Ten Things Every Developer Should Know Before They Do their First Tax Credit Deal Tax Credit Pricing is Important but it is not the only thing that matters – Customer Service is the most important thing to me. Is your investor / 1) syndicator / lender focused on giving you a good experience? Are underwriters / asset managers / construction people and attorneys difficult to deal with? Can they move quickly and be respectful your timeframe? Is your Investor / Syndicator /Lender flexible or by the book? - Things won’t go perfectly, so you want a partner who will st and by you, share 2) the pain and accommodate you even if it’s not in the written agreement. Don’t Allow your Investor / Syndicator / Lender to change the deal at the last minute - This is a big one. You negotiate the deal and then at 3) the last minute they come back with materially different terms. Negotiate your deal upfront and hold them to it. Don’t be a fraid to walk if your financial partner tries to pull a fast one. Focus on Building Relationships, Not getting the last half cent – I think you have to do some shopping to keep your financial partners on their 4) toes, to satisfy your Board of Directors and to make sure you are getting a market deal. However, in the midst of all this you should develop deeper relationships with a few key partners who can help you figure out tough deals, refer you business, and come to your aid when you need it. Be Realistic about what your skill level is – It takes experience and knowledge to execute these transactions. Most organizations and 5) individuals should consider a Joint venture if they lack expertise Understand the Guaranties before you sign them – There are a multitude of guaranties that lenders and investors require. You should 6) understand them and negotiate the best deal for yourself before you sign anything. This is more important than tax credit pricing, in my opinion. Be Realistic about your compensation / fee sharing in a Joint Venture – If you are not in a position to sign guaranties, you cannot expect 80% 7) of the fee. If you are inexperienced, you cannot expect 80% of the fee Developers should hire a construction professional – the biggest mistake I made as a syndicator was not insisting that developers hire 8) capable owner’s representatives. The biggest risk is construction risk and you mitigate that by having a strong experienced construction person involved. Strong Personnel is more important than fancy projects – The best developers have the best personnel. Reinvest your fees in hiring the best 9) talent. If you have good people, you will distinguish yourself as a developer Don’t try to do everything. Pass on Projects that seem messy or problematic – Saying no to things that don’t make sense or require too 10) much work for too little reward is critical. The worst thing is to invest a lot of time in a project that ends up producing very little financial benefit – and a lot of headaches..
Learn the Basics: The Low Income Housing Tax Credit Panel NYSAFAH Conference May 15, 2012 60 East 42 nd Street, Suite 1822, New York, NY 10165 • www.rockabilladvisors.com
Learn the Basics: Project Feasibility/Evaluating your project • New Construction • Preservation/ Acquisition Rehab • 9%, 4%, SLIHC, other low income development options 60 East 42 nd Street, Suite 1822, New York, NY 10165 • www.rockabilladvisors.com
Learn the Basics: New Construction • What is your market? • What can you build? • What are your costs (predevelopment, acquisition, construction, soft costs) • Putting together the numbers • Timing 60 East 42 nd Street, Suite 1822, New York, NY 10165 • www.rockabilladvisors.com
Learn the Basics: Preservation/Acquisition Rehab • What are the physical needs of the project? • Market? • Putting together the numbers • Timing 60 East 42 nd Street, Suite 1822, New York, NY 10165 • www.rockabilladvisors.com
Learn the Basics: Development Team • Architect • Attorney • Accountant • Consultants • Development Partner • Property Manager • Contractor • Experience Counts 60 East 42 nd Street, Suite 1822, New York, NY 10165 • www.rockabilladvisors.com
Learn the Basics: Evaluating Financing Needs • How much permanent debt can the project support? • What is the projected equity raise? • Has any other funding been made available to the project? • Know your subsidy need before asking for it. 60 East 42 nd Street, Suite 1822, New York, NY 10165 • www.rockabilladvisors.com
Learn the Basics: Subsidy Needs • Is the project a priority for one of the funding agencies? • Are your development costs in line with industry standards? • Are you asking for subsidy to cover acquisition or development fee? • Are you providing supportive services? • Are you building with Green or innovative technology? 60 East 42 nd Street, Suite 1822, New York, NY 10165 • www.rockabilladvisors.com
Learn the Basics: Evaluating 9% vs. 4% Example Previously Provided: Total Development Budget: $9,632,000 Qualified Basis: $11,140,350 9% Annual Tax Credits: $1,002,631 4% Annual Tax Credits: $357,605 9% Equity Raise (@ $.80): $8,021,048 4% Equity Raise (@ $.80): $2,860,840 60 East 42 nd Street, Suite 1822, New York, NY 10165 • www.rockabilladvisors.com
Learn the Basics: 9% vs. 4% Allocation 9% Allocation • NYSHCR – Capitol Programs (NYS and NYC City Deals) • NYC HPD (primarily not-for-profit supportive housing deals) 4% Allocation • NYSHCR/HFA • NYCHDC •Local IDA’s SLIHC – NYSHCR 60 East 42 nd Street, Suite 1822, New York, NY 10165 • www.rockabilladvisors.com
Learn the Basics: The Qualified Allocation Plan (QAP) The QAP sets the goals and requirements for the allocating agency: • NYSHCR: http://www.nyshcr.org/Publications/QAP/ • NYSHFA: http://www.nyshcr.org/assets/documents/4875.pdf • NYCHPD: http://www.nyc.gov/html/hpd/html/developers/low_income.shtml 60 East 42 nd Street, Suite 1822, New York, NY 10165 • www.rockabilladvisors.com
Learn the Basics: Completing the Application When to file an application What is needed: 1. Site Control 2. Market Study 3. Appraisal 4. Phase I 5. Financial Commitments 6. Schematic Plans & Specifications 7. Cost Estimates 8. Operating Assumptions 9. Time 60 East 42 nd Street, Suite 1822, New York, NY 10165 • www.rockabilladvisors.com
Learn the Basics: Sources of Permanent Financing Debt Service Coverage Requirements Income to Expense Requirements 4% • SONYMA, • REMIC • Fannie/Freddie 9% • NYSHCR-HFA • Traditional Lenders • HUD FHA 223f 60 East 42 nd Street, Suite 1822, New York, NY 10165 • www.rockabilladvisors.com
New York State Affordable Housing Pre-Conference NYSAFAH – May 16, 2012 Investor Deal Terms the Letter of Intent DOMINICK BUFFA FIRST STERLING FINANCIAL
WHO TYICALLY BUYS CREDITS • FINANCIAL INSTITUTIONS – TRADITIONAL BANKS – INVESTMENT BANKS • INSURANCE COMPANIES • FORTUNE 500 COMPANIES • SYNDICATORS
WHAT ARE THE DIFFERENCES FINANCIAL INSTITUTIONS • SPECIFIC GEOGRAPHIC AREA – CRA • CUSTOMERS OF THE BANK • LESS LIKELY TO STRUCTURE • COMPLETE PACKAGES • COMPETITIVE PRICING
WHAT ARE THE DIFFERENCES INSURANCE & FORTUNE 500 Cos… • SIMILAR TO LENDERS EXCEPT HAVE WIDER GEOGRAPHIC RANGE • MOSTLY MIF – LIMIT ON % THEY CAN OWN • ECONOMIC INVESTOR • WHEN PURCHASING DIRECT • EXPERIENCED DEVELOPERS, LARGE DEAL • MAY HAVE 3 RD PARTY DUE DILIGENCE • LESS LIKELY TO STRUCTURE • SPECIALTY CREDITS – HTC • MAY IMPOSE DEVELOPMENT CONDITIONS
WHAT ARE THE DIFFERENCES SYNDICATOR • BUYS WITH INTENTION OF PLACING IN A FUND • PROPRIETARY & MIF FUNDS • WIDE GEOGRAPHIC AREA • PERFORM DUE DILIGENCE & AM • KNOWLEDGEABLE BUYER WITH IN-HOUSE EXPERTS
WHAT ARE THE DIFFERENCES SYNDICATOR WILL ASSIST IN APPLICATION STAGE ASSIST WITH STRUCTURING DEAL CAN WORK WITH A WIDE VARIETY OF CREDITS AND DEAL SRUCTURES CAN CLOSE QUICKLY
WHEN SHOULD YOU SOLICIT PROPOSALS PRELIMINARY/APPLICATION STAGE • SYNDICATORS WILL ASSIST HELP RUN NUMBER, STRUCTURES AND PRICING THE EQUITY • BEST TO START WITH A CONSULTANT WHO IS FAMILIAR WITH THE PROGRAMS AND CAN ZERO IN ON THE RIGHT ONE • LENDER NEEDED FOR DEBT
A PROJECT IS READY TO GO WHEN . . . • SITE CONTROL • CREDIT AWARD OR BOND VOLUME CAP • FINANCING IN PLACE • PLANS READY FOR BIDS • THIRD PARTY REPORTS • BUILDING PERMITS ZONING APPROVALS ULURP IS DONE IN NYC
INFORMATION NEEDED FROM THE DEVELOPER PROJECT DESCRIPTION • NUMBER OF UNITS & UNIT MIX • POPULATION TO BE SERVED • RENT STRUCTURE – GROSS & NET • AMI LIMITS • PROJECT AMENITIES • NUMBER OF BUILDINGS
INFORMATION - CONTINUED ORGANIZATION • NAME OF PARTNERSHIP OR COMPANY • NAME OF GENERAL PARTNER OR MANAGING MEMBER • FOR PROFIT OR NOT FOR PROFIT (501 (C) (3)) • GUARANTORS • DEVELOPER • MANAGING AGENT
INFORMATION - CONTINUED DEVELOPMENT BUDGET • SOURCES AND USES • CONSTRUCTION AND PERMANENT PHASE
INFORMATION -CONTINUED BASIC SOURCES & USES SOURCES USES Tax Credit Proceeds Land Developer equity Building Acquisition Hard Debt Hard Construction Cost Soft Debt Soft Costs Federal Grants Developer Fee State Grants Rrserves Deferred Developer Fee
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