How do LIHTC developers make money?

Question

In the process of discussing a VP level position with an affordable developer (mostly 4% LIHTC deals).

My background is primarily market rate value add multifamily and commercial.  I was curious if they comp structure for affordable groups is similar or less than what it would be for a pure play equity shop investing in value add deals?

Also, given that these LIHTC deals are held for longer periods, would I be off base assuming that I could ask for some form of "carried interest"?  Or would that be pointless given the structure of a LIHTC deal?

picklemonkey · Accepted Answer

Section 42 LIHTC projects often are not cash flow positive as they have to be loaded up with "soft" loans. The return to the investors is driven by the receipt of the tax credits. The government does not pay your rent for you on Section 42 properties. You just have to meet certain household income criteria. The LP investors are really only interested in the tax credit stream from these properties, any cash flow that is generated often goes towards the soft loan payments.

Mr. Deeds · Answer

Not to hijack this thread, but ALL of this is going to change in the coming year. I currently work (analyst level) for a large syndicator in the LIHTC (low income housing tax credits) world and we have been bleeding investors since the election. The prospect of a lower corporate tax rate and the volatility of interest rates (blowing up underwriting because of rising perm rates) has investors running scared. My company also has a guy in DC that is actively working with the Ways and Means committee to determine the future of this program.

Yakehito · Answer

Can we get someone in the know to shed a little more light on how lucrative this strategy is for the developer?  I heard of a group capitalizing a 20% dev fee into a project recently. Then you get PMF going forward (how high can these go? 8%?).  You can envision a scenario where you get a bunch of fees upfront, along the way, and then essentially own the building outright for basically no equity contribution, so that when it rolls to market you make a killing.

Danielplainview · Answer

Hey DetRustCohle. I work in LIHTC asset management for a large institutional investor. I usually see the opposite transaction take place, where the GP exercises a ROFR or $100 PO etc. Once the LP takes its benefits (credits, depreciation, and losses) it doesn't want the deal any more. If there is no value in the deal we'll essentially give it to the GP, maybe make them pay our transfer taxes and legal fees. If there isn't a ton of debt on the deal and there is actually value, that's just a bonus for us.

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How do LIHTC developers make money?

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How do LIHTC developers make money?

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