Manager, VP Asset, Asset Manager, Status Codes, Construction Status (Construction, Lease-Up, Pre-Stabilized, Secured, Stabilized), projected Completion Days, % Contingency Used, etc.

SMT PBI Development Risk Report

• Shows metrics like Percent Contingency Used, Projects Under Construction, Cost Change Order, Causes of Cost Change Orders, Causes of Delay, and related project info (e.g., SMT #, Project Name, initial LU%, Current RR).

AHIC Development Risk Ratings – Primary Development Risk Categories-Post Construction

• Leasing: the risk that a project falls behind leasing projections.
• Compliance: the risk that a project does not place all units into Qualified Tenant occupancy; risks of material non-compliance, missing minimum set-aside, and 2/3rd credits.
• Construction loan maturity date: the risk is that the construction loan comes due before necessary projects are complete to support loan repayment; this could result in lender default.
• Permanent loan rate lock: the risk that a rate lock expires, leading to unfavorable new rates and needing loan right-sizing/sources.

AHIC Development Risk Ratings – Primary Development Risk Categories - Post Construction

• Stabilization: the risk the project does not meet projected rents or expenses satisfying the stabilized occupancy benchmark, causing delays in conversion or requiring loan right-sizing.
• Conversion: multiple risks exist in conversion: the risk the project does not convert before the construction or permanent loan maturity date, the risk that the project does not meet the expected debt amount, and the risk of loan default.
• Financial: risk for the project to not meet cost overrun, lease delays expectations from lease up, and need for additional GP fees requiring the DCG to be called.

AHIC Development Risk Ratings – Primary Development Risk Categories – Permanent Loan Rate Lock

• Rate Lock Risk: the risk that project is unable to secure financing at the desired rate lock, leading to delays.
• The risk that project delays the completion or lease-up of the project, increases interest rates in the interim period leading to financing risks. Increases in interest rates that could significantly increase costs.
• Heightened Awareness: tracking mechanism for projects at risk, and reviewing loan commitments with added dates, tracking, and related notes in SMT.
• Significant Delays: Add notes on the permanent loan rate lock.

AHIC Development Risk Ratings – Primary Development Risk Categories – Permanent Loans

• Describes the criteria for rating construction and permanent loans, and nuances where deals fall between clear categories.
• Includes aspects like construction loans being anticipated to be paid, permanent loan conversion on track with original projections, and situations where the loan is not anticipated to be paid within the original terms, indicating potential for risks.

AHIC Development Risk Ratings – Primary Development Risk Categories – Stabilization and Conversion

• Status of stabilization and conversion are areas frequently asked about by investors in development deals.
• These are highlighted, noted for clarity in the AHIC write-up,
• It addresses the timeline, material variations, schedules and extensions, noting that the AHIC development rating does not provide designated categorical sub-ratings focusing on stabilization.

AHIC Development Risk Ratings – Primary Development Risk Categories – Financial

• The financial sub-rating is focused primarily on construction cost overruns, and post-construction the overall balance between project sources and uses is considered.
• Sources and uses for the project (e.g., construction cost overruns, construction loan balances, remaining developer fees, and permanent loan amounts).
• Proper sub-rating for financial issues is selected, and specific details related to imbalances are included.

SMT Development Power BI Report

• A report showcasing various development metrics with data pertaining to projects like construction delays, revised completion dates, and current risk ratings (e.g., overall, construction lease-up, financial, construction loan).

Q and A

• A general Q&A section for the presentation