It seems like those groups who specialize in affordable housing tend to do both LIHTC as well as Section 8, and sometimes in combination with each other?
I have a pretty good general understanding of 4% LIHTC, rents are restricted, which mostly means the deals can only support so much hard debt, and typically doesn't have much in the way of "net cash flow" that can be "distributed". On the handful of underwriting models I have seen, typically any cash flow after debt pays a deferred developer fee for a number of years, if the dev fee eventually does get paid in full there might be a few years at the end where there is some leftover cash that gets split between GP and LP in some ratio.
With project based section 8, I keep hearing that those deals are "cash flow rich", insomuch as there is more pure dollar upside for an owner than in LIHTC, where the GP isn't putting any skin in the game.
Can anyone provide a basic outline on project based section 8, and why it's considered lucrative (in theory)?
It's lucrative because the government is paying rent for the subject 8 units, and the government doesn't "forget" to pay the rent. IIRC the section 8 HAP contract also includes annual rent increases which you usually don't get for LIHTC units. For straight LIHTC units, the tenants are still responsible for their rent and will often be short or late and due rent increases are tied to AMI which rarely goes up a significant amount over the life of a deal.
Thanks. Are the HAP contracts annual renewals? Are project based deals capitalized similarly to market rate deals, in the sense that it's straight debt and equity vs bonds, tax credit financing, etc? I'm assuming project based deals aren't infused with as much rehab capital as LIHTC, right? Are owners of those deals more apt to just soak cash flow and not invest capex into their deals?
I know it is one of the worst answers ever, but the answer to many of your questions is "it depends". It is not as cut and dry as I'm sure you'd like to hear.
Many HAP contracts are 20 year contracts. Project based deals can be capitalized like market rate deals but they can also be similar to LIHTC deals with bonds and soft financing. It usually depends if the property will be applying for an additional allocation of tax credits.
Project based deals can have just as much rehab work as straight LIHTC, it all depends on the sponsor. Some owners just want to milk the property for every dime it throws off. Some owners buy a property in year 10 of the compliance period and collect the cash flow until it's time to reapply for more tax credits. Some owners buy a property with the intent to immediately improve it and are great owners/managers. If a property is run poorly and looks to be in bad shape it is way more difficult to receive another HAP contract so good owners should maintain their property.
Novogradac (novoco.com) is a great resource for all things affordable housing/LIHTC/Section 8
Great post. Loving all the affordable information being shared lately.
A little off topic, but what does it mean when they say 9% LIHTC is competitive and 4% is non competitive? I thought there was an annual $ allocation per state for each, such that each application was being compared to others to determine who was awarded credits and who wasn't. Are there specific times during the year when applications are submitted and reviewed, or can they be submitted anytime they are prepared?
9% allocations occur usually once and sometimes twice per year (depending on the state). States have a fixed $ amount of tax credits they can allocate towards 9% deals. Receiving a 9% allocation is a pretty competitive process in most states.
4% is more of a rolling application process as you can submit and receive an award for 4% credits anytime. As the 4% credits are backed by tax exempt bonds instead of a state housing authority allocation, there is more flexibility. Again, some of this varies from state to state.
Its really pretty simple. A typical LIHTC deal is rent restricted and the owner cannot earn any revenue over and above the max allowable rent (you cannot have ancillary incomes that put you above the max levels). Section 8 was historically administered by HUD through "HAP" contracts which are housing vouchers typically provided by a local Housing Authority, I believe on these deals you can get other income from pet rent, utility RUBS, etc..
I'm not a Section 8 expert, but have dabbled in both spaces over the past couple years, and I dont believe that HUD issues HAP contracts anymore, I think they are called RAD contracts now. Only other comment is that on a LIHTC deal you can also put a HAP/RAD contract on it. So the tenant would pay max rent + there is a matching voucher.
I know that on LIHTC, there's the max rent and then you back out the allowable utility allowance to get the net rent. So what you are saying is that ancillary income such as pet rent, parking income for garage ports, RUBS bill backs, laundry, etc are NOT allowed?
If you put a HAP or RAD contract on a LIHTC deal, that max net rent would still stay as is, just now you have the govt subsidizing a portion of that rent payment?
1 - Yes, max rents are reduced by utilities, parking, and other income streams charged by the owner. There are exceptions to this rule (i.e. I believe if you provide adequate parking per the required code, than you can charge for the covered parking, even if it exceeds the max rents levels).
2 - Yes, that is how I understand it.
I'm not trying to sound like a prick with this question, but in a general sense, aren't Section 8 tenants considered to be the roughest of the rough? I've often heard LIHTC tenants referred to as "working class poor", for example social workers or service providers. Whereas Section 8 are below that level (I believe someone in a prior thread used "think homeless" as a way to describe).
That being said, if putting a HAP contract on a 4% LIHTC deal would allow govt subsidization of rent and therefore guarantee rents, but on the flip side, lower the quality of the renter pool and profile of the property, is the trade off worth it?
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