Creative Project
Financing Strategies
IN Association for Community Economic
Development
Presented by Louise Elving, VIVA Consulting
1
Introductions,
Goals for This Course
Class will cover how to strategically assess & use
financing creatively
 Challenges in the current financing environment
 Benefits & risks of diverse kinds of financing
 How to evaluate whether financing is appropriate
for a residential or non-residential project
 Circularity between development costs &
financing
 Creatively combining financing resources:
What kinds of obstacles must be addressed?
 Creating financing for mixed-use & commercial
projects
2
Core Competencies
1. Know how to evaluate the appropriateness of
financing resources for specific projects:
benefits, risks, impacts and constraints
2. Differentiate the financing issues in diverse
kinds of projects: Homeownership & cooperatives,
affordable rental housing, non-residential projects
3. Understand the overall uses, benefits,
restrictions and challenges of key financing
resources today
 3 kinds of tax credits
 Tax increment financing
 Local & State funding streams
4. Use on-line resources to obtain more financing info 3
Introductions
1. Pair yourself with one other person.
2. Introduce yourselves to each other and
prepare to introduce the other person:


Name & organization
Role in the organization
3. Together, pick a prop and prepare to tell us
what it says to you about financing real
estate projects
4. Also prepare to tell us: Your goals for this
course
4
Types of Deals Typical to CDCs
1. Rental Housing: Affordable or mixed-income
2. Homeownership: Fee simple or condo
3. Cooperative housing: a hybrid between
ownership & rental
4. Non-residential & Mixed-use:

Retail, offices, industrial, community facilities,
health care, child care, schools, arts centers, etc.
5
3 Phases of Real Estate Financing
1. Predevelopment: Pays for early costs, pre-construction
- E.g. Acquisition financing
- Hardest to get because riskiest
2. Construction financing: Pays to build the project
3. Permanent financing: Pays back construction financing.
Remains in place long-term (15-40 years)
- Rental Housing & Coops: Project developer arranges
- Homeownership: Buyer arranges this,
perhaps with help from sponsor/developer
- Non-residential: Project developer arranges this
6
Debt and Equity: 2 Types of
Funding for All RE Deals
What is the difference between
debt and equity?
What are examples of each?
“OPM”
7
Debt and Equity: 2 Types of
Funding for All RE Deals
1. Debt

Common sources: Banks, states HFAs
2. Equity: Grants or investments
 Common public sources: CDBG, HOME, state or
local municipal grants, NSP
 Common private sources: FHLB, foundations
 Buyer down payments for homeownership/coops
 Tax credits for rental housing or commercial deals


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Low Income Housing Tax Credits (LIHTC) for rental
Historic Tax Credits for rental & non-residential
New Market Tax Credits for non-residential
8
Affordability Gap:
Very Low Income Household
Household Income
$ 20,000/year*
Rent or mortgage at 30% of income $ 500/month
Operating costs: taxes, insurance,
maintenance, etc.
($ 350/month)
NOI - Net Operating Income
$ 150/month
Debt service at 85% NOI
$ 127.50/mo.
Mortgage supportable at 5.5%, 30 yrs
$ 22,500
Development costs per unit
$125,000-225,000
Gap per unit
$102,500-202,500
* Income = approx. $10/hour, fulltime. This is roughly one-and-a-half
times the federal minimum wage. HUD 30% income level, for 4
person household, in 2015, Indianapolis is $20,910.
9
Affordability Gap:
Moderate Income Household
Household Income
$ 41,800/year*
Rent at 30% of income
$ 1,045/month
Housing operating costs
($ 350/month)
NOI - Net Operating Income
$ 695/month
Debt service at 85% NOI
$ 590/month
Mortgage supportable at 5.5%, 30 yrs $ 105,000
Development costs per unit
$125,000-225,000
Gap per unit
$20,000-120,000
* HUD income at 60% AMI for a 4 person household,
Indianapolis, 2015
10
5 Types of Subsidies
1 Development subsidy funds = free (or reduced cost)
money to pay costs: e.g., HOME, CDBG, tax credits
2 Reductions in development costs: e.g., free land
3 Debt service subsidies to increase debt capacity, so
owner can pay more development costs:
e.g., reduced interest rates on mortgages
4 Income assistance to pay more debt: e.g.,Section 8
5 Operating cost reductions: e.g., RE tax reductions
See Tab 3 for list of Subsidy Sources
11
Evaluating Financing Resources
“Judging Whether Resources Fit A Project”
Directions:
1. At your table, as a group, brainstorm the
criteria you would use to evaluate whether
or not a financial resource is appropriate
for a project.
2. Write your criteria on a flip chart.
3. Present to the class.
Example. “Availability:” Whether a resource is
available when your project needs it.
12
Assembling Public & Private
Financing: Strategic Issues to Evaluate

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Availability
Qualifications
Timing
Submission Requirements
Funding Criteria, Competitive Scoring: likelihood
of success
Competition
Politics
Conflicts Among Funding Sources
Impact on Development Costs
Impact on Long-term Project Operations
See Tab 3 for more details
13
Creatively Combining
Financing Sources
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The patchwork quilt of affordable housing finance
Combining direct and indirect subsidies
Combining public and private monies
Financing obstacles and conflicts
Project sponsor responsible for coordinating and
aligning diverse, multiple funding requirements and
schedules
See Tab 4 for chart on Comparative
Requirements of 4 Federal
Funding Programs
14
How Financing Sources Impact Your
Development Program
 Residents & Income Requirements

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Income limits vary by funding source
Target population: the very low income (under 30%
AMI), homeless people, people with disabilities
 Evaluation Questions:

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Are these the people you want to serve?
Can you market to the target residents?
 Are income targets too narrow for feasibility?
Will administration of multiple income limits be costly?
Will you need services for special populations?
 How will you obtain them, pay for them?

Need to partner with a social services provider?
15
How Financing Sources Impact
Your Development Team
Development Team Requirements
 Davis-Bacon (prevailing) wages for
construction contractors – may add 15-30%
to construction cost
 MBE/WBE firms on the development team
 Minority and women employment on the team
and/or by construction contractors
 Section 3, local hiring requirements
16
How Financing Sources Impact
Your Development Team, Con’t
Evaluation Questions
 Can you afford to pay Davis-Bacon wages?
 Can you find firms or employees that fit the
standards?
 Will the requirements prevent hiring firms you
want?
 Do you (or the contractor) have skills and
funds for recruitment and reporting?
17
How Financing Sources Impact
Other Development Costs
 Additional Development Cost Requirements
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Reserves: Operating reserves for rentals; carryingcost reserves for sales period for ownership
Greening
Construction & soft cost contingencies
Market studies & model units
Financing fees & construction inspection fees
Additional environmental reviews
18
How Financing Sources Impact
Other Development Costs
 Evaluation Questions
Can you cover these costs in project
budget?
 Can you manage time implications, e.g.,
market studies, environmental reviews?
 Is a resource worth its extra costs?

19
How Financing Sources Impact
Your Developer Fee
 Limits on Developer Fee

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May be capped at 10% of development costs, perhaps
not including acquisition costs, in rental
May be capped at a fixed amount per unit in ownership
Sometimes development & financial consultants must
also be paid from developer fee
 Evaluation Questions
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Is this fee enough?
Can it cover your own organization’s costs?
Can it cover project costs not in the budget?
Can this fee cover reserves, generate seed money for
other projects, or cover other organizational expenses?
Timing: When can you get the fee?
20
Combining Financing Sources
What are COST and TIMING impacts
of combining multiple financing
sources?
21
Combining Financing Sources:
Impact on Development Costs & Time
Costs from Multiple Financing Sources
 Preparing multiple applications
 Responding to multiple funders
 Negotiating to align multiple requirements &
interests
 E.g., mortgage positions
 Time delays: Waiting for multiple application
deadlines
 Multiple reporting requirements, long-term
22
Combining Financing Sources:
Impact on Development Costs & Time
Evaluation Questions
 Do you have or can you hire the skill to
manage this?
 Can the project sustain the time?
E.g., Maintain site control, hold building costs
 Can the project absorb the costs?
E.g., Multiple lawyers
23
Homeownership Financing Issues:
Market Challenges Bring Opportunities
 Market Challenges Today
 Weak
demand in many places
 Many existing homes on the market
 Financing difficult, especially for condos
 Spill-overs from foreclosures
 Market Opportunities
 Acquire
land or stalled projects at low
prices
24
Homeownership Financing Issues:
Lender Concerns Today
 Market: Evidence of strong market of buyers
 Strict Credit Standards: Buyers with good credit &
able to make sizeable down payments
 Well planned product that matches local demand
 Short time between house completion & sale
 Adequate budget for carrying costs = cost of
owning houses between construction completion &
sale
E.g., RE taxes, utilities, maintenance, mortgage,
security
 Pre-sales: Homes sold before construction begins
25
Homeownership Financing Issues:
Responding to Lender Concerns
 What would you do to respond
to these lender concerns?
 What other lender concerns
do you hear?
26
Homeownership Financing Issues:
Responding to Lender Concerns
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Extensive market studies
Careful buyer screening & support
Committed pre-sales
Sponsor guarantees of construction completion and
sales
 Developer fee not paid until last house is sold
 Forced construction phasing
 Will you have to build in small phases to prove
sales?
 May create:
 Re-mobilization costs
 Higher construction prices per phase, over time
27
Homeownership Financing Issues
Resources for Affordability
No single major federal subsidy available
 Development Cost Subsidies
To pay for gap between affordable sales price and
development costs
 Typical funds: HOME, CDBG, FHLB, city & state
ownership programs, etc.
 Will funds be a grant, or soft second mortgage to
new home owner?
 Debt Subsidies for Home Buyer
 City or State first-time home buyer mortgage
programs with subsidized interest rates, lower
fees, etc.
28
Financing Strategies to Increase
Ownership Affordability
 Section 8 for Homeownership
 Increases income to pay for mortgage
 Energy Conservation Grants (to increase energy
efficiency) - potential dual impact:
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Pay for some development costs
Reduce on-going utility expenses, so more buyer
income can be used for mortgage payments
 Soft Second Loans: Cover part of development costs
 If 1st mortgage can be reduced to 80% of value, buyer
doesn’t have to pay for private mortgage insurance
 Down Payment Assistance or IDA programs
29
Homeowners’ Views of
Affordability Restrictions
How do you “sell” prospective buyers on
unusual restrictions?
 Limited equity upon re-sale to keep homes
affordable to future buyers
 Having a second mortgage to cover gap
between affordable sales price and
development costs
 Resources w/ restrictions: HOME, FHLB, NSP,
etc.
 Greater issue in soft markets than strong
markets
30
“How Would You Deal With This
Homeownership Opportunity?”
Exercise 1 –”Wood’s Edge”
Directions
1. Read the exercise
2. Answer these 2 questions:
①
②
What information might be useful in
convincing the banker this is a viable
project?
What might you do to make the project more
feasible and reduce its risks?
3. Prepare to share your answers with the
class
31
“Exercise 1 – Wood’s Edge”
Relevant Information
 Current local sales data: Prices, time on
market
 Data on costs to complete the project:
Construction & soft costs. Bid from GC
 Team you’ll use: GC, architect, realtor/sales
agent, engineer
 Update on project permitting: Are building,
zoning & planning permits still valid
 Update on environmental conditions of
vacant buildings (e.g., mold, structure) & site
32
“Exercise 1 – Wood’s Edge”
Ways To Reduce Risk
 Finish build-out in small phases
 Committed pre-sales from buyers with a real
deposit (e.g., $10-15,000 or more)
 Binding price & schedule from GC to
complete construction
 Evidence of home buyer training & support,
post-sale
33
Cooperative Housing
What is cooperative housing?
34
Cooperative Housing
 Cooperative housing is a hybrid of rental &
ownership
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Residents own a share in the owner organization;
do not own their own home
Residents participate in decision making
Residents have a proprietary lease for their home
 Financed like rental housing
 Construction & permanent financing on the entire
project; individual coop buyers do not finance their
own homes.
 Can use rental resources: LIHTCs, HOME, CDBG, etc.
 Limited equity cooperatives promote affordability
35
Special Costs/Concerns of Coops
 Preparing Cooperative Documents,
including bylaws & articles of organization for
the coop
 Marketing & Education of Residents
Potential residents are unlikely to understand
coops and so staff, consultant or marketing
agent need time to explain it
 Educating Lenders
36
Coop Housing Online Resources
 National Association of Housing Cooperatives
has a wealth of information
www.coophousing.org
 Policy Link has many resources related to building
stronger communities.
Its Equitable Housing Toolkit includes information
specific to Limited Equity Coops
www.policylink.org/…/Limited_Equity_Housing_Coop
37
Rental Housing Financing
Permanent financing has multiple
potential sources & subsidies
Typical project: 4 -12 funding sources
 Development subsidies
 Operating subsidies: Section 8, Vouchers
 Debt service subsidies: Low-interest
mortgages through state HFAs
 Major equity investments: Low Income
Housing Tax Credits & Historic TCs
38
Tax Credits for Community Real Estate
What is a “tax credit?”
versus
What is a “tax deduction?”
39
Tax Credits for Community Real Estate
Definition of a “Tax Credit”:
A $1 for $1 reduction in taxes paid
Three Types of Tax Credits
1. Low Income Housing Tax Credits (LIHTC)
- for rental housing
2. New Market Tax Credits
- for commercial or mixed-use projects, community
facilities
3. Historic Tax Credits
- for rental housing, commercial or mixed-use projects
40
Rental Financing & LIHTC
Advantages of LIHTC
 Can raise significant equity capital without
debt
 As much as 40-60% of development
costs
 Single most effective federal hsg program
ever: $6 billion/year!
 A vehicle for socially responsible
investments by business
41
Rental Financing & LIHTC
Disadvantages/risks of LIHTC
 Very competitive
 Complex, with high transaction costs
 Need to use skilled staff and/or consultants,
expert attorneys
 Not suitable for all projects, e.g., small ones
 Trade-off in control: Project must be owned
by a partnership or limited liability
corporation
 Major negative financially if do not comply
w/ 15 year TC reporting and occupancy
requirements
42
LIHTC Income & Rent Restrictions
To qualify for LIHTCs, projects must meet one of the
following income and rent tests:
1. 50% income test: At least 20% of the units must be rented to tenants with
incomes at or below 50% of area median income, and their share of rents cannot
be more than 30% of 50% of AMI. OR:
.
2. 60% income test: At least 40% of the units must be rented to tenants
with incomes at or below 60% of AMI, and their share of rents cannot be more
than 30% of 60% of AMI. OR:
3. At least 15% of the units must be rented to tenants with incomes at or below
40% of AMI. Plus, rents charged to tenants who are not low income must be at
least 200% of the average rent charged to low income residents for comparable
units.
(This 3rd limitation is rarely used.)
43
Who Owns A LIHTC Project
 A Partnership or Limited Liability
Corporation
 General Partner: Has “general” or overall control,
and overall or extensive obligations
 Limited Partner or Investor: Has “limited”
control and obligations.

Can use TCs to offset federal income taxes
 Who Are Investors?
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Typically financial corporations, insurance
companies, other profitable businesses
Investors may be identified and aggregated by a
syndicator
44
Illustration of Legal Ownership Structure
Your Local CDC, Inc. (the sponsor of
the XYZ Housing project)
XYZ Housing,
Inc., general
partner
ABC Housing
Investments
ABC Housing, LP,
limited partner
XYZ Housing Limited
Partnership (ownership entity
which owns XYZ Housing)
45
Sample LIHTC Financing Structure
Investor(s)
or
Investment Fund
Soft Loans & Grants
Government loans & grants,
foundation grants, other
soft loans
$
(Subordinate Debt)
Equity $
• Project
• Project Partnership or Limited Liability
Corporation, LLC, owns project
Hard Debt
Bank loans, bond issue
TCs,
Losses
TCs
LIHTCs from
State Agency
$
(Senior Debt)
• Project
• General Partner / Managing Member of LLC
Project Sponsor
• Initiates Project
• Arranges Hard & Soft Debt
• Obtains LIHTC Allocation
Prepared by VIVA Consulting, with thanks to MHIC
46
LIHTC Financing in These Times
 Investment market is changing and will
continue to evolve
 Pricing can vary greatly by location, project
type, and investor
 Strong urban markets often get more than
soft urban or rural areas
 2 coasts often stronger than Midwest & South
 Senior & family housing may get more than
special needs housing
 Investors with CRA motivation will pay more
47
Challenging PROJECT Issues
In This Investment Market
Plain vanilla deals most easily accepted. More
complex deals may raise investor concerns.
 Scattered site deals
 Moderate rehab deals
May trigger more inspections & reserves
 Small deals, i.e., under $3-4 million in equity
 Hard to get investors interested
 Special needs housing unless services are funded &
service provider identified
 Section 8 Project Based Rents if higher than LIHTC
rents
 May trigger reserve requirements

VIVA Consulting
48
Challenging SPONSOR Issues
In This Investment Market
If you’re new to LIHTC or not well capitalized, you’ll
need to compensate
Sponsor’s team must have LIHTC experience
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Sponsor itself or development consultant
Attorney
Good architect & contractor with affordable housing
track record
Sponsor needs some balance sheet strength, e.g.,
$500,000 in the bank or 6 months operating costs

If you don’t have it, may need to partner to get it
Sponsor’s liquidity will be examined
VIVA Consulting
49
Evaluating Potential Investments
Need to examine ALL aspects of investment terms
 #1 Issue - Pricing: pennies per dollar of tax credit
 Investor Fees
Costs for third parties due diligence
 Annual asset management fees to syndicator
Reserve requirements
Timing of equity payments
 How much up front at construction start: 10-15% or
more
 How much during construction
 Need to look at borrowing cost of construction funds
 How much after lease-up
Adjusters: Penalties for late or reduced credit delivery
50
Back end: What happens after 15 years
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Indiana LIHTC
What are challenging IN issues?
QAP Requirements
 Set asides and long list of scoring points
 Very detailed application requirements
 Must have zoning approvals before applying
51
LIHTC: Additional Information
See Tab 5 for more information on LIHTCs
ON-LINE RESOURCE:
Website of Novogradac and Company has extensive information
about LIHTC, including TC amounts & application deadlines for
every state, list of states with their own programs, federal rates
for TCs, & more
www.novoco.com/low_income_housing/lihtc
52
National Housing Trust Fund
New federal funding program, almost
exclusively for very low income rentals
 Authorized in the 2008 Housing & Economic
Recovery Act
 Collects & distributes funds not at risk of
Congressional appropriations
 Will be funded out of profits of Fannie Mae
and Freddie Mac, starting in 2015
 HUD will allocate funds to states, starting in
summer of 2016
 States will pick projects
53
NHTF: How Much Money in 2016?
 Administration estimates: $120 million
 NLIHC estimates: $188 million in 2016,
then up to $385 million or more
 How much does each state get? Based
on formula emphasizing shortage of
affordable rental housing
 Each state & DC gets at least $3 million
54
NHTF Focus on
Extremely Low Income Rentals
 A least 75% of funds for extremely low
income households

ELI = Below 30% AMI or below poverty level,
whichever is higher
 Up to 25% of funds for very low income
households between 30% and 50% AMI
If less than $1 billion, 100% must benefit ELI
 90% for rental production, preservation, rehab or
operation.

 Up to 10% of funds for homeownership for firsttime buyers: production, preservation, rehab, down
payment or closing cost assistance.
55
NHTF: How Will Funds Be
Allocated by States?
 Each state must pick ONE agency to receive
and distribute NHTF, and notify HUD of it
 States must create a public plan for using
NHTF
State allocation plan:
 Recipients can be nonprofits, for-profits or
public entities (but not usually public housing)
 Must describe criteria for selecting recipients
56
NHTF: Allocation Plan continued
State allocation plan must give priority to
projects based on:
Geographic diversity
Affordability of rents
Length of time units will be affordable
“Merit” of a project. HUD examples:
Serving people with special needs
 Accessible to transit or employment
 Energy savings & nonpolluting features
Applicant’s ability to obligate money & complete
project in a timely way
Extent project will use non-federal funds

57
NHTF: More Information
 Find out which IN agency will distribute
funds and review its Allocation Plan
 NHTF rule is at 24 CFR part 93
How to get more information:
ON-LINE RESOURCE: Go to the website
of the National Low Income Housing
Coalition www.nlihc.org
Check its United for Homes campaign
58
Non-Residential Financing:
Funder Perspectives
Why is non-residential development
riskier than residential?
59
Non-Residential Financing:
Funder Perspectives
 Market: If you build it, will they come?
 Rents: What rent can they pay?
 Demand: Need strong commercial market demand,
e.g., buildings in high traffic areas or proven tenants
 Risks

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High vacancy
High turnover
High oversight from sponsor/owner
Financing/rent guarantees from sponsor/owner
Low rents: Can rents cover any debt or only operating
costs?
Example: Rents at $6-12/SF cannot carry much, if any
debt for construction costs . . . And there’s little if any
60
subsidy available. . .
Non-Residential: Matching Program
to Market Demand & Location
 Retail & offices: Need high demand, high-traffic 1st
floor space for retail. Both need parking for staff &
clients
 Small retail space: Usually struggles…. Especially
on ground floor of residential buildings

Rarely will it cross-subsidize housing
 Community centers: Match location to
program needs. E.g., teen center near a school;
health center needs good public transportation &
maybe hospital link; day care needs safe drop-off w/
parking
 Commercial & manufacturing: Identify specific
tenant needs. E.g., commercial kitchen & manufacturing need
delivery space, parking, truck access
61
Non-Residential Development:
Special Development Costs
What are these?
62
Non-Residential Development:
Special Development Costs
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Architect fees for tenant build-out
Construction costs for tenant build-out
Separate utilities or meters for each tenant
Special permits and licenses for tenants
Broker’s fees for renting commercial space
 Often based on an amount per SF (e.g.,
$0.50- $1/SF/year of a lease) or a number
of months’ rent
 Developer time to manage rent-up & fit-up
 Guarantees by developer of rental income
63
Non-Residential Development:
Build-Out Issues & Budgets
 Does owner or tenant build-out the space?
 Does owner or tenant pay for build-out?
Examples
 Beauty parlor: Extra plumbing for sinks
 Restaurant: Meeting codes for ventilation, plumbing,
cooking spaces, rest rooms, HC accessibility
 Retail & offices: Specific lay-outs for each tenant
 Day care: Meeting licensing requirements
 Manufacturing: Specialized equipment, complex disposal
requirements, truck access
64
“How Would You Deal With This
Non-Residential Opportunity?”
Exercise 2 – “First Food”
Directions
1. Read the exercise
2. Answer these 2 question:
①
②
What questions would you ask First Food at an
initial meeting?
What information would you ask First Food to
bring to an initial meeting?
3. Prepare to share your answers with the class
65
“First Food” – Initial Questions
 Experience of FF staff and their roles
 Budgets: What is the basis of their budgets
 Investors: Who are “angel investors” and
terms of their investment
 Users: Who will be the users; what evidence is
there of users’ interest
 Permits: What permits will be needed to
operate
 Design and fit-up: What will be needed. Who
will prepare the plan. Architect & builder ID.
66
“First Food” – Initial Information
 Written business plan
 Resumes of key staff
 Identity of angel investors and their
commitment
 Financial plan: budgets for start-up, fit-out
and operations
 Operating/management plan: staff, hours,
waste disposal, etc.
 Marketing plan: How will First Food find
users
67
New Market Tax Credits
 Authorized by Congress in 2000
 Objective: Promote business growth in distressed
urban & rural communities
 Compensate for perceived risks of investing here
 Intended to produce a profit for investors.
 For mixed-use, commercial & limited housing but
NOT usually for rental housing. Examples:


Community facilities: Day care, health care facilities,
community services facility, education or training
center, arts center or theater
Commercial uses: supermarket, shopping center,
offices, manufacturing, biotech, other businesses
See Tab 6 for more information on NMTC
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NMTC: Advantages & Disadvantages
Advantages of NMTC


Provides funding for non-residential projects of all
kinds that have few other public subsidy resource
Investor market is still relatively strong
Disadvantages of NMTC



Very complex and expensive; high transaction
costs
Need expert legal and financial structuring
assistance
Time in pre-development may be long due to:
 Complicated financing structure
 Competition for credits at the organizations that
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invest in deals
New Market Tax Credits
 Ideal NMTC project is large -- usually over $6
million -- with only a few funding sources
 Difficult (though possible via condo
structure) to use with development that is
primarily housing
 Talk early to a potential investor!
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NMTC: How Do You Get Them?
 Apply to a qualified “community development
entity (CDE)” which has obtained a competitive
allocation of NMTC from US Treasury Dept.
 CDEs exist in all states: Over 200 nationwide

LISC, Enterprise Community Investments, MHIC, etc.
 CDEs raise investment capital from businesses which
use the credits to shelter their profits from federal taxes
 Big investors: US Bank is largest investor. Some
other banks, insurance companies, other financial
services firms
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NMTC: Investment Structure
 NMTC investments can be loans or equity, in
for-profit or non-profit businesses in lowincome census tracts
 Credit is based upon the “investment
amount,” not project costs. Not like LIHTCs nor
Historic Tax Credits.
 Equity investment may be paired with a complex
“leveraged loan” structure to increase equity
value
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NMTC: Investment Structure, Con’t
“Leveraged loan” structure
 Project sponsor aggregates funds:
Loans, grants, its own equity money, etc.
 These funds “loaned” to the CDE’s investment
fund that pools them with equity investors’
funds
 CDE fund then advances all these monies to
the project as NMTC equity investment or loan
 NMTC are taken on the value of this entire
investment

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Sample NMTC Financing Structure
Soft Loans:
Government grants, charitable
contributions, bridge loans, other
soft loans
(Subordinate Debt)
Equity
Investors
$
Hard Debt:
Bank loans, bond issue
(Senior Debt)
$
$
New Markets Fund
(owns 99.99% of CDE)
$ - Qualified
Equity Investment
(QEI)
NMTCs
NMTCs
From US
Treasury Dept.
$
NMTCs
Cash Distribution
Interest & Loan repayments
New Markets
Community Development Entity (CDE)
NMTCs,
Interest & Loan
repayments
First mortgages
Subordinate loans,
Equity investment
$
• Project
• Limited Liability Corporation, LLC, owns project
• Project
• Managing Member of LLC
Project Sponsor
• Initiates Project
• Arranges Hard & Soft Debt
Prepared by VIVA Consulting, with thanks to MHIC
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NMTC: Their Value?
 NMTC is taken over 7 years and equals 39%
of the value of the investment made in a
project by the NM investor
 $1 of investment earns $0.39 in credits
 Value to the project must be calculated individually
due to evolving program use & individual project
leveraged loan structure/value
 Rough rule of thumb: Might cover 10-25% of
development costs
 Over $18 billion in equity investments
raised to-date by NMTC nationally.
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NMTC: Other Key Issues
 Must have experienced team members to protect
your interests & get a good deal – staff, consultants,
and/or attorneys
 During project operations, need someone (in house or
project operator) who knows the long-term NMTC
requirements – fees, debt service structure,
reporting
 Plan ahead: During development, structure how the
NMTC deal will unwind in 7 years when the
compliance period ends
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NMTC: Creative Combinations
Can combine NMTC and Historic Tax Credits
in non-residential projects.
Example: 50,000 SF commercial building
Development cost: $125/SF or $6,250,000 total
Historic credits = $6.25 Mil x 20% x $.90
= $1,125,000
NMTCs = $6.25 Mil x 15% = $ 937,500
Total credits’ value =
$2,062,500
or:
33% TDC
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NMTC: Creative Combinations, Con’t
 Combining NMTC and LIHTC is very
complex, so not often done:

Must create a condominium for separate
ownership of 2 parts of a building: e.g., ground
floor commercial with NMTC and rental
apartments above it with LIHTC
 If rental housing in NMTC deal, less than
80% of project income must be from
housing rents
 Must engage legal & tax experts to structure
it properly
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NMTC: Additional Information
See Tab 6 for more information on NMTCs
ON-LINE RESOURCES:
New Markets Tax Credit Coalition
www.newmarketstaxcreditcoalition.org
Community Development Financial Institutions Fund
www.cdfifund.gov
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Creative State and Local
Funding Streams
 Generate local funds dedicated to affordable
housing or community development projects
 With dwindling federal resources, consider
new local action to create financial resources
 Invest time and political will to obtain them
Examples of state and local funding resources:
 Bond, Tax-revenue and Surcharge-funded Programs
 Linkage
 Inclusionary Zoning
 Tax Increment Financing
 Capital Campaigns
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Bond, Revenue & Surcharge-Funded
Programs
3 typical structures for local or state project funding
1. General revenue direct funding. Payment from
general tax revenue, perhaps with a budget line-item
2. Bond financing. Borrow against general revenue
with a public bond
3. Surcharge or Dedicated Funding. Increase or
set aside a portion of a particular tax (e.g., hotel room
tax, deed stamp tax).
These funding streams often target specific
community goals (e.g., homeless people or fostering
transit-oriented development).
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Bond, Revenue or Surcharge Programs:
State Examples
 State Bonds. California & Massachusetts have
enacted state-bond programs to fund TransitOriented Development such as housing near
subway and commuter rail stations, plus related
infrastructure
 New Dedicated State Revenue.
 In 2004, New Jersey enacted a Special Needs
Housing Trust Fund funded by a bond paid with
a surcharge on motor vehicles.

In 1992, Florida enacted a surcharge on property
deed stamps to fund both state and local
housing trust funds. The money is used for a
variety of housing types and needs including
development and predevelopment financing. Pre- 82
Bond, Revenue or Surcharge Programs:
City Examples
 City Dedicated Revenue & Bonds. In the late 1990s,
San Francisco dedicated a percentage of its hotel
tax and floated a general revenue bond providing
$100 million to finance supportive housing for the
homeless.
 Using a CDBG Guarantee. In Cambridge, MA the
City has used the CDBG Section 108 Loan
Guarantee program to support affordable housing.
 City dedicates its likely future stream of federal
CDBG funds to guarantee a loan made to an
affordable housing project.
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Linkage & Inclusionary Zoning
What are these?
How are they different?
How can you use each for your projects?
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Linkage
 Commercial Linkage. A fee on commercial
development which the locality dedicates to affordable
housing or other community projects
 Linkage programs usually have a local oversight board
and RFP process to distribute funds
 Payment typically made into a housing trust fund
 Linkage programs vary according to such factors as:
 Linkage amount imposed per SF of building
 Whether smaller buildings or some amount of
development are exempt
 When payment must be made
 Whether developer can build affordable housing
instead of paying
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Linkage, Continued
Direct Linkage
A developer meets the requirement by directly giving
payments for units to a local nonprofit’s affordable
project. Amounts vary nationally but are typically in the
range of $100,000-200,000 per unit.
Examples of Linkage


Boston, MA imposes a fee on new commercial
development which funds housing & job training.
Berkeley, CA imposes a similar fee, used for
housing & day care facilities.
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Inclusionary Zoning
 Requires that a percentage of units in new




housing developments be made affordable to low
or moderate-income households
Not a direct financing tool
Voluntary linkage with benefits: Developer gets a
density bonus for building more affordable units
Hundreds of municipalities nationwide have this
Affordability transfer: Sometimes, a for-profit
developer will give its affordable units to a nonprofit to
own long-term. Or will ask a nonprofit to develop the
affordable units required for the developer’s own
project plus may have to donate land and/or funds for
the affordable housing.
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Tax Increment Financing
What is TIF?
How have you used it?
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Tax Increment Financing
 New “incremental” taxes in a defined district are
set aside to help pay for a project or public
improvements
 TIF targeted to underserved or blighted areas
 TIF financing can pay for:
 Site assembly or site preparation
 Build infrastructure: roads, sidewalks, utilities
 Fund community development or housing
 Increased RE taxes created 3 ways:
 Higher assessments on existing properties
 Improvements to existing properties
 New development
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3 Forms of TIF Financing
1. “Pay as you go”: City accumulates TIF
revenues & spends them on improvements or
projects
2. TIF supported debt: City borrows against
future TIF revenues & pays for improvements
3. Developer financed investment: TIF
revenues repay developer for its expenditures
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3 Essential Parties for TIF
1. State: Authorizes TIF financing in a state
and regulates it. Almost all states have
authorized it.
2. City: Plans and administers a specific TIF
district. Public hearing must be held.
3. Developer: Plans and completes a project
that benefits from TIF financing
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When to Use Project-Specific TIF
-- A Strategic Choice
 Your project will pay significantly increased
taxes over current taxes on the site

Probably needs to be a large project
 Your city already has experience with TIF

You probably don’t want to be a pioneer!
 Your project needs public improvements, or
your city is very supportive of funding you
 You’re willing to seek local public approval,
with the time and politics involved
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Indiana TIF Examples
 City of Marion raises approx. $1.3 million
annually through several TIF districts;
reinvests in economic development
 Indianapolis Circle Center in downtown in
late 1990s used TIF to repay bonds for land
purchase, construction, and professional
fees
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Affordable Housing Programs
Using TIF Financing
Building city-wide or state-wide support to
use TIF for affordable housing - examples


City program: Portland, Oregon
State program: Maine
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Portland, OR TIF
 In designated urban renewal areas, 30% of
increased taxes dedicated to affordable
housing:


Create, preserve, rehab for households
under 80% median family income, and
Develop or give homebuyer assistance to
units with 3+ bedrooms for families under
100% MFI to encourage homeownership for
families with children
 Policy established by City Council vote
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Maine State TIF
Local government designates an “Affordable Housing
TIF District” that is approved by Maine State Housing
Authority
Up to 2% of community land may be in an AHTIF area
New property tax revenue dedicated for up to 30 yrs
All or part of new revenue may be dedicated
Affordability term: 10 years for single-family homes
30 years for rental units
Affordable to households under 120% AMI
Locality may use TIF to pay bonds or TIF may be given
to housing developer to pay its financing
Example: Augusta, Maine. An abandoned downtown warehouse
converted to 24 units of workforce family housing, using $250,000 in 96
AHTIF funding.
Other TIFs For Affordable
Housing
 Chicago, IL. Creates project-specific TIFs for large public
housing redevelopment projects and directs downtown
TIF revenue into affordable housing for the homeless
 Atlanta BeltLine. A major new public transit initiative to
link multiple communities to downtown Atlanta. Created a
27-year tax allocation district, over a 22 mile area, to
direct $1.3+ billion into redeveloping 45 neighborhoods
 East Austin, TX Homestead Preservation District. To
prevent displacement here with rising values &
gentrification, City has established a community land
trust, a land bank and a TIF district where new tax
revenues will go to housing preservation
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Capital Campaigns:
Tapping Local Business & Grants
 Time, support and connections needed for
capital campaigns
 Specialized-use housing & community
projects can have strong appeal
Examples
 A Chinatown CDC, squeezed by downtown
development, got a large bank grant, recognizing
affordable housing needs
 An early education nonprofit over 4 years raised $4
million, then leveraged 3 times that in HUD & state
funds & NMTCs, for a large child ed center. Board
members were key initial donors.
98
Capital Campaigns:
Initial Questions to Ask
 What’s the local climate for fund-raising for my kind




of project
What’s my organization’s capacity to raise funds
 Do you already run a successful annual appeal or
other fund raiser
 Do you have core funders who could increase their
contributions
Is your Board able to contribute (often give half of a
capital campaign)
Do you have staff who can manage a campaign
Are you prepared to commit time & resources
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Politics of Local & State Resources
 Political challenges to creating new resources
Building coalitions to support them
 Finding other strong advocates
 Addressing opposition -- e.g., School
supporters who don’t like TIFs
 Keeping housing & community
development on the public agenda
 Persevering thru multiple years

 Great potential benefit:
Years of dedicated funding!
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Local & State Resources:
Additional Information
See Tab 7 for additional information on TIFs
ON-LINE RESOURCES
TIF projects and programs:
• Portland, OR: www.portlandonline.com/pbh/tif
• Chicago, IL: www.cityofchicago.org/…/tif
• HousingPolicy.org: Its website describes several TIF
programs, including Austin, TX and Atlanta BeltLine
Policylink has a toolkit with both inclusionary zoning and
linkage as part of its Equitable Development Tool kit: 101
www.policylink.org/site/…/Equitable_Development_Toolkit
Historic Tax Credits
 Can be used for federally certified historic buildings
or bldgs in federally certified historic districts
 Rental housing & commercial & community services
buildings can all use historic credits
 Rehab must be approved as historically appropriate
by historic commission: sometimes too expensive!

May require restoration or re-creation of historic
features such as trim and historically appropriate
materials
 National Park Service & IRS regulate
 NPS defines rehab standards & process for certifying
rehab.
 Applications begin at each state’s Office of Historic
Preservation
102
Historic Tax Credits: Their Value?
 A one-time credit = 20% of historic rehab costs
 Value: About $0.80-.90 for each $1 of historic credits
 Can be combined with Low Income Housing Tax
Credits

But must subtract from LIHTC basis the basis of historic TCs
 Example: 10,000 SF building

Development cost: $125/SF or $1,250,000 total costs

$1,250,000 x 20% x $.90 = $225,000 in equity from
historic tax credits or 18% of dev. costs
ON-LINE Resource: Web site of the National Park Service
www.nps.gov/history/hps/tax
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See Tab 8 for more information on Historic TCs
Some closing thoughts…
“Change is inevitable. Change is constant.”
-- Benjamin Disraeli, British statesman
Development projects constantly evolve,
as do financing resources….
So we must inevitably learn constantly.
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VIVA Consulting
Louise Elving, Principal
VIVA Consulting LLC
36 Cottage Street
Cambridge, MA 02139
Telephone (617) 864-4481
Email lelving@vivaconsult.com
Website www.vivaconsult.com
NeighborWorks® Instructor # 109549
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