Can someone walk through how to evaluate a potential site for a 4% or 9% LIHTC deal?
As title says, I am interested in how you would go about evaluating a site for low income tax credits.
Both site and economic feasibility.
Thanks
It's not really much different than a regular ground-up deal, it's your rents and your Sources that change. (Uses will change a little). Novagradac has good information.
... it is so different.
Can you explain how so, and if you know, how you evaluate one?
Financially evaluating an in-place rehab 4% LIHTC bond deal:
(1) Realize it takes a while to execute these things, so factor in a year or two of bridge financing.
(2) Take a look at in place rents, compare with LIHTC 60% AMI maximum rents. Are they under or are they over? If they're over, you've got some problems right off the bat.
(3) Look into the housing authority fees, make sure you understand what they are charging as these fees are usually 4% of the total tax credits. Also figure out what the maximum developer fee is.
(4) Figure out what your rehab plan scope is and start calculating basis. Call up your local tax credit equity broker and start getting tax credit pricing in the area where the project is.
(5) Once you've got your basis, estimated 10 years of tax credits, and estimated credit pricing is, you know what your LIHTC equity looks like. Generally this equity will be phased in once hurdles are met but the equity guys will lend you the money as a bridge loan (so factor some interest in).
(6) Based on cash flows, you can size a DSCR based bond.
(7) Now you know if you have a gap. If you have a gap, find out if there is any soft money you can get in the jurisdiction. Once you've tapped all the soft money available, now you need to start deferring fee. Once you've deferred all of your fee, now you need to keep equity in the deal.
(8) At this point you should realize if the deal is feasible. Likely, it won't be and you've wasted time just to realize that the going in cap is way too low and LIHTC deals don't make any sense in today's seller's market.
What do you consider a good going in cap rate?
Whatever makes the capital stack work. The goal of a LIHTC execution is that you have no traditional equity left in the deal and developer fee doesn't have to be deferred. I'm at a MF Developer now and the principals tell me about how in the good ol'e days they were buying LIHTC deals at 7-9 cap, but now sellers have wised up and realized the value that LIHTC executions have so they have adjusted pricing upwards.
This is great. Thanks.
If you want to figure out how much your land basis would be, are you going to want to treat this like an typical market rate deal and run the model with all of your basis and potential rents to reflect a return (say 6% cap) like a standard market rate deal?
I have heard many times that the developer will pick up the land for free or almost free. How does that work?
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