Better Understanding Low Income Housing Tax Credit Investing + Section 8 Housing?
I'm new to real estate and want to learn more about Low Income Housing Tax Credit Investing and Development. I've read some posts here on Low Income Housing / Section 8 development, but info on this seems to be quite atomized / sparse, and I would like to learn more.
Hypothetical Example of LIHTC project from ChatGPT, arbitrary numbers
Project: Developer wants to build a 50-unit affordable housing complex in a low-income neighborhood. Total development cost estimated at $10 million. The developer applies for LIHTC through its state housing agency, which provides the developer w/ tax credits
Tax Credit Calculation: LIHTC is calculated as a % of qualified development costs. Rate is typically between 9% and 4% of the eligible basis. Assuming a 9% rate:
Eligible Basis = $10MM. LIHTC Amount = Eligible Basis × LIHTC Rate LIHTC Amount = $10MM × 0.09 = $900k per year for 10 years -> $9MM
Syndication and Investors: Developers may not have enough taxable income to fully utilize the LIHTCs themselves. So they may seek investors, banks or corporations, to purchase the tax credits. Investors provide upfront equity to the developer in exchange for the tax credits.
Developer + Equity : The Tax Credit Investors provide equity upfront to developer to fund the project, typically [~75%-80%] of the present value of the project, and investors in exchange receive LIHTCs of $900k per year, for 10 years, in addition to receiving other benefits like D&A.
Project Financing: With the upfront equity from the investors, the developer can secure additional financing, such as a construction loan or other sources of capital, to cover the remaining development costs.
After project is built, I assume they can rent units out to low income tenants or section 8 tenants. Section 8 rent is also subsidized to a certain percentage.
From my surface level understanding, I have a few general questions:
1) For LIHTC investors:
a) Investors benefit from LIHTC tax credits + deductions from depreciation. But how to quantify the benefit to these investors, as they'd have $800k in cash outflows to purchase $900k worth of yearly tax credits, which exceeds the yearly yields of a few hundred thousand in additional from tax savings. Assuming they can also benefit from D&A deductions. Any other ways for investors to make or save money?
b) Would the tax credit investors also own 75-80% of the project or do they receive that proportion of the cash outflow?
2) For developers:
a) How much equity do developers typically put in themselves, assuming they receive large portion of financing upfront from investors? Or is the remainder of the project financed with construction & , local subsidies etc, and developers put in little to no money themselves?
b) If the rest is debt financed, to what extent of ownership would developers have in the project? Or would they essentially receive a development fee + proceeds from future cash flows + exit price?
3) In General: Any other thoughts to add or things I may have misunderstood from the above? I understand one of the barriers of entry is the knowledge and experience required to build one of these projects, and the hassle of operating one, screening for tenants etc. Aside from that, any other insights anyone may have about tax credit investing, section 8 housing or development?
Would very much appreciate any insights. Thank you.