• What to look for in a partner
  • What to look for in a deal

Choosing an equity partner is one of the biggest decisions that an affordable housing developer will ever have to make.
A developer and an investor are committing to a long-term relationship, as long as 15 years for low-income housing tax credit projects. So, choose wisely.

“Like in anything else, you want someone who will be a good partner and who will work with you and not against you,” said John Simon, partner and head of the affordable housing practice at the Sidley Austin Brown & Wood law firm in Chicago.

Since the tax credit program began in 1987, most syndicators have compiled a track record of reliable performance. But there have been some problems along the way.

Finding the right equity partner takes time and effort. When evaluating potential partners, it is critical to analyze their financial strength, track record and reputation.

Before signing up with an equity investor, check the firm’s finances, said Simon. While that may sound facetious, he said, it’s important.

“Every once in a while you get someone who comes into the market and says they are going to have a big program and will invest in affordable housing, but then it turns out they don’t have all their internal approvals or couldn’t get their internal approvals,” Simon said.

It is a good idea to make sure the investor has experience closing deals and money in the bank to do so. Experts say one way to ensure that funds for your capital contributions will be available is to have the investor escrow or provide a letter of credit. Many investors have no problem with doing this. If they object, it may be a red flag.

Just like any other business, the tax credit industry has investors with varying financial strength and stability. In 2001, at least one well-known and respected syndicator left the market, citing difficult business conditions. Several others were operating on razor-thin margins and shaky lines of credit.

Most equity capital for tax credit projects come from corporate investors. Some corporations are very sophisticated and look for individual projects they can buy directly. By participating in a direct investment and being the sole buyer of equity in a single project, it allows the company to increase its yield by eliminating fees a syndicator would charge. The most likely candidates for direct investment are those with real estate experience such as banks.

Banks often invest to meet their obligation under the Community Reinvestment Act, which calls on them to invest in low-income parts of their service areas. Most corporate investors invest primarily for economic reasons and expect tax credit projects to deliver a minimum target yield that is predetermined.

Many other corporations invest through diversified tax credit funds sponsored by syndicators and nonprofit equity funds. It is those organizations that acquire tax credit projects and negotiate deal terms.

Private equity funds raise money from small groups of corporate investors for investment in portfolios with some diversification. Large transactions are preferred.

A large portion of corporate equity also flows through national nonprofits, such as the National Equity Fund and the Enterprise Social Investment Corp, or state and local nonprofits. These organizations appeal to companies that invest for social as well as economic reasons and concentrate in nonprofit-sponsored projects and smaller projects.

Dealing with a major syndication firm offers developers many advantages, including an increasing array of financial services. To win the battle for tax credit acquisitions, many firms are now providing debt as well as equity financing.

One-stop shopping has its advantages, including the cost savings of combining the debt and equity applications and underwriting and closing processes. Several major companies, including Boston Capital, GE Capital and Related Capital, offer debt and equity programs. Several others are considering adding debt financing to their services.

Meanwhile banks are coming at the same idea from the other direction. Wachovia Securities (formerly First Union) and Key Corp. were among the first to start offering equity investment as well as mortgage financing for tax credit deals.

What to look for in a partner

Experience. Experience is critical, said Mark McDaniel, president of the Michigan Capital Fund for Housing, a nonprofit that has raised more than $250 million in equity and is credited with producing about 4,000 units of housing across the state.

The group focuses on deals in Michigan. It’s a specialty that his group uses to its advantage. “From our viewpoint, local knowledge and local staff and local relationships make a big difference in getting a deal done and for the long term,” McDaniel said.

There are, however, many national, for-profit syndicators that make fine partners.

Whether using a local group or a national one, it is a good idea to study how they have closed deals, how they have operated over the long run and what kinds of projects they have been involved in.

Analyze how a company’s past equity funds have worked and how they have performed.

Resources. Evaluate the resources the investor can bring to the partnership. Do they bring skills you don’t have?

Practical problem-solver. It is important to find investors who approach problems practically, added Simon. Look for investors who will be sensible when a problem occurs and one almost always will. You want someone you can work with and not someone who is going to want something that comes out of left field.

Reliability and reputation. Are they making timely payments? Are they working will in other partnerships? Attorneys and accountants specializing in the tax credit industry are knowledgeable sources.

Their team of professionals. It is also good to learn not only about the investors, but also their attorneys and accountants. The wrong attorneys, yours and/or the investor’s, can increase legal fees and drive you crazy. Find out about their experience as well.

To find out about a potential partner, call other developers and even state housing and tax credit allocation leaders to learn about their experiences with a particular investor, suggested McDaniel. Always try to get references from independent sources. Those will ultimately be the most valuable.

Madison Avenue has come to the tax credit industry. Many investors have slick ads and flashy Web pages that won’t tell you what you need to know. Obtain a comprehensive list of investors, consult with those who know the investors and pick six to 10 to talk to, advise experts. Also, beware of trade magazine articles that make an investor seem too good to be true.

Stay on top of the industry by reading news about the field and attending conferences. This will help keep you informed about the affordable housing market and provide you with better insight to choose a partner.

What to look for in a deal

Prices. It will be tempting to go with the highest price. But, first make sure there are no catches. Find out if there are any hidden fees. Is there an investor expense reimbursement? Is there bridge loan interest? The strongest investors may not offer the highest prices or the best terms. Investors desperate for business may offer seductive prices to sign the business, but then spring costly surprises later.

Equity pay-in. Not all investors operate in the same manner. It is important to learn if the syndicator will provide equity at once or over time? If provided over time, how many months or years and in what amounts? Will the equity be provided during construction?

Deal-breakers. Find out if the investor has any major issues early on in the process, advised Simon. This will save valuable time and money. If there are any deal-breakers, it’s better to know them right at the beginning rather than be surprised by them after considerable work has been done. If any equity investor won’t give you a security interest, that’s something you want to know upfront, Simon said.

Time. You want someone who will perform due diligence and close the deal in an acceptable time frame and not get bogged down with other projects, or worse, change their deal terms or back out altogether.

Project disposition. This is an important issue for nonprofits that wish to continue to operate a project as low-income housing after 15 years. Many syndication agreements fix the price at which a nonprofit can buy out the limited partners after 15 years in advance. The price is often set at the assumption of debt and payment of an amount equal to the limited partner’s exit tax liability or fair market value as low-income housing.

Return to Table of Contents