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REDWOOD CITY FAIR AND AFFORDABLE HOUSING ORDINANCE <br /> <br />Economic & Planning Systems, Inc. 35 Affordable Housing Impacts <br />• Scenario 3: Ordinance’s Potential Impact on a Pre-1995 Affordable Housing <br />Project: This scenario assumes the project is subject to the same new fee <br />burdens as Scenario 2, plus local rent stabilization under the proposed <br />Ordinance (thus only applies to pre-1995 units). Rental revenue is assumed to <br />grow at 2.0 percent annually, reflecting the approximate 10-year average of 60 <br />percent of percent change in CPI under the proposed Ordinance. <br />The cash-flow analysis compares the differential financial performance of the <br />three scenarios described above by forecasting their respective (1) debt coverage <br />ratio, (2) funding for replacement reserve, and (3) funding for resident services <br />over time (detailed assumptions and calculations are provided in Appendix A). The <br />scenarios do not quantify the financial impact of other tenant protection <br />provisions discussed in Chapter 2, including tenant safety plans, relocation <br />assistance, legal exposure, right-to-return obligations, administrative hearings, or <br />compliance costs. As a result, the modeled impacts likely understate the full <br />potential cost burden of the proposed Ordinance <br />The pro forma analysis is designed to serve as an illustrative model for how the <br />proposed Ordinance may affect an existing operating affordable housing project <br />over time, but it also has implications for prospective affordable housing <br />development. To the extent similar cost pressures, reduced rent growth, or <br />additional operating uncertainty are anticipated at the time of underwriting, <br />affordable housing projects may face greater difficulty securing debt, tax credit <br />equity, public subsidy, or other financing needed to proceed. <br />Debt Service Coverage Ratio (DSCR) <br />A project’s debt service coverage is the most important operating feasibility <br />metric in the case study because it shows the project’s ability to generate <br />sufficient operating income to meet required debt obligations over time. The <br />DSCR is calculated as the ratio of annual net operating revenue (including all fees <br />and contributions to reserves) to debt service (a ratio of 1.0 means that a building <br />has zero surplus cash-flow and is at risk of default). The baseline scenario begins <br />with a relatively healthy debt service coverage ratio of 1.15. It should be noted <br />that many older affordable multifamily projects may already operate with lower <br />debt service coverage ratios, thinner reserves, or more limited cash flow. <br />In the analysis, residual receipts (e.g., loan repayments to so-called soft lenders <br />such as the City or county) are treated as a “below-the-line” use of remaining cash <br />flow and are reduced first as the project experiences financial pressure. <br />Replacement reserve contributions and resident services funding are treated as <br />above-the-line operating uses. The model continues funding these items unless <br />doing so would prevent the project from fulfilling senior debt obligations, meaning <br />the DSCR would otherwise fall below 1.0. If residual receipts are reduced to zero <br />and additional pressure remains, the model then limits replacement reserve <br />contributions, followed by reductions to resident services funding. <br />8.A. - Page 94 of 168 <br />104