Written by Kiefer Maracle
July 3, 2019
As a member of the Cahdco team, I am drawn to the office every morning by the prospect of a fresh coffee and the opportunity to contribute to something that creates lasting value for our community. Many of the projects we undertake directly result in the creation of new affordable homes. In truth, at the end of the day that’s why many of my colleagues and I are here. Fortunately for me, there is no shortage in available opportunities or ideas for creating new housing. Despite many competing financial priorities, our clients are always looking to push their boundaries to achieve their mission and I am continuously impressed by their resourcefulness and willingness to overcome challenges. Unfortunately, we, too, are constrained by a limited set of resources with which to pursue these ideas. As an organization Cahdco must constantly review and balance our risks and opportunities to choose the best projects we can. From a portfolio perspective this means drawing a clear picture of the scope and viability of each project and continuing to update this picture as our work progresses. From pre-feasibility through construction, the tool our team uses most often for determining a project’s viability is our own Pro Forma model.
In their simplest form real estate Pro Formas are calculators. They model a portion of the known information on a project as an input along with a series of assumptions and then output a key metric or metrics that indicate whether that given project is likely to be feasible. These calculators can range in complexity from a paper template to a custom built financial application. For example, a very simple Pro Forma may provide an order of magnitude estimate of the total cost to construct a project by capturing the project’s gross floor area (GFA) and multiplying it with an assumed set of construction costs. Alternatively, in their most complex forms these tools can be automated to capture construction conditions (e.g. built form, zoning, use, and land cost) and combine them with market assumptions (e.g. construction cost, inflation, and lending rate) to predict information such as the 30-year cash flow, the project’s Debt Coverage Ratio (DCR), or the project’s Internal Rate of Return (IRR).
At Cahdco, starting with Dennis Carr and continuing through each of our past and present staff, we have developed an effective Pro Forma in Excel that we can adapt to each project’s unique needs. Our Pro Forma model incorporates the available project information along with educated assumptions to determine whether that project is feasible under a series of present or future conditions. Through our continuous refinement this Pro Forma template has become rather complex. That complexity allows us to more accurately determine the feasibility of our projects; however, it also makes our Pro Forma inaccessible to anyone who doesn’t use them on a regular basis. I am going to tell you why that matters and what a charity from Toronto has been doing to address this issue.
Having a consultant such as Cahdco create a Pro Forma model to determine the viability of your project is a prudent measure to ensure that your project is a success. However, in an industry that relies on partnerships and pooled resources to deliver new homes there is a benefit to having an option to determine whether your concept is feasible before you invest in the services of a of professional team such as Cahdco. Further, in our present environment of renewed Federal involvement in housing, the capacity to show our peers, potential partners, or policy makers where their money could make the most impact within a project is a key to enabling them to participate in a discourse that can have an impact to the whole sector. An interactive and intuitive Pro Forma could address both of these needs for a way to quickly explore further collaboration and feasibility through informed real-time feedback.
With this in mind, I recently had the opportunity to review the “Ontario Affordable Housing Calculator” (OAHC), it is an interactive Pro Forma released in collaboration by Evergreen and the Grounded Solutions Network with financial support from the Ontario government.
Evergreen is a Toronto based charity that’s on a mission to enable cities to flourish. Within their many endeavors they support this mission through their work in advocacy and by hosting a city innovation lab. The Ground Solutions Network is an Oregon based non-Profit on a mission to cultivate communities through their advocacy for inclusionary zoning and the formation of community land trusts. The OAHC is a product of their collective work in response to the need for a Pro Forma that can enable community organizers, charities, non-profits, and policy makers to collaborate on solutions for the development of affordable ownership and rental housing. This web-based interactive Pro Forma provides a fun and approachable interface that allows anyone to begin exploring the feasibility of opportunities in rental or ownership. The tool is well documented and provides multiple prepopulated templates as well as a series of video based how-to guides for getting started in modelling.
As a brief overview, the OAHC model allows you to capture information such as tenure model, market type, affordability criteria, development costs, operating costs, profit requirements and the inclusion of any municipal development incentives. With this information the model can provide a report with a detailed estimate of total project cost, profit, predicted net operating income, and other industry metrics. The OAHC website also allows you to create a profile to save your Pro Formas for further analysis or to share with others. The accessibility of this tool enables users to generate the discussions that we all need to be having in order to achieve the greatest collective impact available to us.
Having built a couple of Pro Formas on the site, I very much appreciate the work these two organizations have put in to developing such a well thought out and practical tool. I understand the project is still under construction and I look forward to the future iterations of this tool. For the purposes of my work, I found the OAHC currently does not offer the flexibility and precise control that I am used to when working on a project. For that reason it won’t replace Cahdco’s Pro Forma or the need to hire a professional consultant. However, I do see a use for this tool within our workflow when demonstrating to clients and partners how we analyze the viability of a project. A personal key take away from this product is the inclusion of pre-calculated municipal development incentives. I think taking a step back to appreciate these tools and their potential impact on our projects is a great starting point for a conversation around future advocacy work with policy makers.
At the end of the day whether it’s the OAHC or Cahdco’s Excel model, Pro Formas are only one of the many tools we must use when evaluating our risks and opportunities for development. They serve to inform the best tools that, we, as a team, bring to our work which is our experience and expert judgement. After all, the model is only ever as good as its assumptions.
I would encourage anyone interested in exploring this tool further to head over to Evergreen’s website to take a look by following the link here: https://ontariocalculator.evergreen.ca/ihc/
July 3, 2019