LIHTC Thread

Starting a thread comps in the LIHTC industry. Developers, syndicators, debt underwriters, anything else. List role, TC and YOE, I'll start.

Development Associate (small firm)
YOE: 5
TC: $125k + $15-30k in bonuses based on dev fee installments

Comments (32)

Jun 24, 2022 - 11:00am
George Costanza, what's your opinion? Comment below:

As someone trying to transition from a state housing finance agency to the development side of the business, thanks for starting this thread. If you don't mind saying, which region of the country are you in?

Jun 25, 2022 - 9:50am
BigMoneyPlays, what's your opinion? Comment below:

15% in most states. Calculated as a percentage of total eligible basis (hard costs).

In this environment, I would be very surprised if you could find a deal that doesn't defer a large portion of this fee to make it through construction.

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Jun 25, 2022 - 11:26am
pudding, what's your opinion? Comment below:

Wow. So high. Does it really make sense for a developer to defer it's fee; or a portion of it? Of course $0 is less than some dollars, but developers still have overhead and costs to pay, from this fee, during construction. Are LIHTC developers allowed to pass back salary and overhead to the development, in a similar way that market rate developers may charge a development fee plus salary for its employees working on a project? 

Jun 25, 2022 - 2:54pm
BigMoneyPlays, what's your opinion? Comment below:

It is probably best to think of deferring developer fee as similar to putting in GP Equity in the deal. In order to get the deal to pencil, there's likely going to have to be some deeper equity component than just the tax credit and debt financing, but that all depends on the nuances of the deal. It is very common to see highly levered deals in the LIHTC space so developers can preserve as much developer fee payment during constructing/conversion.

The answer to your second question is yes - kind of. There are fees that are similar to market rate developments (eg. Contractor Fees, Architecture Fees, etc.), but more so encapsulated in the developer fee. Being tax credit funded, the sizing and payment of these fees will all be limited to what is outlined in each states Qualified Allocation Plan.

Jun 26, 2022 - 2:57am
pudding, what's your opinion? Comment below:

So interesting. Is it as profitable as it seems? At a 15% fee, if a firm can get all of that, it's huge. But in reality, is it truly that profitable? It seems it, but i feel like there is something im missing? Otherwise everyone would be doing it. Also, I imagine deferring a dev fee is hard as if you have a $3MM fee which gets deferred over 7 years, while still a lot of money, the present value is just significantly less. 

Jun 26, 2022 - 2:20pm
BigMoneyPlays, what's your opinion? Comment below:

Yes, in many cases. That said, you are taking on many risks when working to get these projects underway.

When dealing with non-competitive TCs, the most profitable states (loose rules/high AMI) will likely struggle with bond capacity limitations, which leads to proposed developments/rehabs not receiving Gov. funding. Other risks associated may be decreased tax-credit pricing, strict lease-up requirements, high levels of delinquency from the tenant base, and many other compliance related items as you will be holding this asset on your books for the next 15-30 years. On top of that, AMI Rent caps lead to cash flow streams being razor thin, so most the money is made up front through dev fees or through major capital events (refi, sale). This list just goes on.

In the end, you will be less likely to win big or lose big.

Jun 26, 2022 - 5:05pm
pudding, what's your opinion? Comment below:

So are people deferring dev fees to get deals done because it is better to have $1 than $0? Im curious if you think it's worth the risk to defer a fee based on cash flow which may never materialize? Interestingly enough, if the development under performs, the tax credit investors actually receive a higher return than they originally underwrote as they will receive less gains than originally anticipated. Therefore their tax credits offset a larger portion of their income. 

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Jun 26, 2022 - 6:00pm
BigMoneyPlays, what's your opinion? Comment below:

If you were incapable of underwriting the deal to return the total "required" Dev Fee within 12 years, you wouldn't even get approval from Governmental agencies. There is a very conservative approval process that insures the deal will pencil and is compliant before receiving any funding.

I'd also note that Dev Fees are included in the eligible basis for the TCs calculation, so if you were not charging on as much developer fee as possible, you would be minimizing the amount of additional equity and overall profit component developers could be making on the deal.

To answer your second question, not really. If a deal fails or significantly struggles, you will have a headache of compliance issues/contract issues, which will then lead to decreased and delayed Governmental TC funding. Most syndicators are yield focused, so as a result, contracts will outline deferred equity pay-ins and decreased TC pricing adjustments for missed internal hurdles to protect their investment. Ultimately, if everything goes south, Equity Syndicators will need to have a lot of faith in the Developer's Guarantees.

Jun 27, 2022 - 1:32pm
Ozymandia, what's your opinion? Comment below:
pudding

So are people deferring dev fees to get deals done because it is better to have $1 than $0? Im curious if you think it's worth the risk to defer a fee based on cash flow which may never materialize? Interestingly enough, if the development under performs, the tax credit investors actually receive a higher return than they originally underwrote as they will receive less gains than originally anticipated. Therefore their tax credits offset a larger portion of their income. 

BigMoneyPlays has answered the rest of this well, and I didn't even see these responses when I posted my first response.  So less to the specific questions and more to the overall thrust of where it seems like you're going with this.

The LIHTC space is insanely profitable for the people who know what they're doing.  You aren't "missing" anything except the misconceptions of the public at large.  First off, even wanting to enter the space means having a working knowledge of the relevant laws and regulations surrounding affordable housing, both at the federal, state, and municipal level.  That isn't nothing!  Moreover, to have any real hope of getting a project financed (all of which is at the discretion of the local public housing authority or issuing agency, or often both!) you need to know people.  Not in an illegal way, but in the sense that you want to know that someone in government accepts the basis of the project and will help it move along.  You need to know the politics of your municipality.  You essentially need to have an existing network, or else someone else is going to take your spot in the pipeline, because why should the head of New York's housing agency give the green light to your project instead of someone elses?  All of that takes a lot of time and effort, which isn't immediately rewarded.  I mean, look at the last decade or so - it's a lot easier to go raise a ton of money and hope to hit a home run on a luxury rental product.

Additionally, because there isn't a huge equity requirement (just predevelopment costs, which get refunded at construction closing), this isn't a space that big players or institutions are particularly interested in.  You certainly will see some platform level investing, but the assets themselves don't need it.  Plus, as a corollary to the above, a lot of people not specifically in the affordable housing industry have, in the past, been scared off by regulation and by fear of the unknown - not hard to find people on these forums who think that low-income tenants are monsters who immediately wreck whatever home they've been put in (patently untrue, by the way; people are people, and some LIHTC tenants are disasters, but then, so is your average shared apartment of 23 year olds).  There is bureaucratic risk, in that priorities can be imposed on financing which aren't relevant to the deals.  For example, NYC under de Blasio wanted to give more share of financing to non-profit developers instead of the BFCs and L+Ms and Arkers of the world, who often weren't as competent, and thus many shovel-ready projects languished.

As far as your question about risk goes, LIHTC development is arguably less risky than traditional ground up rental product.  It's almost guaranteed that the moment you finish with construction, you'll have a list as long as your arm of tenants waiting to move in.  Whch can take some time, unfortunately (see: bureaucratic risk), but also means that whatever revenue you underwrote is almost certain to be hit.  As long as you can manage opex, you won't have a problem on your budgets, there is essentially no market/lease up risk at all.

And while it's an interesting point for the tax credits, in practice it rarely matters.  To my knowledge, the only firms buying credits these days are major financial institutions, so the relative performance of the asset means almost nothing to their bottom line.  However, you strike on an interesting point, because for banks in particular, the credits are worth more than just their nominal tax benefit.  Technically, they constitute ownership of the underlying asset, so they're depreciable.  And they also help banks fulfill CRA needs.  So, for example, tax credits get sold for above par in places like NYC (prior to the 2017 tax cut they were pushing $1.30/credit) and for less in less desirable markets.

Jun 27, 2022 - 1:16pm
Ozymandia, what's your opinion? Comment below:
pudding

Ozymandia can you discuss why fee structures differ across the country? Does each state have a different structure under LIHTC for development fees? Could you also discuss profitability of these deals? I've heard dev fees could be upwards of 10%. Is this true?

I've been told recently that my posts are too long, so apologies*!

Fee structures are set at the state level.  For example, in NYC, it's 10% of acquisition costs and 15% of hard costs (well, qualified costs, but lets just equate them for the moment).  In a high cost of land, labor, and materials municipality like New York, that means fees can be enormous.  In NJ, it was 4% on acquisition and 15% on construction (though in certain circumstances you can exceed that).  CT has a weird sliding scale based on TDC which I do not remember off the top of my head, but the upper level tops out at like 3%, I think.  Those are the only places where I've read the QAP within the last handful of years.  All of this is subject to your ability to actually pay that fee - federal regulations dictate that all developer fee must be paid back by Year 15, so if you are so overleveraged that you don't have the cash flow to pay back the fee, it'll get scaled down.

To address what @BigMoneyPlays said, the expectation is that large portions of the fee will be deferred.  However, most LIHTC developers treat this as implied equity, so obviously it's cheaper to fund that from deferred fee than actual equity dollars.

*Obviously that is sarcasm.  Anyone complaining about word count in a post isn't actually interested in learning anything.

  • Associate 2 in RE - Comm
Jul 10, 2022 - 11:13am

Do developers (who are not GCs themselves) ever have the GC bill the max contractor fee that the state allows to the project and the split the amount that is above market?

  • Investment Analyst in CB
Jul 11, 2022 - 11:18pm

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