Gap Funding for LIHTC
For those in the affordable space,
I'm in the midst of developing a unique gap funding source for LIHTC deals that is a lower cost of capital and less red tape. For the LIHTC people out there what are some things I need to considered to ensure it's doesn't encumber the closing of affordable developments.
For example I know grant funds have a tax implication so the dollar are usually loaned to the development as a soft loan.
Is there anything else I should consider to allow gap funding to be an easy subordinate source of funding?
Thanks in advance.
9% or 4% transaction?
At the moment I'm thinking both 4% and 9% deals.
Hmm twinning isn't allowed in my state so not sure on specifics, but this is something you need to ask your tax credit investor. Isn't the purpose of twinning the ability to monetize excess basis lessening the need for gap funding?
Are you saying you want a lower cost of capital loan for the LIHTC Bridge and the tax exempt bonds?
I'm not sure I understand. If you're developing a unique gap funding source, why are you asking for input? So much of this is dependent on the governing housing agency, the political agendas of the municipalities in which they're located, the specifics of the project... if you don't understand that gap funding is going to be a solution at the state/local level, then you probably don't have enough of a grounding in the space to be "developing" a funding source.
How are you going to have a for-profit, private lender do all this funding... how do they beat the public sector in terms of cost of capital? Are they willing to be subordinated to the bonds? What kind of DSCR are they willing to take, given how highly levered most projects are right off the bat? Is this basically just a hope note? How will public sector partners respond to being bumped down in seniority, or grant writers feel, if you're bringing all this extra soft debt into the equation? All of these questions have answers which will vary wildly between states or municipalities.
As always, the answer to the underlying question is: you aren't smarter than every other affordable housing participant combined. If it hasn't been done, there is a reason for it.
I figured you would responds. Thank you for poking holes in what I'm trying to create. Give me a lot to think about as I try to come up with a "standard" way to fund gaps for each states/municipality I plan to fund deals in. I agree with a lot of what you're saying. I'm not necessarily trying to be private lender. The money to lend would come from another income generating business. You're right I'm not smarter than anyone in the affordable housing space but we need to think outside the box so affordable housing so it doesn't go the way of the farmer i.e. the average practitioner is old as dirt.
So again, I ask, what is the point of the product? You're just going to lend at below-market rates? It's all well and good to say that "it'll come from another income producing business" or whatever, but... that means nothing. It also, by the way, is the definition of being a "private lender"
Affordable housing is already pretty innovative, and there are plenty of young people coming into the business and starting new ventures to replace to old guard of guys who started in the late 80s and early 90s. The fact that affordable housing is more or less dominated by older people isn't a problem, necessarily, nor is it something that can be "solved" any more than in any other industry. Older players will retire and fade away, and opportunity will emerge for newer people and firms to come in. To be clear, I applaud you for wanting to be in the industry and hope you do well, but if you're thinking about this as a "problem" then you need a fundamental shift in your views. Merely being younger isn't a win condition, nor is it any guarantee of productive innovation,
You aren’t smarter than everyone be in the industry combined? If this line of thinking was true, there would never be innovation in any area of life. Hasn’t been done yet, must be a reason. Give up. Not worth the effort. Jeez.
Within certain areas, this may be true. Perhaps you've found something in your locality that makes sense. But it won't be broadly applicable, because again... tens of thousands of extremely smart people have been working to make this industry as efficient as possible for several decades. Maybe you've got a great idea that is transformational - but someone crowdsourcing feedback on WSO is not that person, full stop.
And innovation is almost always iterative. How often does one person come up with a truly transformational innovation? Exceptionally rarely. Now, if there is a sea change in the pre-existing regulatory structure, that is obviously a different story - but that isn't what's happening here.
Why only LIHTC deals? The issue with LIHTC is Davis Bacon will make these not pencil, but State and Local governments have incentives (tax, density, wavied fees etc), as well as local lenders (favorable DSCR and leverage on construction to perm financing) that make these work in my market if you have the starting capital to get going.
I was thinking about starting with LIHTC because it’s the easiest way to ensure it’s going toward affordable units and affordable units that will provide extended affordability upon the 15 years compliance period. Maybe there is way to provide funds to deals that have covenants to have a certain percentage of units at lower AMIs.
If you can source EB-5 equity (or even crowdfund equity) that could be one way to bring a lower cost of capital into the project. Subordinate loans will typically have tight restrictions from the senior lender unless it's serviced by available cash flow.
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