How do banks view tax abatements?
I guess I'm speaking from a development standpoint. when constructing a new multifamily project and one is able to secure a tax abatement, how do lending institutions take this into consideration, if at all? Would they lend against the present value of the unrealized value of the abatement? Do they factor in your increased ability to service debt? I am talking abatements that last between 7-15 years and are at least a 100% abatement in the first year on new improvements, and then scaling down as time goes on.
I underwrote a deal with significant tax abatement for a historical redevelopment - the appraisal took into account the value of the abatement in their total project valuation and we factored in the extra capacity to service debt. This deal had already been executed with the city prior to showing up on our desks. If your abatement isn’t executed or if there’s any possibility you won’t get it, expect the lender to structure the loan assuming the downside case with no abatement. I bet you’d be able to negotiate an accordion/hurdle of sorts where if the abatement is executed post-close, you could get additional loan proceeds and/or a more favorable structure.
First and foremost, I want to know what the actual cash flows will be to service the debt. That includes the benefit of the tax abatement.
Second, I need to know that the loan is able to be refinanced. Especially in cases where I will be near the end of the abatement period at loan maturity I need to know that, after amortization of the loan and with full real estate taxes, that the loan can be refinanced from several different sources.
Just went through this on a refi. The appraisal took the PV of the tax abatements when looking at the value of the property, the lender looked at it from both angles.
Also, like credit said above, the lender put in a springing recourse in the event that the tax abatements wouldn't come to fruition. Unlikely, but they weren't fully baked so they wanted that protection.
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