LIHTC Dev Fee?
All else equal, why wouldn't you want your project cost be higher rather than lower? if project cost is higher, developer fee is higher. Of course the project still needs to be able to cover senior debt and you'd need more sources/grants and what not to fill the capital stack. Other than this, why would developers want to keep project/hard costs low?
In theory yes, the more you spend the higher your fee can be.
There are two components to the developer fee you need to understand. The "15% fee" you hear thrown around is the gross fee. This is the total amount that can be capitalized in the budget within the IRS guidelines for the purposes of generating eligible basis/credit. Of the gross fee there is a net portion and a deferred portion. The gross fee is earned from construction closing through stabilization. The deferred fee is a cash flow loan made by the developer (typically at conversion to perm financing) from the gross fee that they would have earned at that time.
From the developers perspective a deferred fee isn't really a fee because it just absorbs cash in the water fall they would otherwise be entitled to the lion's share of. Yes having a fee in the waterfall is better than nor having one, but not at the expense of your net fee.
While there are tricks to drive credit and fee amounts to get more investor dollars, it is still a real estate transaction at the end of the day. You need to be able to service your debt. Generally the states, who allocate credits and bonds, have guidelines in place to in order to discourage the abuse/ waste you are referencing. They limit the gross fee, net fee, and total development costs.
To add to this, the project also needs to be able to demonstrate that it can repay the fee over that 15 year period.
Thus, you cannot close on a deal where you have $10mm of deferred fee but only $9.99mm of free cash flow over those years. And for most affordable projects, which are highly leveraged as it is, even that is a ton of NOI.
Moreover, the OP is overlooking the fact that tax credit financing just doesn't materialize into being when you snap your fingers. You have to route it through government institutions, which are staffed by men and women of varying ability, but who at the very least see a bunch of these deals every year. They have calculators and can do basic math, so when you show $400/bsf of construction cost and the other 3 guys in their pipeline are showing $250, you better have a good for why you're costs are so much higher. And whatever you think about the mdi level project managers, the heads of the agencies are generally both intelligent and committed public servants, who have limited resources. If you want to buy the most expensive piece of land in your municipality, when you could buy as much for a third of the price half a mile down the road, those agencies are going to (generally) prioritize building 3x the units for the same price.
And I am aware there are exceptions to all this, but in general, that is how it gets looked at. As with many examples of government "inefficiency", there are lots of safeguards in place, both statutory and discretionary, that prevents rampant abuse of the system, as long there are independent people/agencies overseeing how those funds get disbursed.
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