Pref/Mezz for LIHTC
Has anyone utilized preferred equity or a mezzanine loan as a source of funds in a 4% LIHTC project?
I’m working on a new construction deal that has a small funding gap (less than $200k) even if 100% of the development fee is deferred. If we take +/- $2m of pref/mezz, we can fill the gap and take a portion of our dev fee at stabilization. The operating cash flow is strong enough to pay back a pref/mezz lender with interest within a few years.
We have concerns about soft fund availability and want to know if anyone is using private capital sources to get deals done.
That’s a pretty small check to write with little upside given the hold period. Probs not worth most shops’ time.
Makes sense. The deal can afford a bigger check, especially if it is pref equity (mezz limited to 75% of surplus cash flow)
Assuming 12% pref rate, the deal can pay off a $7M pref equity check in 10 years, a $5m check in 6 years, and $2m check in 2 years.
Are you aware of groups that are active in this space?
Have you exhausted your search in shopping the deal around for pricing?
No, it’s very early in the deal. We’re doing initial underwriting and feasibility. Still need to open escrow then rezone the land.
I echo the sentiment below about soft funds. Also depending on your allocation you might not even have much of a gap if pricing moves in the next year or two. Now would be a good time to shop around for predevelopment loans as well. My employer has funds for them, with a new round coming up soon. It requires first and last look at the equity but just putting it out there for ya. You also won’t be able to defer anywhere close to 100% of fee with most investors.
I'm surprised you're able to take on that high octane of a rate and still make the numbers work. I don't think that you'll be able to take mezz and not run into coverage issues with your senior, but could be wrong. We are using a lot of soft money and grants to fill gaps. 7-9 sources of funds per deal is not unusual right now.
We are going through initial UW and I was just curious if anyone is using pref/mezz instead of soft funds. The market I am in doesn’t have a ton of soft fund availability at the moment. Maybe I should have just asked the question and provided less information on my deal.
It’s an early underwriting, but my model has the senior loan pegged to estimated 2024 rents, but lease-up is not until 2027/2028, so with 3% rent and expense growth, there is a decent amount of NOI growth, getting us well above 1.15x. The loan doesn’t have an earnout. It’s a $95-$100M project.
I'm still not really following your math...you shouldn't have any room in your capital stack for mezz if you are maxing out your senior debt. I would also be careful underwriting NOI growth. That's not really something that is done a lot on LIHTC deals. Ozymandia is the expert in this space so listen to him. My firm does LIHTC deals, but I don't work on them directly and only have a passing knowledge of the space.
This doesn't make a whole lot of sense on it's face. Even assuming those assumptions are defensible (they probably aren't, by the way), you're still not exactly rolling in additional cash. This generates what? Like... 6.5% additional potential proceeds in Year 3 of the loan? You'll also have a massive amount of deferred fee to pay down, so it's not at all certain that you'll be able to afford to take on the extra debt service and still meet your coverages. Hard to do all the math without a model in front of me, but this all seems like something where you guys are looking to patch holes in the boat while you're pulling out of the harbor - yeah, it might all turn out all right but you'd be way smarter to scrap the whole thing and find a new boat.
I mean, even before the specifics of the pro forma... you're assuming fairly robust rent growth, you're forecasting relatively modest expense growth, presumably an on-time delivery (because if you don't, you'll get an always-welcome downward adjustor on your credits)... if literally everything has to go right and you've still got a gap in your budget, it is time to start rethinking some basic assumptions.
If the cash flow is so strong why not just upsize your senior debt?
Really sounds like this is a busted deal from a developer with no LIHTC experience who is quickly realizing that there is a reason affordable housing is it's own ecosystem within the MF space. It's a lot harder than building market rate rentals...
Other developers in this market are putting in GP loans to fill gaps. I was just curious if anyone on WSO is using private capital after exhausting search for soft funds.
We are underwriting a HUD 221(d)(4) loan, which doesn’t allow an earnout.
I respect your experience in this space Ozy.
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