For developers, the price received for their low-income housing tax credits (LIHTC) may be paramount, but it’s not the only critical matter.
Housing credit syndicators and other LIHTC authorities share seven key questions that developers should consider asking to better understand a deal and their finance partners.
1. Will my deal close into a proprietary or a multi-investor fund?
“LIHTC equity pricing and terms could vary between the two different fund structures, particularly if a single Community Reinvestment Act (CRA)-motivated investor in a proprietary fund really needs or wants your specific deal as a CRA investment,” says Jack Kukura, president of Marble Cliff Capital. “Specific proprietary investors may also have other strings attached to their equity offer—construction loan/permanent loan/bridge loan requirements or establishing a deposit relationship with the investor.”
Syndicators say they are seeing more of this as banks emphasize liquidity and prioritize doing business with existing depository customers.
David Leopold, senior vice president and head of affordable housing at Berkadia, also suggests asking about capital sources as well as how sensitive the commitments are to changes in the capital markets and the time horizon for the commitments.
“Volatility in the capital markets is expected to put more pressure on getting deals signed up within a shorter timeframe—shorter windows for expiration of letters of intent/pricing commitments,” he says. “Clarity on end investor placement: Placement in multi-funds versus proprietary can mean different outcomes and challenges.”
2. Does my deal need to close by a certain date to meet a bank’s CRA-cycle deadline?
“Banks operate on CRA cycles that typically can last approximately three years,” Kukura says. “As the clock winds down and a bank approaches the end of that cycle, they may be clamoring to fulfill their CRA obligations across their banking footprint. Thus, they may push to close specific transactions to meet CRA targets before the current exam cycle expires. Developers should be aware of these CRA exam cycle considerations as they build out timelines for closing and early on raise any possible cliff dates like this with their syndicator and limited partners.”
Heather Pierce, fund development manager at CAHEC, also suggests asking questions around the general ability and pace to close as the industry faces headwinds, including how long is my pricing good for in terms of forward commitment.
“It’s imperative that developers understand the urgency of closing deals on time in a rising yield environment,” adds Julie Sharp, executive vice president at Merchants Capital. “If deal closings are materially delayed beyond what was initially contemplated in the initial letter of intent, investors will be less likely to hold pricing. Developers should be communicating frequently with their syndicator or investor partners to ensure pricing will hold and assessing the impact of market pricing adjustments on the overall capital stack.”
3. How can I make the case to you that my operating expense budget is sound and conservative, especially on a new construction deal that doesn’t have a performance history?
It’s important that developers and syndicators be on the same page when it comes to a project’s operating budget.
At times, a proposed operating expense budget will appear light and doesn’t match the actual performance levels that are being seen in an overall portfolio, explains Paul Cummings, senior vice president, director of originations, at National Affordable Housing Trust.
“We don’t believe that there is a minimum operating expense number (i.e., per unit/per year) for any deal, but partners need to be able to demonstrate that they have done their own due diligence to confirm that their proposed operating expense budgets are sound,” he says.
A follow-up question could be “how conservative do I need to be on some of the sub-components of an operating budget, including insurance, utilities, staffing, and unit-turn costs,” Cummings says.
4. What support do you have available for my organization’s specific needs, and how broad can our relationship be?
“It’s important for developers to delve deeper in the relationships they build with syndicators and investors, especially when aiming for a long-term relationship,” says Matt Reilein, president and CEO of the National Equity Fund. “Developers may find syndicators that have specifically what they need to succeed as well as branch out beyond LIHTC.”
5. Did you walk away from any signed deals last year, and, if so, why?
Several industry leaders point to the importance of a syndicator’s recent track record.
In addition to asking about deals that didn’t happen, Jason Gershwin, managing director at R4 Capital, says other questions to consider include do you have an investor who wants construction debt to further incentivize an equity investment and have regional banks reentered a particular geography after recent volatility.
“For the most part, the LIHTC market remained remarkably strong in 2023 despite the significant economic headwinds,” he says, noting that R4 Capital honored every commitment it made to developer partners last year. “As we enter 2024, and with economic headwinds hopefully easing at least to some degree, we believe that these questions and others are appropriate for developers to ask.”
Understanding various investor motivations, including CRA needs and rules, is as important as ever, according to Gershwin.
“We have seen an increasing number of deals come back to us and request placement after having selected a different dance partner earlier in the year,” adds Josh Ghena, senior vice president, equity business funding, at Cinnaire. “These deals have had syndicators/investors walk away from the deals late in the process, leaving the developers to scramble. Developers should know that selecting an investment partner is more than simply picking the best price.”
6. What happens if legislative or other program changes take place?
The housing tax credit program can undergo small and large changes. Developers should try to understand what these changes may mean for their deals in progress.
Here’s an example: In January, the House of Representatives passed a tax package that includes the restoration of a 12.5% allocation increase to the housing credit program that expired in 2021 and a reduction from 50% to 30% of the amount of private-activity bond financing required to access the 4% housing credit.
Although the Senate had not acted on a bill at press time, it’s still a good idea to ask about the legislation’s potential impact.
What happens to pricing if the allocation cap is increased and what are your expectations for the bond market if the legislation passes are potential questions related to the tax package.
7. What are the long-term plans for my deal?
“On 9% deals, with a for-profit sponsor, you should ask the investor how we are going to unwind the transaction at the end of the compliance period without the developer having to pay back the investors capital account of $5 million to $10 million,” says Barry Palmer, a director in the real estate and affordable housing and community development section of the Coats Rose law firm. “Will the investor work with the developer to come up with a viable strategy to avoid that occurring?”
Carla Vásquez-Noriega, investor relations manager at Merritt Community Capital, also cites the importance of knowing what’s in store at the end of a development’s initial LIHTC compliance period: What is your track record on Year 15 dispositions, and what can we expect from you in Year 15?
