I’m working on capitalizing a multi development deal. There are two layers of tax credits. I’m wondering if I can subtract those tax credits from development costs to improve my ROC.
I think this is common practice but want to understand how equity investors and lenders might view it. Thank you!
Based on the most helpful WSO content, tax credits can indeed impact your return on cost (ROC) calculations, but how they are treated depends on the perspective of equity investors and lenders. Here's what you need to know:
Treatment of Tax Credits: Tax credits are often monetized by developers, either by selling them to investors or incorporating them into the capital stack. This can effectively reduce the development costs, thereby improving the ROC. However, the way these credits are treated in underwriting can vary:
Key Considerations:
Best Practices:
By addressing these points, you can better position your deal and align expectations with your financial partners.
Sources: LIHTC during the next recession, Economics of building affordable housing?, Q&A: Affordable Housing Acquisitions, Development and Capital, Historic Tax Credits
Not exactly. You should be monetizing the tax credits and capitalizing them in your development budget to reduce the amount of required cash equity you need to contribute as GP. The tax credit investor(s) will remain as equity partners in the deal for some number of years depending on the type of tax credits, so the best way to look at the impact of the tax equity is after the investor(s) have exited the deal. It's at that point that the tax equity becomes truly accretive to the GP's equity position. What kind of tax credits are you talking about?
Yes you are correct, take the NPV/net equity of the tax credits out of the denominator to reduce the total cost basis. This is how institutional shops look at it.
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