Well Good Morning All!
Well, I guess this still isn't over! A sponsor is usually a non-profit or a PHA. In 1995, when some began in the real estate business, it was not necessary to have a "sponsor" for a LIHTC, and really even today it is not a requirement, but try getting a deal done without one. The only required parties are the developer, who can also provide the management and a tax syndicator. A sponsor can be a money guy as Dustin pointed out and was also referred to as the Project Owner usually in partnership with the Developer. As LIHTCs became more competitive, ruthlessly so, and as a requirement of obtaing an award of a project, local government entities had to sign off, approve and request that the project be approved. The needs analysis for the project must show that existing low income housing is insuffucient in the community. Well, who was in a position to declare such a shortgage? The local Public Housing Aiuthorities! While each state doles money out with slightly different political stratigies, showing the need for the project is a requirement. Thus the "sponsor" was born. Where no PHA exists, like rural areas, there is usually a non-profit corporation that provides Section 8 management under contract with HUD. These NGOs usually provide other social services, everything from GED programs to weatherization for homeowners. These NGOs or PHAs may sponsor a LIHTC project, maninly to administer the project for the Owner/Developer or maybe just for a small "donantion". The majority of funds come from the syndication (sale) of federal and state tax credits. These are coupons which are redeemed for a tax liability. Let's say Kraft knows they will have a tax liability. If they simply pay their tax it will cost them 100% of their liability, however they can purchase a tax credit from a syndicator (broker) for say 70 cents on the dollar. Kraft buys the tax credit and they redeem the credit instead of paying a dollar in cash, saving themselves 30 cents on the dollar! Now the Syndicator has to buy food too, so let's say his cut is 20 cents on the dollar, that leaves 50 cents on the dollar for the developer to finance his project. Now, for a developer/sponsor/owner to submit a LIHTC the developer must have control (ownership) of the real estate. Now enters the convention lenders, banks or other conventional sources of funding. Now these lenders have nothing to do with the LIHTC process being approved, they just review the deal on a commercial loan basis and make the loan required for the land and perhaps some incidental costs, like soft costs, in the deal that are disallowed under Section 42 Tax Credit guidelines. So any "conventional" lender that thinks that they do the deal, is a little shy of the big picture. They have very little to do with the entire program. So, there is the real life way it's done, with a sponsor!
Dustin propably has not done a commercial, housing or mixed use development, I don't know nor would I be so rude as to put that question to him, but I have and what the young man has said is on target. His Masters Degree from a respected university deserves some credit as well as respect. Most "investors" have a micro environment inwhich they operate and conduct business, one thing about real estate, you don't need a degree to make money, but it certainly helps and I doubt Dustin will end up as a professional real estate blogger as the pinnacle of his career! Good Luck with that! Bill
Updated: 04:56AM, 01/03/2010
Hey Dustin, I'm not here for the points but I just noticed something, someone has made 77 posts and has received 196 points for their comments and I have 80 posts (3 more because of this thread) with 500! What do think that indicates?
