Guarantees and Recourse for 4% LIHTC Projects
Questions for all the LIHTC folks out there…
What are the net worth, liquidity, and guarantee requirements that are typically required to finance a 4% LIHTC project?
Is bond financing for a new construction LIHTC project usually full recourse with completion and repayment guarantees?
Can a guarantor fee be included in the project budget and count towards the eligible basis? This would be in addition to the maximum allowed developer fee.
I have been curious about the affordable housing space and appreciate any insights! Thank you!
1. Approx $5M NW & $1M Liquidity for most of my firm’s deals, which average $50-100M. Have seen higher requirements for larger deals. Could potentially be lower for smaller 9% deals.
Typical guarantees are completion, repayment for construction loan / Letter of Credit, tax credit delivery, tax credit recapture, operating deficit guarantee, & typical bad boy guarantees.
2. 100% completion guarantee is expected. Repayment guarantee is typically a percentage of the construction loan/bonds/letter of credit. Maybe 15-30%.
3. Not that I’ve seen.
This is very helpful insight.
For your 4% projects, what percentage of the capital stack is typically GP/LP Equity (not including deferred Dev fee)? How feasible is it to finance a project without any GP/LP equity?
No traditional GP/LP equity in 4% deals. The LIHTC investor’s (LP) contribution will typically be 35-45% of the capital stack. The Deferred Developer Fee is the GP equity. GPs don’t leave any cash in lihtc deals. Never seen an all-debt affordable deal.
I was assuming some equity investment would be required to cover a gap in the financing. Is it very uncommon to put equity into a deal?
yes. there's no way to make a return on that true equity. Gaps get solved by soft financing or reducing TDC.
A different way to think about it is that you receive a really high developer fee (10-20% instead of a normal 4-5%) in return for giving up annual free cash flow and having less terminal value for the building (because of the regulatory restrictions). You could get paid all of this money up front, and fund the GP portion out of equity. However, it makes more sense from a financial perspective to just roll a lot of your fee into the deal and defer repayment instead of coming out of pocket with expensive equity dollars.
The language in my state’s QAP states that the governing agency will, “ensure that deferred developer fee amounts are sustainable and can be repaid by project cash flow within 15 years”
The requirement for the deferred fee to be paid with cash flow drastically limits the amount we can defer. Have you ever seen a state allow deferred fee to be paid off via sale?
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