Does anyone do LIHTC? I’ve been curious, how are the LIHTC deals marketed? Are there brokers that specialize in selling sites just for LIHTC? If so, who are the brokers? Or do LIHTC investors compete with market rate firms to win deals (and look at the deal via a LIHTC lens)? How are these deals found / put together and who are the prevalent selling brokers?
Similar to the above, what about section 8 project based voucher deals? (Where the vouchers are with the project, not the tenant). Correct me if I’m wrong, but I believe this is a HAP contract deal?
I'll speak to the LIHTC side:
Some brokers who are familiar with the LIHTC program may market their sites as viable for dev (QCT/DDA, enough land outside of floodplain for building, misc QAP specs) but on the whole, you'll be competing with market-rate developers for land. For selling tax credits, a lot of firms use syndicators to pool investors but generally, most of the other development factors pre-allocation (bonds + credits) will be similar to the search for sites that MR devs use. There aren't too many brokers that specifically focus on LIHTC dev just because they want to cast a wider net in terms of the market they can sell to.
There are some LIHTC specific firms on the financing side but that seems out of scope in regard to your question.
Thank you! So how long does it take to put together a LIHTC deal? If you are competing against market rate firms, I am guessing, and please correct me if I’m wrong, that it takes much more time to put together a LIHTC deal than traditional. So why would a seller choose the LIHTC firm?
Absolutely, happy to help.
Ozy hit the nail on the head with the timing question. Less financing concern since you have tax credits and tax exempt bonds baked in so you can be flexible on how much you pay for the land (only up to a certain percent though because for a new construction deal, land is not counted in you tax credit allocation basis). Timing is definitely a sticky point that can make brokers avoid LIHTC deals because you need to wait for allocation (assuming you got your RONO (resolution of no objection) lined up). Given the current bond cap issues in a lot of states, there is a new risk that you may not get allocated (too many deals, not enough room in the bond cap) and then you have to go through the lottery/wait for the next cycle.
Also for clarity, my comments apply to 4% (non-competitive) credits and not 9% (competitive) credits because that adds a whole other list of issues and generally 9% is only for smaller deals.
Edit: Full time allotted pre-construction would be 1-1.5 years for all the pieces to fall into place generally but could move quicker depending on how you time it.
Happy to answer any additional questions.
Really interesting! Thank you for the detailed response! So I have a few follow up questions!
thank you!
There actually are several well known affordable-only brokers. LIHTC buyers can generally offer a higher price than a yield based buyer, which is a why a seller would consider waiting longer to close, but the truth is most of these deals are getting bought on a bridge in the current sellers market. Selling direct to LIHTC comes with a lot of closing risk. I don't see many traditionally market-rate firms directly competing with affordable housing shops. LIHTC and Section 8 property comes with all sorts of land use restrictive covenants, limited distributions, regulatory agreements and other restrictions that conventional buyers wouldn't know how to underwrite, manage, or make use of. From concept to closing, a LIHTC deal is easily 12 months if existing, or could be a few years for ground up, or if targeting competitive credits, and then there’s the construction or renovation period 12-24 months, and the asset management part at the end where the investor sets some financial hurdles a few more months.
They get marketed like any other. There are some brokers that specialize in affordable, because it's a complex asset class and buyers are going to be leery about trusting information from a broker that doesn't understand the market. Affordable Housing Advisors are a subset of Marcus & Millichap and are good affordable brokers. SVN Realty. Lots of others, of course, but those are two big national firms to start.
And it depends on the market, but yes, affordable and market rate compete for land deals. LIHTC developers can afford to pay higher prices, generally speaking, especially in "Class C" markets and the like, where rents aren't high. And as to how they're put together, it really depends on where you are. Some states make it really easy to apply for tax credits (NJ comes to mind from experience), some make it insanely difficult (TX is notorious for a bizarre lottery process, or at least I think it is) and some states are just so constrained on volume cap that you have pipelines stretching for years, waiting on future allocations (NY). So when you talk about how deals get put together, or how and why developers choose to build affordable vs market rate, you really can't separate that from where the deal is being considered. Additionally, every state sets a differing cap on how fee income is earned. Ohio allows developers to take a fee of 25% of total development cost (I think I remember that being the case) - obviously, building a huge project there is a home run, since that's an enormous and effectively risk-free return. In NY it comes out to something closer to 12% on average, but given how expensive land, labor, and materials are, that can also be a large number. Connecticut, but contrast, has a sliding scale that reduces the percentage fee you earn as the project becomes larger... so maybe not as attractive as a proposition, since as you get scale, you get your fee pared back (in a relative sense, of course)
It depends on the type of voucher, but for the purpose of conversation you're correct. Very active market for Section 8 deals, and one that has been seeing a ton of activity over the last two years. It's almost as though people realized that nominal oversight and regulation is worth a federal guarantee of your rent roll!
Including this other post. If you're a seller, you like LIHTC deals because you might be making a 10-15% premium on your sales price. Depending on the market, that might involve an extra 6-12 months before you close, but that's the justification. And as to whether it takes longer, well, that depends. If I'm buying a fully entitled, shovel-ready piece of land to build a market rate rental building, then sure, you're talking about a massive delay in getting into the ground. But if the site needs work, then you can dual track that and cut down the lead time by a lot. An important note is that LIHTC deals don't carry as of right tax abatements everywhere (though some municipalities have it, of course), which means that you're probably going to be negotiating a tax break at some point, which you can do concurrently with applying for the tax credits.
Thanks so much! So if a developer buys a site to be a LIHTC deal and needs to dual track it to get LIHTC’s raise and the site entitled, etc., are there programs for these developers in case they don’t get the credit allocation so that they can continue holding onto the land and try again the following year? It seems like a large amount of risk to do an entitlement deal without the guarantee of any capital being raised. Totally get that’s the name of the game, just an interesting extra twist of risk!
Generally speaking you have a dynamic conversation with local municipal housing officials. The idea would be that you are making sure the deal pencils for all parties - if the local housing authority has exceeded their volume cap allocation in 2022, the concept is that you have a soft agreement that you'll be slotted into the pipeline in 2023. There isn't any state that I'm aware of that disallows applying for tax credits if you don't get them in a given year.
Essentially, I would argue this isn't an additional risk factor. You should know before you ever go into contract whether a deal works, and have that conversation with the appropriate person. Also worth noting that most markets you'll probably get a 6-12 month contingency to get credits allocated, which gives more than enough time to figure out your place in a PHA pipeline.
I don't do LIHTC, I work at a firm where we do exclusively Multifamily. But at the beginning of the pandemic we started to look at alternative assets and spent a ton of time and money trying to figure out LIHTC, seeing if we could make real money out of it. We flew around the country looking at properties that could use a heavy upgrade and get 4% money. But each and every state we went to had a COMPLETELY different set of rules.
We concluded that the only legit money is in the development end, but the annoying part of that is that the 9% money almost always goes to the few main groups that control the industry since its inception (roughly 1990).
In the end we decided that we would stick to multifamily, best decision ever.
In summary I would say that if your goal is to make money then there are definitely quicker and easier (think a lot easier) ways to make money. If however you can't stomach raising rents 20% on lower middle class people ( which is very selfless and admirable) Then LIHTC might be the path for you.
Best of luck!!! You don't know what you are getting yourself into
Rare to see so many shitty hot takes compressed into this short of a post.
Seeing that a mouth breathing, room-temperature IQ moron like @DeeperSense opposes LIHTC development is actually just another piece of evidence that it's actually a good business model. Anyone as breathtakingly stupid as this must be on the exact wrong side of whatever issue they choose to opine on.
If you would read my reply you might notice that I am not opposed to LIHTC, I just think it is an extremely difficult line of business.
Besides development and property management fees, are LIHTC developers able to charge any other fees? If transaction volume slows down, which fees are being charged to keep the lights on? Is it just the property management fee?
I'm just going to come out and say it, LIHTC development is not and will not solve the problem of affordable housing in a meaningful way. To balance credits based on basis only to develop 80-100 units after 3-5 year of commingling funds and development entitlements is only a drop in the bucket toward the issue of affordable housing. Yes, its guaranteed developer fee, but when you're having to defer the fee due to uptick in cost and labor, is it really worth it? I went in thinking it would be impactful but it's too much red tape and lack of standardization that holds it back from being impactful. The fact that most LIHTC developer usually have to use consultants shows how inefficient the process is. I'm getting my ass back to market rate asap and just focusing on workforce housing and NOAH.
Thanks for the thoughts! What is NOAH?
Naturally occurring affordable housing. It's getting harder and harder to find but that is definitely what Freddie and Fannie are putting more emphasis on going forward. We just really over did the luxury class A this cycle.
The only way to solve the housing crisis is to allow for more building in general, especially in urban areas. LIHTC housing was never supposed to address the kinds of housing needs we have today; it's supposed to support a reasonably small slice of the population at the very bottom of the market. Housing scarcity is turning that "small" group into a meaningful percentage of Americans. LIHTC development should be targeted at a very specific economic demographic, not as a cure-all. Growing economic inequality since the 80s hasn't helped, either.
We build market rate and LIHTC multifamily in DC, one of the most complex regulatory LIHTC markets in the nation. We try to acquire land as cheap as possible because it is not included in eligible basis, thus does not yield any additional tax credits. I don't think we pay above market for land in class C areas like other commenters have mentioned, we pay at market.
We ultimately collect our 15% fee (mostly if not 100% deferred) and the minimal cash flow we receive from the property. We increase our income from SRECs and antennas. The perk is your sources (loan, LIHTC, other forms of grants and subsidy) typically cover the cash you would of had to put up. The increase in competition over the past decade or so has definitely made it more difficult. 9% credits are very hard to obtain and are capped much lower than 4%. It seems the sweet spot for 9% credits is 40-50 units. Rising construction costs are making it harder for tax credits to cover your cost to build, so developers are seeking additional sources of capital for LIHTC deals.
Some developers are twinning 4% and 9% credits. This is a relatively new structure that grants the developer more tax credits, but creates some complex timing issues. We've found that sticking to large acquisition rehabs over ground up development is the best strategy. You get acquisition credits as a developer, lower your construction costs over ground up, and can generate economies of scale on a larger project.
The process is very political. Getting politicians who serve in your neighborhood on board with your project is key. The goal of local politicians is to say "Look at me! I'm brining more affordable housing to my neighborhood without giving breaks to developers". If you obtain land in a high cost area, you'll have no issue getting the credits. The issue is, it's expensive to acquire land in A neighborhoods and you're competing more with market rate developers.
Banking relationships are also key. Every additional .$01 or even $.005 on your tax credit price yields many more dollars.
Is this true? That is absolutely bonkers. It's basically redlining at the municipal level!
I'm not sure how your equating this to redlining.
Recommend any attorneys for TOPA issues?
There’s a massive shortage of affordable housing and developers are simply not offered sufficient incentives, let alone the right incentives, to include a reasonable amount of affordable units in their projects. If the government wants more affordable, then do what NYC does and give a 25 year tax abatement for including affordable and literally every single new building will be 20% affordable and you won’t need to dick around with the minutiae of LIHTCs and the like.
It’s hard enough finding a regular deal to pencil let alone one with affordable. Without incentives they massively fuck up the pro forma as we all know.
Mandatory affordable, especially without corresponding incentives (I’m looking at you, tax abatement-less Chicago), not only reduce the overall supply of new housing but also make the new housing that is built shittier because the revenues are artificially depressed at every building. It’s really a public policy fuck up of epic proportions.
They should cut the red tape, open up the firehouse of free cash to build affordable and you can guarantee developers will be there with their hands out and a commitment to build however many $1100/month one bedrooms they can ask for. Everyone wins.
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