NEF Asset Management Development AM Program PDF

Construction & Session 5 Asset Management Assessment, Rating, and Reporting Risk During the Oversight of Development Period Development NEF Asset Management Development AM...

Construction & Session 5 Asset Management Assessment, Rating, and Reporting Risk During the Oversight of Development Period Development NEF Asset Management Development AM Program Managing Production, Expanding Expertise, and Creating Growth Opportunities Emmett Street Apartments Bickerdike  Wait…Where Are We !? Phase I – “Qualified” Asset Manager Program Session 1: Introduction of Program (Bob, Carey, Peter) Session 2: Documentation and Process During the Construction Period (Baker Tilly, Bob) Session 3: Third-Party Monitors & 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) *Qualified To Monitor Construction in Liaison with CRM  Today’s Outline Assessing, Rating, and Reporting Development Risk I. Recap II. Coordination with CRM at Closing III. Construction Risk Rating During Development III. Lease-Up and Stabilization Risk Rating During Development IV. Development Risk Power BI Report – Update! IV. Q and A  Recap (1 of 3): Qualification and Specialization “Qualified” Asset Manager Asset Manager, qualified in development oversight , active during construction, and with mixed portfolio of stabilized and non-stabilized projects. Member of Regional asset team and liaison with assigned CRM  Example: AM may take over monitoring of small number of projects under construction, potentially already in AM’s portfolio Development Asset Manager Specialized Asset Manager, qualified in all aspects of development AM, overseeing a mixed portfolio that primarily composed of non-stabilized projects (>50%). Member of Regional asset team and 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 within Qualified AM or DevAM portfolios, with technical oversight by CRM  Recap (2 of 3) Standard Monitoring Documents Periodic Construction Payment Draw Packages Contactor’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  Recap (3 of 3) - NEF AMD Development Risk Ratings Current Process Construction Risk Management Risk Rates Monthly (until PIS) Asset Manager Risk Rates Quarterly, Relying on CRM for Construction Update and Rating CRM and AM RR’s must be coordinated at Quarterly Risk Ratings Under New Program “Qualified” Asset Managers and Development Asset Managers Will Be Rating Monthly and Quarterly for a Portion of Projects Under Construction, with Guidance from and in Partnership with Construction Risk Management Projects Under Construction Will Be Monitored and Rated by Both CRM and AM “Either/Or and Sometimes Both” Depending Upon Assignment (2023-2025 Goal 50-75%) CRM’s Will Always Be Assigned to Projects Under Construction, But Role Will Vary By “Qualified” AM and DevAM Involvement  Pre-Investment CRM Due Diligence and Closing Coordination CRM’s Perform Due Diligence and Mitigate Risk Prior to Investment. Initial Mission Role Was Limited to Pre-Investment Monitoring Later Added. Currently, Bulk of CRM Resources Remain Involved With Pre-Investment CRM IRC/Closing Risk Reviews and 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  CRM Pre-Investment Due Diligence and Rating CRM Preliminary IRC and Final Closing Review Highlight Key Issues Identified by CRM  Pre-Investment CRM Due Diligence and Closing Coordination Post-Closing Coordination Between CRM and AM Utilize and Expand Scope of PM-to-AM Handoff 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 AHIC Development Risk Rating Construction Risk  AHIC Development Risk Ratings – Nuances Straight Forward:  Construction/Lease-up: Review Schedule; Monitor’s Report; Leasing. Rate Following Guidelines *Note That There Was an Error in SMT: 30=B  Financial: Review Construction Draw; Monitor’s Report; CO’s, PCO Log; S/U’s. Rate Following Guidelines. *Overruns without Sources PIS Primary Development Risk Categories-Post Construction Stabilization: Risk That the Project is Not Meeting Projected Rents or Expenses to satisfy the Stabilized Occupancy Benchmark. This Could Delay Conversion, Hold Up the Conversion Equity or Require a Loan Right-Sizing or Additional Reserves. Conversion: Multiple Risks Exist Related to Conversion. The Risk that the Project Does Not Convert Prior to the Construction Loan Maturity Date or the Perm Loan Rate Lock Expiration. The Risk That the Project Can Not Support the Projected Debt Amount Based on Actual Rents or Expenses. Could Result in Loan Defaults, Loss of Permanent Financing and/or Loan Right-Sizing. Financial: The Risk That a Project Will Have a Source and Use Gap Related to Cost Overruns, Leasing Delays, or Adjusters. Could Impact GP Fee, Require The DCG Be Called, or Require Additional New Sources Be  AHIC Development Risk Ratings > PIS Primary Development Risk Categories-Leasing Risk Ratings Should Focus on Leasing Projections vs. Actual Leasing Projections Can Be Found in the Closing Spreadsheet on the LU (Lease Up) Tab.  AHIC Development Risk Ratings > PIS Primary Development Risk Categories-Leasing cont’d For Quick Reference in SMT, the Lease Up Schedule Screen Pulls the Projected Leasing From the Closing Spreadsheet.  AHIC Development Risk Ratings > PIS Primary Development Risk Categories-Leasing cont’d 2 1 1. Leasing Should Be Entered Monthly In The Initial Lease Up Tab In The Compliance Tracking Screen. 2. Select The Construction/Lease Up Sub-Rating That Matches Actual Leasing Progress Compared to Projected.  AHIC Development Risk Ratings Primary Development Risk Categories-Leasing cont’d 1 1. Projected Leasing From the Lease Up Schedule Screen and Actual Leasing From the Initial Lease Up on The Compliance Tracking Screen, Pull Into the AHIC graph. 2. If There is An Obvious Delay Showing On the Graph, Be Sure to Note “Why” In the Write Up. 3. If There is No Leasing Update Showing in the Graph for the Prior Month, Be Sure to Request a Rent Roll and Update the Initial Lease Up Screen. 4. If Projected QO Has Been Missed, Include an Update in the Write Up Noting When They Expect To Meet Qualified Occupancy. 2&3  AHIC Development Risk Ratings > PIS Primary Development Risk Categories-Compliance The AHIC Score Card Gives Limited Options to Accurately Identify Compliance Issues Post Construction. AHIC Write Ups Should Always Consider the Status of the Compliance Review, any Leasing Delays that Might Result in Compliance Issues including 15-Year Credits and/or Risk of Meeting the Minimum Set-Aside. If You Know That Any Of These Issues Exist at the Project, In Addition to Noting Them In the Write Up, Be Sure that you Select an Appropriate Sub-Rating for “Program Compliance”. If the Projected QO Date Has Passed, Include the Revised Projected Date in the AHIC Write Up.  AHIC Development Risk Ratings Primary Development Risk Categories-Construction Loan Maturity Dates Construction Loan Maturity Dates Should Be Very Closely Monitored These Dates Can Be Found In The Documents Screen In The Legal Checklist Folder In Folder #27 Construction Loan (Often Named Construction and Permanent Loan If It’s The Same Lender For Both) The Maturity Dates Are Generally Found In The Note, The Loan Agreement and/or The Loan Disbursement Agreement (ex. Maturity Date, Extended Maturity Date, Conversion Date, Outside Conversion Date etc.) These Documents Will Also Have Any Available Extensions Noted.  AHIC Development Risk Ratings Primary Development Risk Categories-Construction Loan Maturity Dates cont’d Loan Maturity Dates Are Tracked In SMT In the Financing Screen. Construction These Estimated Dates Upload From The Closing Spreadsheet But are Later Updated Post-Closing. Check for Notes On The Right-Hand Side To See If/When Dates Were Verified.  AHIC Development Risk Ratings Primary Development Risk Categories-Construction Loan Maturity Dates Cont’d New Fields Have Been Added To Better Track These Dates and Ensure Accuracy  AHIC Development Risk Ratings Primary Development Risk Categories-Permanent Loan Rate Lock Rate Lock Risk Is Currently an Investor Hot Button Issue and A Real Risk For a Lot of Deals. Increase In The Number of Deals Delayed During Construction and/or Lease Up Rising Interest Rates Mean that If A Rate Lock is Lost It’s Feasible the Permanent Loan Amount Can No Longer Be Supported and May Need To Be Right-Sized Heightened Awareness and Tracking Mechanism are A High Priority for NEF Right Now Stress Test Performed to Identify Deals That Might Be At Risk Reviewing Perm Loan Commitments and Adding Dates and Tracking Notes In SMT Projects With Significant Delays Should Have Notes About the Perm Loan Rate Lock Added to the AHIC Write Up  AHIC Development Risk Ratings Primary Development Risk Categories-Construction and Permanent Loans AHIC Provides Detailed Criteria to Rate Both Construction Loan Risk and Permanent Loan Risk. You Must Review and Understand the Loan Documents and Dates To Rate These Categories Accurately. Like Other AHIC Ratings, There Are Some Nuances-Deals that Fall between the Categories. For These, Choose the Most Representative Rating, and Add Additional Detail to the AHIC A B C D F Write Up.  AHIC Development Risk Ratings Primary Development Risk Categories-Stabilization and Conversion The AHIC Development Rating Does Not Have A Designated Category Sub-Rating to Address Stabilization. The Status of Stabilization and Conversion Are Among the Most Frequently Asked Questions from Investors on Deals in Development. Without an AHIC Category to Address This, the Status Should Always Be Noted In the AHIC Write Up. When Is It Expected the Project Will Stabilize? Is The Expected Stabilization Timeline Within The Timeframe Permitted in The Construction and Permanent Loan Documents? Are We Seeing Any Material Variations in Actual Rents or Expenses that Might Delay Stabilization and/or Conversion? Is there a Conversion Date Scheduled or Targeted? Is it Anticipated That The Scheduled/Targeted Date will be Met? If Not, Are There Extensions Available and/or Granted?  AHIC Development Risk Ratings > PIS Primary Development Risk Categories-Financial The Financial Sub-Rating on the Development AHIC Card is Mostly Focused on Construction Cost Overruns. Post Construction, This Rating Should Be Used to Look at Overall Sources and Uses for the Project. Consider All Of The Following When Looking at Project Sources and Uses: Construction Cost Overruns and/or Contingency Balance Construction Loan Balance, and Sources of Repayment Adjusters, Upward or Downward Remaining Developer Fee Permanent Loan Amount (Projected or Right-Sized) If It Appears that There Might Be a Source/Use Imbalance, Be Sure the Proper Sub-Rating for Financial is Selected and That Details Are Included in the AHIC Write Up. Always Include the Interim Adjuster Amount in the AHIC Write Up, It Is Another Commonly Requested Investor Question on Deals in Development. SMT Development Power BI Report SMT PBI Development Risk Report SMT PBI Development Risk Report SMT PBI Development Risk Report SMT PBI Development Risk Report SMT PBI Development Risk Report SMT PBI Development Risk Report Q and A End of Session Five PPT (Following slides are reference only)