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City of Roseville, Minnesota TIF District No. 17: Twin Lakes Apartment LLC Proposed Project October 16, 2012 Page 5 used to determine whether a project is likely to proceed as proposed without the use of public dollars. To complete this analysis we constructed and examined two ten-year project proformas, one showing a result if the developer receives the requested TIF assistance and one showing a result without assistance. Our analysis of the proforma included a review of the development budget, projected operating revenues and expenditures, and the project's capacity to support annual debt service on the first mortgage and notes. Springsted performed an analysis using the Rate of Return on Equity (ROE) and Internal Rate of Return (IRR) mechanisms to estimate the proposed project's rate of return. The rate of return on equity is an annual test and considers the before-tax cash flow as a measure of the equity invested to determine the developer's return. The internal rate of return measures the average annual yield on an investment, generally over a longer period of time, which in this case is 10 years. The internal rate of return measurement is typically what is used by public agencies to tletermine the need for a subsidy. Generally, should the rates of return lie below a reasonable range without assistance; we could assume the project as proposed would not move forward without assistance. Should the returns lie within a reasonable range with the assistance, we could assume the amount of assistance tested is appropriate for the project. All such estimates should be viewed as general indicators of performance antl not exact forecasts. The number of current and future variables affecting these estimates and actual results are great. The `with assistance' scenario assumes the developer receives tax increment assistance from the city in the form of a pay-as-you-go note. Sources would inclutle first mortgage and equity. Any city assistance would be provided as reimbursement for certain project costs and not upfront. The developer has indicated it would leverage the city assistance in the form of a TIF Note to receive additional funding from its lentling institute with annual tax increment revenues available for repayment of the loan. In the `without assistance' scenario it is assumed to be the same project, but privately financed without any tax increment assistance. To make up the gap we have assumed the developer would either provide increased equity and/or receive additional bank financing to close the financing gap. The likelihood of these scenarios (`without assistance') will ultimately be tletermined by the marketability of the project. Based on the developer's project assumptions, Springsted has estimated the IRR in the `with assistance' scenario to be 10.45% with a ROE of 2.11 %. Our analysis has determined that without assistance, with increased bank financing and same amount of equity, the projected IRR would be -4.59% and ROE would be 0.06%. In addition the debt service coverage ratio would be 1.00 upon project stabilization. Should the first mortgage amounts remain the same and equity be increased to fill the gap, the projected IRR would be 3.30% and ROE would be 1.42%. The developer has indicated the `without assistance' scenarios would not be feasible based on the projected returns. In addition to the rate of return analysis described above, we also reviewed the debt service coverage ratios of the proposed project operating proforma, as compared to the initial information provided to us. The developer `with