Pros and Cons of Purchasing an LIHTC Apartment Complex Year 15

4 Replies

I have come across a LIHTC apartment complex that is just about to complete year 15. What should I look out for or consider when looking further into this deal? I am not very familiar with the LIHTC and believe most of the benefits of the program have already been taken advantage of. I must agree to restrictions until 2034.

You have to read the LURA to make sure you thoroughly understand the restrictions.  You need to know what you are getting yourself into and these can be tricky.

One of the reasons that LIHTC deals are attractive at certain points is that the restrictions can be stripped off through a "qualified contract" process.  The draw is that you can buy at the capitalized value of today's income stream, strip the LURA and convert to market rate at significantly higher rents.  This can yield a high return or you can then sell at the capitalized value of a much higher income stream which means that the resale value is a lot higher.  

The downside is that the qualified contract process takes a lot of time (about 4 years to fully implement) and can only be done after a specific point where it is allowed by the terms of the LURA (which is sometimes much earlier than the restriction's termination date without the qualified contract).

This isn't a do-it-yourself strategy for a beginner--you need competent counsel with experience in doing this.  

Hi Skyler - the great thing about these LIHTC projects is that at year 15 they are prime for a re-syndication. Have you explored going in for a competitive 9% LIHTC or 4% LIHTC round? As a developer/GP you will make your money from the developer fee (there is a cap on this depending on your State's QAP), but at year 15 you have the options to repeat this process and do it all again.

With any investment there are tons of variables at play. Everything is a risk/reward ratio. What is the expected return? What is the downside? How long will it take in months, years to achieve the expected outcome? How will timing of market cycles affect exit strategies and success of the project hitting expected returns?

If the size of the project increases in size and the time to get the full expected return on the project is really long then at least for me the returns have to go WAY,WAY up to compensate for the risk factors.

These days I look at retail properties. I like the small price point with upside versus larger projects for multifamily. Seems like everyone is chasing the Grand Slam today with properties in the tens of millions. I am not joking when I say there are thousands of multifamily syndicators right now looking for this stuff.

I do look at larger retail value add projects but they have to have a really big upside component to make that worthwhile.