Case Study: Financing an Inner-City Supermarket Charles Quintera… 1 answer below »

I want a minimum three page double spaced response. As in all of the case studies, you are free to make assumptions, but please make sure that you express these clearly.

“Case Study: Financing an Inner-City Supermarket Charles Quintera, community development director for the city of Nolton, has contacted you to help with the financing of a difficult project. Nolton Community Corporation (NCC) is developing a supermarket in a vacant building in the city’s Northside neighborhood. Although the project is worthwhile, its feasibility depends on filling a large financing gap. Your assignment is to devise a financing plan for the project. This plan needs to delineate the required amount of debt, private investment, and grants for the project to be feasible and to identify the specific sources for each part of the financing plan. He is particularly concerned about the amount and type of financing that the city of Nolton may need to provide to make the project feasible. As the CD director, Charles wants to have a realistic plan to propose to the mayor when NCC approaches the city for help. Since it is an election year, he knows the mayor will be responsive, but the city already faces budget cuts due to level tax collections and declining state aid. Although the city has Community Development Block Grant (CDBG) funds to fund the project, the demand for these dollars far exceeds available funding. He wants a plan that maximizes other resources, in a realistic manner, to reduce the city’s financial contribution. Northside Northside is a low-income neighborhood that faces the multiple problems of crime, disinvestment, housing abandonment, and limited jobs that confront many inner-city communities. With a growing population (the core neighborhood population grew by 17% to 2,997 persons from 1980 to 1990) and a rapidly increasing minority population (the share of minority residents grew from 15% to 43% from 1980 to 1990), the neighborhood is undergoing considerable change. These changes have been accompanied by housing abandonment and loss from arson, foreclosure, and crime. Approximately 50 buildings are vacant, representing over 10% of the neighborhood’s housing units. Disinvestment also encompasses commercial properties, with a supermarket and a discount store closed in recent years. Drug trafficking has hurt the neighborhood by increasing gang activity and related crimes. Local Response To address these problems, local residents, the city housing authority, and city officials established the “Reclaim Our Community” (ROC) demonstration program. ROC organized residents to address neighborhood safety and physical deterioration while expanding youth services. It established a neighborhood crime watch, secured improved street lighting, and sponsored several neighborhood cleanups. It also converted an abandoned lot into a garden, secured the reopening of several city parks, and organized youth activities such as field trips, dances, and talent shows. Nolton Community Corporation (NCC) was started 3 years ago as a community development corporation to address affordable housing and economic development needs. NCC started a microloan program to support home-based and start-up businesses and rehabilitated several abandoned three-family properties for sale to low-income residents. Supermarket Project In addition to addressing crime and housing abandonment, ROC and NCC are pursuing additional projects to stem disinvestment and improve the neighborhood. Both organizations have focused on a vacant former discount store on the neighborhood’s main commercial street, which they believe is a potential supermarket site. The site is a former Ames discount store that was used as a flea market before the current owner, an office furniture store, used it for storage. The current owner is offering the property for sale with a $400,000 asking price. Since the Northside neighborhood has no supermarket, this use appears to be an appropriate reuse option. A supermarket will benefit residents by reducing their reliance on high-cost convenience stores and decrease their need to travel to stores on the outskirts of the city for groceries while creating jobs for local residents. NCC obtained a $15,000 Economic Development Administration technical assistance grant to study the supermarket’s feasibility. Market Analysis A market analysis was completed as a first step in assessing the supermarket’s feasibility by determining whether a sufficient market remained in the Northside neighborhood to support a supermarket, given other supermarkets in the city. Based on the number of households and income levels within the 1.5-mile primary trade area for the Ames site, the market analysis concluded that almost $57 million in spending potential existed for a new supermarket. However, with competition from four supermarkets located in or adjacent to the primary trade area, the market analysis concluded that a new supermarket would not generate sufficient sales to support the minimum 35,000-square foot store size required to attract a major chain supermarket. Therefore, an independent grocery store operator represented a more probable candidate for the site. Based on capturing 10% of trade area spending plus additional sales from catering to the citywide minority population and a sales level of $350 per square foot, the study concluded that the market could support a 16,000- to 18,000-square foot independent grocery store. Development Plan Based on the market analysis, NCC decided to focus on attracting an independent grocery store and include additional retail space for other neighborhood-based stores that could benefit from being located next to the grocery store. Potential stores for this space include a hairdresser, small restaurant, or laundromat. With another 2,000 to 4,000 square feet of retail space and a grocery store, the project would be developed as a 20,000-square foot neighborhood shopping center. With this development plan, NCC next focused on determining the project’s development costs and operating income. Development Budget The project’s development budget is presented in Exhibit 14.1. Total development costs are estimated at $1,965,291. Although the current asking price is $400,000, a lower $200,000 acquisition is included as a more realistic estimate of fair market value. Construction costs reflect the proposed uses and a phased approach to the 60,000-square foot building. It includes site and shell building repairs, roof repairs for the entire building, rehabilitation for the 20,000 square feet of leased space, new HVAC and electric systems for the improved space, and costs to finish space for the grocery store and retail tenants. Soft costs were estimated based on figures from comparable projects, an estimated construction period of 7 months, current real estate taxes, and insurance estimates from an insurance agent. A 5% soft-cost contingency is included along with a $28,000 debt service reserve and an operating reserve close to 20% of the first year’s operating budget. No provision is made for tenant equipment because equipment is generally the tenant’s responsibility. Operating Budget A 10-year projected operating budget is presented in Exhibit 14.2. Income projections assume 5-year leases with tenants responsible for common area costs and increases in taxes and operating expenses above the first-year costs. Tenants also would pay all their own utility costs. Rents are projected at $7 per square foot for retail space and $10 per square foot for the grocery store. A 10% allowance for vacancy and bad debts is included. Rental income is almost $170,000 in the first 5 years and increases to over $215,000 for the second 5 years. Common area charges and escalators range from just above $10,000 in the first year to a maximum of $37,000 in year five. When new or renewed leases take effect in year six, the base operating costs are once again fully assumed by the landlord, as is typical in commercial leases. Operating and tax escalators are zero for this year and then grow relative to the base costs in year six over the following four years. Operating expenses are based on expenses for comparable neighborhood shopping centers. Real estate tax estimates use the current commercial tax rate of $25.78 per thousand and an estimated final assessed value of $1 million. Total operating expenses begin at $88,300 and grow to $101,689 in year five. This increase reflects a 4% inflation rate and increases in real estate taxes. Exhibit 14.1 Supermarket Development Budget Uses of Funds Amount Acquisition $200,000 Construction Hard Costs $1,059,093 Contractor’s Overhead, Profit, and Contingency $211,819 Design, Engineering, and Project Management $190,637 Legal Fee $75,000 Financing Fee $3,000 Accounting $2,500 Insurance $8,000 Appraisal $5,000 Construction Interest $36,000 Taxes During Construction $10,200 Developer’s Overhead and Profit $100,000 Miscellaneous Fees $500 Debt Service Reserve $28,000 Operating Reserve $14,000 Soft-Cost Contingency @ 5% $21,542 Total Uses $1,965,291 Exhibit 14.2 Nolton SupermarketRetail Center 10-Year Operating Pro Forma Financing Plan Using the projected development and operating budgets, prepare a financing plan for the project that minimizes the amount of city funds needed. This plan needs to encompass The achievable level of debt financing for the development and the proposed debt source(s) (e.g. private lender, state development agency, etc.) The potential to attract private equity investment and the amount, if any, of such equity The amount of required grant funds and sources from federal economic development programs The amount of city funding needed and the recommended form of the city’s financing An explanation of why each source was selected Table 14.4 lists several potential debt and equity sources and their financing terms and requirements. Table 14.4 Summary of Potential Debt and Equity Sources Endnotes”


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