Page 56 - A U4SSC deliverable - Guidelines on tools and mechanisms to finance Smart Sustainable Cities projects

A detailed template guide on preliminary questions for conducting due diligence regarding the
four basic types of resources can be found in the Annex III. These are:

(a) land: property status. What real and/or contractual rights are there on the development site?

(b) law: urbanistic and legal status. What can we develop according to the planning and licensing
requirements and permits?
(c) technical: construction and technology solutions. Who will construct and operate, and how will
they do this (stakeholder mapping)?

(d) value: use of the assets. An assessment of this should use cash flow and feasibility models based
on KPIs.

Once the quantity and quality of the available resources are determined, in order to create the
business model that will accompany the proposed project, it is recommended to quantify the
potential performance of the project, using financial indicators of its direct value: rents, fees
and present sale/securitization value; and its indirect value: land value increases, savings and
greenhouse gas emission reductions.

With this step in mind, due diligence (Annex III) should provide conceptual designs, infographics,
and control tools that demonstrate the value of the project, particularly in relation to the expected
use of resources and the purpose of the project. Furthermore, it should suggest templates for
the accounting and financial control of the construction and operational phases. These templates
should include feasibility studies, development charts, cost-control charts, cash flows, and all
other elements that help to control the flow of capital involved. Depending on the nature of the
project, these documents could also include a valuation of the project as part of an exit scenario,
investigating the potential for sales, leases, or sale and lease-back scenarios for the real asset which
is created by the project.

A more extensive feasibility study could also be conducted to estimate the indirect value created
by the project. For example: an increase in the value of neighbouring areas/projects, the savings
provided by the eventual extension of the life span of the affected assets, the environmental impact
of reducing emissions, and improvements to the quality of life of the stakeholders.

In the early stages of creating a project, it is particularly important to define the financial dynamics,
the potential risks, the costs to be incurred, when they will be incurred, and from what sources
income will be derived. Likewise, when initiating a project, cities should model free cash flow
(remaining cash after all costs are paid), which can be used to pay for any external financing used.

In order to find a formula that can be used to measure the performance of a project in revenue
terms, we can adopt certain well-established models already working globally. Some of these are
listed in Box 21.

38 U4SSC: Guidelines on tools and mechanisms to finance Smart Sustainable Cities projects