Affordable Housing Development Modeling Test

I have a modeling test coming up with a national affordable housing developer (long-term hold strategy, active in 4% deals).

I have 2 years of experience in multifamily acquisitions for an institutional GP. I’m comfortable underwriting stabilized/value-add deals and have underwritten existing affordable deals, but I haven’t underwritten/built a ground-up LIHTC development model entirely from scratch.

Would love to learn how those in the space approach underwriting a 4% deal from a development standpoint, and/or share a model template to practice. I’d really appreciate it.

4 Comments
 

Based on the most helpful WSO content, here's how you can approach preparing for your modeling test for a 4% LIHTC development:

Key Steps to Underwriting a 4% LIHTC Development Deal:

  1. Understand the LIHTC Structure:

    • For 4% LIHTC deals, tax credits are awarded as-of-right if you use tax-exempt bonds. These bonds come with their own regulations and, in some states, may require competition.
    • The developer typically applies to a state agency for the credits, and once awarded, equity investors are brought in to monetize the tax credits.
  2. Key Components of the Model:

    • Development Budget: Include land acquisition, hard costs, soft costs, financing costs, and reserves.
    • Eligible Basis: Calculate the portion of the development costs that qualify for tax credits. This is critical for determining the amount of credits you can claim.
    • Tax Credit Calculation: Use the eligible basis and the applicable percentage (4%) to calculate the annual tax credits.
    • Equity Contribution: Determine the equity raised by selling the tax credits to investors. Typically, syndicators or investors will acquire a 99.99% interest in the partnership.
    • Debt Financing: Incorporate tax-exempt bond financing and any other debt sources (e.g., Fannie Mae, Freddie Mac, or HUD loans).
    • Cash Flow Projections: Model out the operating cash flows, including rental income, operating expenses, and debt service.
    • Compliance Period: Account for the 15-year compliance period and any potential refinancing or recapitalization strategies.
  3. Practice with a Template:

    • While no specific template is provided in the WSO dataset, you can start by adapting a stabilized multifamily model to include:
      • A development phase with construction draws and interest capitalization.
      • A tax credit equity tranche in the sources and uses.
      • A detailed calculation of eligible basis and tax credit equity.
  4. Additional Considerations:

    • Syndicator Requirements: Be prepared to model scenarios where syndicators require guarantees, liquidity, or a development consultant if you're new to LIHTC.
    • Market Analysis: Include assumptions for rents, vacancy, and operating expenses specific to affordable housing.
    • Exit Strategy: Even though this is a long-term hold strategy, consider how the project might be recapitalized after the compliance period.
  5. Resources for Learning:

    • Explore WSO’s affordable housing threads for insights into LIHTC financing and development.
    • Research "LIHTC eligible basis" and Qualified Allocation Plans (QAPs) for state-specific rules.

By focusing on these elements, you'll be better prepared to tackle the modeling test and demonstrate your understanding of 4% LIHTC deals. Good luck!

Sources: Q&A: Affordable Housing Acquisitions, Q&A: Affordable Housing Acquisitions, Economics of building affordable housing?

I'm an AI bot trained on the most helpful WSO content across 17+ years.
 

Highly doubt they will ask you to model a LIHTC deal with 0 experience, its completely apples and oranges to MR development unless its an 80/20 deal. Which would still be a crazy ask for someone to model with 0 experience. 

 
Most Helpful

Without seeing the actual test no one knows, but I strongly suspect they will not actually ask you to build a 4% model.

Modeling tests are meant to show you have basic Excel skills and much more importantly, that you understand how the pieces of an underwriting model fit together and interact.  If you can grasp that, it's pretty simple to teach a new model.  I wouldn't worry about not knowing how to model 4% deals specifically.

 

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