LIHTC Real Estate Development - Profitable?
I currently work in finance at a large bank (WF, BofA, Citi) in LIHTC. The pay is good - all-in ~$270k with around 5 years of experience. An opportunity could be coming up to work on the LIHTC developer side.
These developers make big fees, but know there is limited upside due to the nature of these developments. Would anyone have some insight on development compensation at any level? It seems like it would be more interesting to work on the development side, but the comp profile is a blank box to me. Curious if it would be more lucrative than the financing side?
Anything is much appreciated! Thanks
Why do you believe upside is capped? The developers make big fees and the resources to the project (employees) can go into the project budget and have their salary be reimbursed. It’s a volume game similar to lending.
So are you saying that development team salary can be added as part of the project budget ? Does the syndicator/tax credit investor allow for that?
Regarding compensation it is very much firm dependent and the value they see in you. If anyone has any idea how carry/equity works at different companies in LIHTC development it would be great to know as your only equity in the deal is pre-development cost which is returned at construction closing.
Many developers add the cost of their project team to the budget. If you think about it, it makes sense. It allows the development fee to theoretically be pure profit (this isn’t the case, theoretically it is, but the dev fee pays for office space, etc.). The salaries passed through the project are appropriate because if you don’t do it, the project won’t get built. There will be no one to build it.
I agree about it conceptually. I believe it will be part of soft cost. Will it be part of eligible basis? Additionally, most hosing agencies don’t allow payments to developer apart from developer fee (consultant fee was is also removed from it). Which states have you seen this being done?
Don’t know if it’s part of eligible basis. I don’t know affordable housing. Will need an affordable housing developer to chime in. But if I had to bet, people do thread the cost in somehow, whether it’s via a different line item or it’s a larger development fee. Developers try and let’s profit be profit. Similar to how firms try and not use their promote to pay for firm operating costs. You should have enough fees to pay for your costs and than profit on top of that, separately.
The developer is usually a separate entity and in-house staff payroll is not part of the project's development budget. Certain third party consulting and professional services can be included as soft costs, but most of it won't be eligible basis. This means new developers will need to build up a pipeline of fees before they can hire employees.
Dev fee is a separate line item, not a soft cost. There's a calculation for limiting the fee. It comes in around 10-12% of TDC in many cases. Usually at least half is paid by perm conversion. Often some of it is deferred, as in paid out of cash flow over the next few years. It is mostly going to be included in eligible basis. There's plenty of money to be made but it's a different game from market rate.
Are you an underwriter, originator, or asset management? Do you work in LIHTC syndication?
Assuming you do originations/underwriting at the bank. But what's the developer job? They're actually different skillsets unless you focus on acquisitions-only at the development shop. To get the same comp in "soup-to-nuts" development you'd need development experience first, IMHO, which might mean a step down in salary for a couple years. Ultimately I think you'll do well either way, but what makes you want to jump ship?
Your salary will go down. And I would actually agree with the idea that there is limited upside working for a LIHTC developer - because fees are capped and there is no back end, it's very difficult for principals to give meaningful carry to employees or to give massive salaries.
The upside, of course, is that the major barrier to entry in tax credit development is knowledge, not capital. So with 5-6 years worth of experience, a couple full deal cycles, you'll be more than capable of doing a development project on your own and pocketing the fee. You don't need millions of dollars for pursuit costs and deposits.
How large are the general pursuit and start up costs? I get that this may change by state / region- but do you have any insight here?
I'm in NYC, so.... the most expensive market for this in the country, I'd argue. It's not cheap, because you have to front a fair bit of the soft cost, but that comes back at construction closing. I think with a few hundred thousand in the bank you could legitimately entitle and finance a deal.
The bigger issue would be acquiring land. That is way too dependent on size, location, zoning, etc to make a call on. But if you assume that you can pay up to $50/bsf for land and still have a LIHTC deal work, you can back into it. A 50,000 sf development parcel would cost $2.5mm, maybe you put a 5% deposit down? I don't know, it's all so fungible and circumstance-dependent.
Do you like the finance side (besides the comp)? If you find it boring, working for a LIHTC developer would be more interesting. Albeit I'm sure they'll rely on you heavy to read equity docs, construction docs, convert to perm, plus run financial models. So you'll likely still be on the finance side of things. You're definitely going to be making less than $270k/year at a developer with your experience level.
From the development side- it's getting harder and harder to build ground up LIHTC deals with rising construction costs. We've had some opportunities to build affordable that we've passed on because deal didn't work- would have worked with construction numbers from 2 years ago. If developers do less deals, that means less fee to collect...
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