Metropolitan Park Apartments - Construction

[ModSquad]

Those rents are unbelievably low. How can they possibly do that?

This project was funded via Low Income Housing Tax Credits.

For those that care here is a LIHTC Primer:

LIHTC are a 9% credit for total construction costs. Once awarded the developer gets these credits each year for 10 years. Say for example the project has eligible project costs of $5,000,000. A 9% credit is $450,000. Over 10 years this equates to $4,500,000. The actual credit usually translates to about $0.92 on the dollar or an acutal credit of $4,140,000. The developer must have a syndicator who buys the credits and sells them...they are usually purchased by banks or large investment firms.

The developer agrees to rent to Low Income Familes, usually below 60% of Area Median Income. For a family of 4 that is below $38,000. The rents have to be maintained at an affordable level established by the State on a County by County basis.

[torgo]

All right, I'm confused.

What are "eligible" project costs?

What do you mean by "actual credits"?

"The developer must have a syndicator who buys the credits and sells them...they are usually purchased by banks or large investment firms. "

I have no idea what that means.

Sorry if these are stupid questions, but financing stuff is like asking me to read latin.

[GaryP]

This project was funded via Low Income Housing Tax Credits.

For those that care here is a LIHTC Primer:

LIHTC are a 9% credit for total construction costs. Once awarded the developer gets these credits each year for 10 years. Say for example the project has eligible project costs of $5,000,000. A 9% credit is $450,000. Over 10 years this equates to $4,500,000. The actual credit usually translates to about $0.92 on the dollar or an acutal credit of $4,140,000. The developer must have a syndicator who buys the credits and sells them...they are usually purchased by banks or large investment firms.

The developer agrees to rent to Low Income Familes, usually below 60% of Area Median Income. For a family of 4 that is below $38,000. The rents have to be maintained at an affordable level established by the State on a County by County basis.

That is really a powerful tool. Why can't the same thing be done on a smaller scale (maybe a 2% yearly credit for example) for mid income apartment constuction?

[ModSquad]

All right, I'm confused.

What are "eligible" project costs?

What do you mean by "actual credits"?

"The developer must have a syndicator who buys the credits and sells them...they are usually purchased by banks or large investment firms. "

I have no idea what that means.

Sorry if these are stupid questions, but financing stuff is like asking me to read latin.

Eligible project costs are very complicated. The State Housing Authority, which issues the tax credits, has a set of criteria which are used as guidlines to determine eligible costs. Of course this is VERY VERY complicated.

Suffice it to say that the developer submits a sources and uses spread sheet and the State, based on its criteria, decides what is eligible basis for determining the tax credit.

In my $5 million project axample, the developer could potentially have total project costs of well over $5 million, but according to State criteria have only $5 million count towards determining the tax credit.

Actual credits is what the development receives based on the amount synidcator is able to get for the credits when sold.

[twoshort]

"The developer must have a syndicator who buys the credits and sells them...they are usually purchased by banks or large investment firms. "

I have no idea what that means.

The developer sells the credits to someone because they need cash up front for development costs. For example, if you are going to have a tax credit of $3,500,000 over 10 years.. the bank gives you like, $3,000,000 for that credit. (I just made those figures up). And after 10 years they've made a $500,000 return on their investment.

This is what I take it to mean. How close is that Dave?

[GRDadof3]

While we're on this topic, what happens to the Brownfield Redevelopment Tax Credits if you don't retain ownership of the building (as in a condo project that you sell off to co-owners)? And if there are SBT tax credits involved, what happens to those on a condo project where the developer does not retain ownership once it sells out? Do SBT Tax Credit even make sense for a condo project?

For instance, there are a few projects in the works with retail on the first floor and condos above, that are receiving Brownfield Credits and SBT credits. Do the SBT tax credits go to whoever retains ownership of the retail bays, and the Brownfield Credits help reimburse the developer for infrastructure improvements?

Thanks

[ModSquad]

The developer sells the credits to someone because they need cash up front for development costs. For example, if you are going to have a tax credit of $3,500,000 over 10 years.. the bank gives you like, $3,000,000 for that credit. (I just made those figures up). And after 10 years they've made a $500,000 return on their investment.

This is what I take it to mean. How close is that Dave?

Not too close. Actually you have it reversed. Let's use our Uptown project as an example. Lighthouse is the one that needs the up front development costs. We applied for and received a tax credit from the State. We brought in an equity partner who is purchasing our tax credit. Lighthouse uses the Great Lakes Capital Fund for our tax credit syndication.

The Cap Fund turns around and sells these tax credits to investors, which mostly consists of banks and other financial institutions. Once the tax credit is purchased these banks etc. are able to calim a deduction on their corporate taxes in an amount comensurate to their investment each year over 10 years.

It is ultimately a win win for all invovled.

Lighthouse get an infusion of up front capital to enable an expensive development project go forward

The investors 10 years worth of corporate taxes breaks at less than a dollar for dollar value. Additionally they get Community Reinvestment Act (CRA) credit for their investment.

The State gets an infusion of affordable housing that is guaranteed to be affordable for the next 30 years.

The Neighborhood gets, if done right, very nice high profile development in a difficult to develop area, which hopefully spurs more development.

[ModSquad]

While we're on this topic, what happens to the Brownfield Redevelopment Tax Credits if you don't retain ownership of the building (as in a condo project that you sell off to co-owners)? And if there are SBT tax credits involved, what happens to those on a condo project where the developer does not retain ownership once it sells out? Do SBT Tax Credit even make sense for a condo project?

For instance, there are a few projects in the works with retail on the first floor and condos above, that are receiving Brownfield Credits and SBT credits. Do the SBT tax credits go to whoever retains ownership of the retail bays, and the Brownfield Credits help reimburse the developer for infrastructure improvements?

Thanks

The answer is Yes.

Ultimately the issue on Brownfield and SBT is whether or not a TIF is set up...(Tax Increment Finance). This is where the real money in Brownfield is. If a TIF is established this pays out over 15 years and adds up to significant dollars. These are transferable to new owners if sold.

[torgo]

I give up.

[ModSquad]

I give up.

There is a reason why these deals do not happen often or quickly. They are massively complex. I only know a portion of what is actually needed. To be honet I am the dreamer and planner. I have an awesome team around me that handles the details to these projects.

[GRDadof3]

There is a reason why these deals do not happen often or quickly. They are massively complex. I only know a portion of what is actually needed. To be honet I am the dreamer and planner. I have an awesome team around me that handles the details to these projects.

Do you have a good real estate attorney (or accountant) that helps guide you through all these tax credit issues Dave?

[torgo]

There is a reason why these deals do not happen often or quickly. They are massively complex.

No kidding! You might as well be typing "jmdie fjbnt f gjr vhf gdpow vkwj cowb d ghd lwqoth"

Thanks though

[ModSquad]

Do you have a good real estate attorney (or accountant) that helps guide you through all these tax credit issues Dave?

We have the best attorney, Cindy Ortega of Miller Johnson. We do not have an accountant. To do this level of development you have to be comfortable with the numbers aspect of things internally. Once set up the projects are stricly audited.

If you screw up, you owe the entire amount of the tax credit back to the investors. It is a mamoth responsibility that requires a large amount of trust between the developer and the equity investor.

[GaryP]

We have the best attorney, Cindy Ortega of Miller Johnson. We do not have an accountant. To do this level of development you have to be comfortable with the numbers aspect of things internally. Once set up the projects are stricly audited.

If you screw up, you owe the entire amount of the tax credit back to the investors. It is a mamoth responsibility that requires a large amount of trust between the developer and the equity investor.

If I'm prying to much just tell me but how did you develop a relationship like that?

[twoshort]

Well I guess I had that all wrong I did find this little website though: http://www.hud.gov/offices/cpd/affordableh...b/lihtc/basics/

Torgo, it says: "After completing the topic, you will be able to describe how housing tax credits work"

Is that a true statement?

[GRDadof3]

There is a reason why these deals do not happen often or quickly

Actually, the Brownfield Redevelopment incentive is being use A LOT, and it's the first words out of the Downtown Economic Development office these days, including SBT tax credits. It seems pretty complicated.

[ModSquad]

If I'm prying to much just tell me but how did you develop a relationship like that?

Knowledge first. We had to build up enough knowledge of this type of development until we were comfortable with the language in order to kick project ideas around. It is kind of like if you are a auto mechanic...and talk autos with someone else, you can pretty much figure out who is real and who if faking it. We had to be able to speak LIHTC language.

Follow through and sound business practices came second. When our funder asked us for data or information we made sure that we gave them what they wanted in the format required, and before they actually needed. We worked real hard on our professionalism.

Last was completing our first project together. Once you go through your first project together, you come out on the other end with a much better understanding regarding what to expect from each other.

Overall we put a big premium on communication.

[GaryP]

^Thanks Dave

[AlexPKeaton]

Not too close. Actually you have it reversed. Let's use our Uptown project as an example. Lighthouse is the one that needs the up front development costs. We applied for and received a tax credit from the State. We brought in an equity partner who is purchasing our tax credit. Lighthouse uses the Great Lakes Capital Fund for our tax credit syndication.

That sounds exactly like what he said. You get the cash up front, and somebody else gets to take advantage of the tax credit. How is that reversed?

-nb

[gvsusean]

im planning on moving there since im starting up school again this fall

[ModSquad]

That sounds exactly like what he said. You get the cash up front, and somebody else gets to take advantage of the tax credit. How is that reversed?

-nb

After re-reading twoshort's assessment, I see that you are right...he was right. I thought the "they" he was referring to in his comment that they need cash up front was the entities buying the tax credits not the developer. It is all a matter of symantics.

Just goes to show that when you get involved in these complicated development deals it is easy to fell like you are being sucked down a rabbit hole.

I think I will take the blue pill and shut up now.

[civitas]

Actually, the Brownfield Redevelopment incentive is being use A LOT, and it's the first words out of the Downtown Economic Development office these days, including SBT tax credits. It seems pretty complicated.

These programs are designed to be an incentive for developers to develop otherwising unacceptable properties. Unfortunately the landowner often attempts to inflate the value of the property by the amount of the tax credits. That puts more money in his pocket while taking away the intended incentive for the developer. The reward has to go to the person taking the risk for the incentive to work.

I have an infill development that was a candidate for Brownfield credits. We declined because the cost of getting the credits was more than the credits.

What happens to Metropolitan Park Apartments after 10 years when the credits disappear and the $500 a month rent doesn't even come close to meeting the debt service?

[twoshort]

What happens to Metropolitan Park Apartments after 10 years when the credits disappear and the $500 a month rent doesn't even come close to meeting the debt service?

I was wondering the same thing...

[GRDadof3]

I was wondering the same thing...

Condos...

[twoshort]

Condos...

They have to remain 'affordable' for 30 years... but the tax credits are only for 10.