Tax credits impacting ROC for Multi Dev?

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:

1. 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:

   • Lenders: Banks may underwrite tax credits as cash flow at a specific time rather than as equity. This is because the credits are often realized after construction is complete, and lenders may not view them as immediate capital.
   • Equity Investors: Investors typically look at the overall financial structure and returns. If the tax credits are sold or monetized, they may be seen as a reduction in the equity requirement, which can enhance the ROC from their perspective.

2. Key Considerations:

   • Timing: Tax credits often require the project to be completed before they can be claimed or monetized. This delay can influence how they are factored into financial models.
   • Underwriting Practices: Some stakeholders may prefer to see the credits treated as a separate cash flow item rather than directly reducing development costs. This ensures transparency in the financial projections.

3. Best Practices:

   • Clearly outline how the tax credits are being utilized in your financial model.
   • Communicate with both lenders and equity investors to understand their preferences and ensure alignment on how the credits are treated.
   • Be prepared to justify your approach, especially if you are subtracting the credits from development costs to improve ROC.

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