LIHTC deals are hot. Throughout the pandemic, LIHTC has continued to be a strong incentive for investors and developers. The pace has continued through 2021 and with high demand and limited credits per state, you can see how particularly competitive it is to get approved. The benefits outweigh the complexity though, and there are certain steps you can take to increase the likelihood of getting your project through the application process and receiving an award.
- Proximity & Proposed Positive Impact. The goal of LIHTC is to stimulate private investment to create and preserve affordable housing in distressed areas and neighborhoods. However, there is more being considered here such as the impact on the community and residents overall. Projects that have the highest potential to reach beyond affordable housing and spur other economic opportunities such as schools, parks, and stores, are going to be at the top of the list. Additionally, proximity to transportation and amenities and projects located near downtown areas or near employment centers are key elements that State Housing Authorities are looking at. Not only does that help the property and renters thrive, but also the community as a whole.
- Secure Funding. Having your financial strategy ironed out and funding in place allows you to get the project going without scrambling to put a capital stack together and negotiating Limited Partners (LP) at a time when energy could be spent elsewhere. Having capital on hand gives the team more flexibility and credibility when navigating the various steps and milestones/hurdles that a LIHTC project presents along the way. But don’t be alarmed, not everyone has capital in place, which is why good partnerships and a solid plan are crucial to ensure continued financial support and agility.
- Property Size. Properties designed with less than 100 units are optimal to making the award amount go farther. However, this number has been shrinking lately due to the increase in materials and labor costs and might be closer to 50-75 units in today’s market. Additionally, it is vital to understand the region’s wage rates, material costs specific to your design (concrete and steel versus lumber), and lead times or delays (potentially severe weather related). And let’s not forget about the unforeseen market impacts, such as those experienced during last year’s COVID-19 pandemic, which can lead to an increase in labor and materials. Socio-economic climate and stress also factor into demand and volume, which can affect costs tremendously in the blink of an eye.
- Good Legal Standing. It is very important to conduct your legal due diligence early and ensure you are in good standing with regards to the General Partner (GP), LP, and site itself. This may relate to liens (against the partners and/or site), zoning approval, density, etc. Keep in mind that environmental impact may also be of concern and related issues should be vetted out well in advance, as many states default to HUD’s standards with regards to flood zones, coastal zone impact, State Historic Preservation Office/Tribal Historic Preservation Office consultation, industrial hygiene (radon, asbestos containing material/lead based paint, etc.).
- Experience. Experience. Experience. Did I say experience? Navigating the State Housing Agency’s Qualified Allocation Plan (QAP), understanding and estimating the tax credits believed to be generated by the project, and the overall submittal of the project to the state can be complicated. Being experienced or having the support of a team who is experienced can help. Collaboration and solid partnerships with seasoned veterans in the industry can bring a welcomed sense of stability to a tricky or time sensitive project, and a holistic approach will always render greater success.
- Due Diligence. A common theme of the above pointers centers around doing your homework and leg work, and due diligence goes a long way to mitigating pitfalls and strengthening the projects application for award success. Everything from environmental, to building condition and energy efficiency analysis should be considered along the way. If your strategy and project characteristics are solid, then the due diligence can be catered to support the deal specifics! For example, environmental due diligence is challenging due to the individual state requirements which vary from ASTM compliant reports only to full NEPA assessments. Always be sure to check with your housing agent on which regulations they follow for environmental due diligence needs.
To get a piece of the tax credit pie, it is important to consider the points above not only for new construction projects but for acquisitions and rehabilitation of existing properties. Applications require initial environmental due diligence like a Phase I Environmental Assessments (ESA) and sometimes additional scopes are required such as a Property Condition Assessments, Asbestos Surveys, Lead Paint Inspections, and Radon Testing to name a few. It is imperative to have a consultant with the technical skills, resources, and experience needed when navigating these deals. A good consultant will have a deep understanding of the rules and due diligence requirements mandatory for getting the tax credit and be able to assist at various stages in the tax credit life cycle.