Affordable Housing Development - LIHTC - 4% Bond Financial Model

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REValuation - Certified Professional
Rank: Gorilla | banana points 537

Anyone active on the GP/LP side of affordable housing? If you have funded or developed any of these deals, please feel free to share your experience or thoughts on profitability, risk, or unique structures.

I figure it's a long shot but I am trying to get my hands a 4% LIHTC Bond financial model. Any help would be greatly appreciated.

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Comments (20)

Apr 8, 2016

Interested as well

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Best Response
Apr 11, 2016

From an LP perspective - we have found proprietary (one-off) deals to be the most bang for your buck, but I have noticed that there a lot of dogs out there and you really need to know what you are investing in.

Off the tope of my head, these are some of the first things I glance at when given a deal..
Debt Make Up- One big thing to take notice of is the capital stack on the debt side, often these deals have a lot of soft debt, which is generally a good thing, but eats away at any residual that you would have. The 4% deals typically get a lot of the losses through interest deductions so higher leverage gives you better return (which is typical, but different mechanics at work here) but there is a higher risk of foreclosure..

Developer Fee - the developer fee should always be delayed to some amount of time that makes you feel comfortable about them having skin in the game

Reserves - you want reserved to be set up to carry the property for at least x vacancy for x amount of time (typically through your compliance period)

I have a 'underwriting an LiHTC deal' guide book that I can share if you would like...

    • 6
Apr 11, 2016

Are you able to post a copy of that book here, or PM me? I would greatly appreciate it.

Apr 12, 2016

I would also be interested as well since I am pretty new to the affordable space. Thank you!

Apr 19, 2016

Interest as well, if you can send along

Apr 19, 2016

Ditto everyone else.

Apr 21, 2016

I would also love to get my hands on this guide book if you don't mind sharing.

May 1, 2016

Great stuff. Please send if possible.

Apr 11, 2016

I would also like a copy if you could send that.

Apr 19, 2016

I ended building a 4% bond model from scratch. Any of you guys on the GP side working as developers or is it mainly syndicators on here? If you are on the GP side, what states are developing in?

Apr 22, 2016

I used to work on the GP side for a developer, and did a short stint on the lending/equity side as well... I mostly worked in awful markets that couldn't support debt - we made our niche putting together deals with very little or no debt. That strategy allowed us to collect a lot of fee by going after markets others wouldn't touch and thus a high success rate on LIHTC applications. We also did a lot of consulting, application prep, and turnkey for non-profit housing providers. Bonds weren't much of an option for our strategy, sorry.

I got out of affordable and work for a boutique RE equity/private debt firm now. The money is better, you don't have to deal with bleeding hearts, and your income is based on your ability to figure out a deal, not the mood of government employees. It did get me through the recession though.

May 1, 2016
turk8th:

I used to work on the GP side for a developer, and did a short stint on the lending/equity side as well... I mostly worked in awful markets that couldn't support debt - we made our niche putting together deals with very little or no debt. That strategy allowed us to collect a lot of fee by going after markets others wouldn't touch and thus a high success rate on LIHTC applications. We also did a lot of consulting, application prep, and turnkey for non-profit housing providers. Bonds weren't much of an option for our strategy, sorry.

I got out of affordable and work for a boutique RE equity/private debt firm now. The money is better, you don't have to deal with bleeding hearts, and your income is based on your ability to figure out a deal, not the mood of government employees. It did get me through the recession though.

A lot of these deals have negative NOI, right? My question is how you get rid of it once you're ready to get it off your plate.

May 1, 2016

You are correct that a lot of deals are drawing on a reserve during the last few years of operation, however there is certainly still value in the property and after the compliance period the property can be converted to market-rate OR (more likely scenario) be re-syndicated and get capital infusions all over again..

May 1, 2016

@investREanalyst nailed it. You aren't making much of anything on the operations at any point unless you have your own management team, and even that is not super lucrative if you actually take care of the property. Industry standard is 2%/3% inflation for income and expenses, so with very thin margins, you generally will always show negative NOI in year 13-15. Then you sell yourself the property that you paid nothing for (the LP used to just hand over the properties once the tax benefits ran out, but I have heard they are starting to ask for some cash now) , resydnicate the deal as a rehab, slap some paint, cabinets, and landscaping in, and pull a 15% developer fee and 14% contractor OH/GC/profit. That is why you don't sell - the rehab is the easy money, and you never have the shut the development down - renovate the vacant units and relocate existing tenants into them. There is no lease-up or vacancy risk for an established property with effective management.

There is a major trend at the state housing corporations that administer the LIHTC to give preference to rehab projects, so there actually is a market for the drained properties, too.

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May 2, 2016

Why is NOI negative in the last few years of the compliance period?

May 2, 2016

Rent growth is restricted to the increase in the area median income thanks to LIHTC requirements. In some cases the Area Median Income can decline or stay flat for years. Having no rent growth while opex increases for 10 years will eventually crush a property.

May 2, 2016

Thanks v much the explanation! Much appreciated.

May 1, 2016

I'm interested in the LIHTC underwriting book also

May 3, 2016

I'm interested in the guide book as well. Thanks

May 4, 2016