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LIHTC Nuts & Bolts
Budgets and Feasibility
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Budgets and Feasibility
Operating and Development
 Two
key components in determining financial
feasibility:
 Development
Budget – includes all of the costs
necessary to construct a project and all of the
funding sources needed to pay for these costs.
 Operating
Budget – reflects the income a
property is expected to earn less all of the
ongoing operating costs and loan payments –
what is left is cash flow.
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The Development Budget
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Budgets and Feasibility
The Development Budget
 Refer
to the LIHTC application provided and
check the following:
 Pages
18, 19, 19A, and 20 – Development Uses
 Pages 21 and 22 – Development Sources
A
Development Budget format, as with this one,
should include all of the categories of expenses
necessary to construct a project.
 An
electronic format allows quick changes as
projected costs change – and costs will change.
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Budgets and Feasibility
The Development Budget
 Cost
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Categories include:
Acquisition - land and building
Construction “hard costs”
 Site Work
 Rehabilitation / New Construction
 General Conditions, Overhead, and Profit
Contingency
Architect and Engineer Fees
Interim Costs – construction period costs like taxes / insurance
Construction and permanent financing fees and expenses
Professional reports and other soft costs
Syndication costs
Developers fees
Reserves
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Budgets and Feasibility
The Development Budget
 Construction
Costs – also known as “hard” costs –
categories include:
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Off-site work
Site-work
Demolition / Abatement
New Construction
Rehabilitation
General Requirements, Overhead, and Profit
Bonding / Letter of Credit
Appliances / FFE
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Costs should get more precise over time – initially based on
estimates but eventually based on a contract.
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Initially expressed as $/unit or $/SF.
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Budgets and Feasibility
The Development Budget
 Architect
and Engineering – includes fees paid to
architects and engineers for building and site
design, construction supervision, and testing.
 Initially
may be estimated, but eventually finalized
in a contract.
 Often
estimated as percentage of construction
costs: 4%-8%.
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Budgets and Feasibility
The Development Budget
 Interim
Costs are non-construction costs incurred
during the construction period, and include:
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Construction interest
Construction loan fees
Inspection fees
Taxes
Insurance
 Calculating
construction loan interest is important as
this is not a fixed expense, but varies based on the
length of time a loan is outstanding and the loan
balance over the loan period.
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Budgets and Feasibility
The Development Budget
 Soft
costs are project-related but not directly related to
construction like:
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Legal – only legal expenses related to construction financing are
basis-eligible.
Accounting – includes, at least, a cost audit at the end of the
project – the cost certification
Consultants
Tax credit reservation / application fees
Syndication fees – costs of forming the ownership entity
Title, survey, and recordation fees
Due diligence costs – market study, appraisal, and Phase I ESA
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Budgets and Feasibility
The Development Budget
 Financing
fees and expenses are the costs of
obtaining permanent financing including:
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Points (on permanent financing)
Closing costs (for permanent financing)
Credit enhancement fees
Developer’s Fee is intended to compensate the
developer for staff time, entrepreneurial effort, and risk
– amount is limited by project circumstances in the
LIHTC application.
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Budgets and Feasibility
The Development Budget
 Acquisition
costs reflect the cost of purchasing land on
which to build a project and/or the cost of a building or
buildings to be rehabilitated.
 Land
and building costs should be separated in a
budget – for tax credit and, later, tax reasons.
 Contingency
is an allowance intended to covers the
unknown – may be required by lenders / funders.
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Budgets and Feasibility
The Development Budget
 Reserves
are funds set-aside in the development
budget to cover specific costs or risks:
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Lease-up expenses.
Operating losses.
Replacement of capital assets.
Debt service payments.
Rent subsidies.
 Reserves
will required by lenders and investors.
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Budgets and Feasibility
The Development Budget
 Financing
falls into different categories depending on the
stage of the development process and the need that the
financing fills.
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of the different types of financing include:
Predevelopment – for costs associated with the planning of a
construction project
Construction – short-term financing for construction-period
expenses.
Permanent (aka Take Out Loan) – long-term financing to cover
period of indebtedness of note.
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Budgets and Feasibility
The Development Budget
 Different
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types of financing (continued):
Bridge – temporary or interim loan made between a shortterm (construction) and permanent financing. Also used to
bridge between extended equity pay-in
Gap – additional funds necessary for completion of
construction or purchase of property. Fills a“gap”
between equity and debt.
Mini Perm – a construction loan that rolls into a short-term
(usually five years or less) permanent loan
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Budgets and Feasibility
The Development Budget
 Financing
consists primarily of grants and loans
 Grant
– normally funds given by a public entity for a
particular project - funds may have conditions.
 Loan – money lent with conditions:
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Amortizing – payment of debt in regular installments of
principal and interest
Deferred – payment made at a future date
Forgivable – after a period of time or condition is met, debt is
wiped clean
Interest – amount or percentage of money charged for use of a
principal sum of money
Term – maturity or period of time from beginning to end of a
payment of a loan
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Budgets and Feasibility
The Development Budget
 Equity
is funding provided by the owner of a project.
 Equity includes:
 Owner’s cash down payment.
 Equity from tax credits.
 Loans
are usually secured to ensure that the conditions of
indebtedness are met.
 Security
is - real or personal property pledged to help
guarantee an amount of indebtedness
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Budgets and Feasibility
The Development Budget
 Types
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of security and some security terms are:
First or Primary Position: Interest in property whereby the security
is guaranteed by the value of the property and no other rights to
property exist
Subordinate: Interest in property which may take a second or third
position behind first
Title: Legal evidence that one has right of ownership to property
Lien: Legal instrument placing an encumbrance against property
for money. All liens are encumbrances, but not all encumbrances
are liens. Normally, a secured interest created by a mortgage
Other terms: balloon, accrued interest, grant structured as a loan,
principal and interest deferral.
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Budgets and Feasibility
The Development Budget
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Loan underwriting ratios: Lenders look at a projects
debt capacity in two ways:
Debt coverage ratio
Loan to value ratio
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Debt coverage ratio:
Debt coverage ratio =
NOI
Annual Debt Service
Loan to value ratio: Provides the lender with a measure of
collateral coverage - value does not equal cost. Often will vary
greatly for affordable housing – value usually much less than
cost. LTV a factor for both the construction and the permanent
lender.
Loan to value ratio =
Loan amount
Value
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Budgets and Feasibility
The Development Budget
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Conventional Financing
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Tax-Exempt Bonds (VHDA)
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Taxable Bonds (VHDA)
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HOME or CDBG (VDHCD and localities)
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USDA
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FHLB of Atlanta
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Local governments
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PHAs
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Private sources
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Budgets and Feasibility
The Development Budget
 Historic Tax
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Credits
Provide a dollar for dollar reduction in taxes due to a taxing
body.
 Federal credit of 20% of the improvement cost of certified
historic buildings – used to offset federal taxes.
 Virginia credit of 25% of improvement cost – used to offset VA
taxes.
Reduce LIHTC basis by an amount equal to the Federal Historic
credit.
Available for properties listed on the Federal / State registers of
historic properties.
Rehabilitation guided by Secretary of Interior’s Standards.
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The Operating Budget
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Budgets and Feasibility
The Operating Budget
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Income
 Sources relating to rental of low-income units – each of
these sources will require adjustment for utilities and
number of bedrooms:
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Housing Choice Vouchers / HAP
Tax Credit rents – 50% test and 60% test
Other rental subsidy (USDA RD, ACC, and so on)
Sources not directly related to the rental of low-income
units:
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Market rate units
Commercial space
Laundry
Surcharges
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Budgets and Feasibility
The Operating Budget
 Two
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The Tax Credit rent calculations described are for the maximum
allowable rents.
Market conditions may make these rents unattainable or unaffordable.
 Rent
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income constraints: regulatory and market
types:
Gross rent includes all utilities
Net rent includes no or limited utilities
Gross rent minus utility allowance equals net rent
Utility allowance establishes figures for out-of-pocket utilities:
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Heating & Cooling
Cooking
Lights
Hot water
Water / Sewer
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Budgets and Feasibility
The Operating Budget
 Vacancy
– adjustments to potential income – there
are two types of vacancy:
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Normal vacancy - a function of the area market and the
types of units available:
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sensitive to management.
expressed as a percentage of gross income – 7%.
Lease-up vacancy - occurs at the end of construction as
occupancy goes from empty to full:
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Lease-up reserve or equivalent reserve of cash from
development can help offset costs incurred during lease-up
period.
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Budgets and Feasibility
The Operating Budget
 Operating
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Expenses
Costs that arise from operation of the project, rather than from its
development/construction.
Expenses that are recurring and necessary for the proper
functioning of the project.
Typical operating expenses include:
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Taxes
Insurance
Water/Sewer
Utilities
Maintenance
Management
Other
Replacement Reserves
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Budgets and Feasibility
The Operating Budget
 Projecting
operating appropriately expenses
accurately is critical as there is little margin for error.
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Rents are often fixed and regulated
Cash flow is thin
The ability to raise rents in future years is limited
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Budgets and Feasibility
The Operating Budget
 Real
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Estate Taxes
Tax paid to local government based on value of property
Initial valuation can be pulled from an assessment, if available,
but an appraisal will provide market value.
 Insurance
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An insurance agent can provide an estimate for insurance –
insurance may include property, liability, workmen’s
compensation, fidelity bonding, health, and auto.
May be able to estimate based on other projects.
Ensure coverages are consistent with those required by your
lenders and partners.s
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Budgets and Feasibility
The Operating Budget
 Water
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Can be estimated by the locality or a utility company engineer
based on typical usage for comparable facilities.
 Good design can reduce usage.
 Rates vary greatly from community to community.
 Other
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/ Sewer:
utilities – may include the following:
Electricity (not paid directly by residents – for common areas)
Heat
Cooking gas
Electricity
Trash
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Budgets and Feasibility
The Operating Budget
 Maintenance
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– day-to-day items like:
Redecorating – cleaning and painting when tenants move out
Grounds maintenance and supplies
Snow removal
General repairs:
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Leaky faucets
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Broken windows
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Water heaters
Clarify amounts for salaries and staffing, materials, and for
outside contracts.
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Budgets and Feasibility
The Operating Budget
 Management:
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Management fee paid to firm responsible for overseeing
property management:
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Generally paid as percentage of collections – 5% to 10%
Varies based on project size, complexity, and unit rents
Does not include cost of site manager or maintenance people –
separate salary line items.
Does not include cost of operating on-site office or manager’s unit.
 Other operating expenses:
 Accounting / legal
 Inspections / Compliance
 Ground rent
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Budgets and Feasibility
The Operating Budget
 Replacement
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Reserve:
Funds set aside to replace major capital items:
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Roofs
Water heaters
Appliances
Lot paving
Generally $300 per unit per year (different for USDA RD)
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Budgets and Feasibility
The Operating Budget
 Net
Operating Income - cash available to pay all
stakeholders (lenders get paid first – investors and
owners last) - Calculated as follows:
Gross Income
- Vacancy
= Effective Gross Income
- Expenses
= Net Operating Income
 Cash
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Flow:
Cash flow = NOI less debt service payments to lenders.
This is the owner’s return on their investment in real estate.
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Budgets and Feasibility
The Operating Budget
 Proforma Tips
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Real estate is a long-term investment. The pro forma illustrates
potential benefits five to ten years into the future.
Increase income and expenses annually to account for inflation
 Income 3%
 Expenses 4%