Developers Target Private Individuals, Regional Banks to Help Fund New Housing Tax Credit Projects
By Caitlin Jones
6 min read
Tax Credit Advisor, August 2009: Upstate New York developer Nelson Leenhouts is raising equity from private individuals. Susan Jenning’s firm is targeting smaller regional banks. And consultant Nick Ratti is encouraging developer clients to explore cheap dollars from the Federal Home Loan Bank System.
Because of the difficulty raising equity for low-income housing tax credit (LIHTC) projects from syndicators and major direct corporate investors, more and more developers are looking to other, non-traditional capital sources.
“In this environment, you have to be creative and sell the credits anyway you can,” says Boston real estate consultant Nick Ratti, of Reznick Group, a national accounting and consulting firm.
Individual Investors
Rochester-based Nelson Leenhouts is raising equity from high net-worth individual investors, for a new 62-unit senior LIHTC project near Rochester. Leenhouts, chairman of Rochester-based Home Leasing, LLC, had unsuccessfully shopped the deal to several syndicators before deciding to go the private placement route.
So far he’s sold 16 of the 20 investment units ($72,000 each), mostly to small businessmen and corporate executives. Leenhouts said the projected after-tax return to an individual investor in the 35% federal tax bracket without passive income is 9%. “If you do have passive income, it’s much higher,” he says.
Equity will account for nearly $1.9 million of the nearly $9 million, 4% tax credit project, which is being funded mostly from tax-exempt financing. Leenhouts said 57 of the project’s 62 units are tentatively “spoken for.”
To undertake the private placement, Leenhouts had an offering plan prepared and submitted to the state. To target prospective investors, he relied mostly on a list of individuals who were limited partner investors in a previous firm started by himself and his brother. By the time they took the firm public in 1994, they had 400 limited partners. “I invited a number of people to a meeting, where we made a presentation,” Leenhouts explained.
Ratti’s firm has encouraged developers to try to sell their LIHTC deals to a group of individual investors on projects smaller than those of potential interest to small to midsized regional banks. He noted one client developer is actively seeking individual investors for a private placement that will have 20-25 investment units of $50,000-$55,000 each, and a projected after-tax internal rate of return (IRR) – from housing credits alone – of anywhere between 9% and 10.5% depending on the individual’s tax bracket.
Ratti says the best prospects for a developer to approach are “the people you know.”
Smaller Regional Banks
Rochester-based Conifer Realty, LLC is also expanding its scope in searching for equity for new LIHTC projects. The firm develops, owns, and manages all of its properties, which are nearly all LIHTC deals and contain more than 10,000 units in five states (NY, PA, NJ, MD, OH). Projects range from 24 to more than 500 units.
Susan Jennings, vice president and general counsel of Conifer Realty, indicated the firm has traditionally raised LIHTC equity from syndicators, and even in the past 18 months has found equity for every one of its new LIHTC projects. Still, she noted, “It’s definitely gotten more difficult to find an investor, and the investors have gotten a lot more picky about the deals that they’re willing to do.”
Jennings adds: “We’ve been trying to find other investors for our deals. We’ve been working with a variety of syndicators, and then we’ve also been doing some direct placement with some of the smaller regional banks that we’ve got relationships with. And we’ve also been approaching other types of companies to see if they’d be interested in participating in tax credit deals.”
Conifer has already had some successes in raising equity from smaller regional banks. In one case, an Upstate rehab project, Conifer brought in new investors, a large bank and a smaller bank, after the original investor, a large multi-national bank, backed out of the deal two days before the scheduled closing. “We haven’t yet closed, but expect to do so in the next month or so,” she said.
Broader Marketing
Jennings indicated Conifer is doing several things to market effectively to smaller regional banks. One is to market the company and its many strengths (30-plus years of successful experience, no defaults, a one-stop shop, etc.), and not just the proposed project. In addition, Conifer might agree to open deposits for the project (e.g., reserve for replacement, security) with the bank that provides the equity. In some cases, the bank provides the construction loan as well as the equity.
Ratti said his company is encouraging client developers to try to sell smaller projects to small to midsized regional banks, and is working on two such private placements for projects that will generate from $100,000 to $150,000 in annual tax credits.
“You really have to understand your selling points” as a developer, he says. One is that these banks can help satisfy their Community Reinvestment Act (CRA) requirements by investing money in projects in their area. “The other thing you can dangle over them,” Ratti says, is the potential deposits connected with the project that could be made in their institution, such as operating and replacement reserves.
FHLBank Dollars
Ratti said borrowing short-term debt under the Federal Home Loan Bank System’s Community Investment Program (CIP) is a way that developers can boost the projected yield on their LIHTC project to make it more attractive to a syndicator or direct investor
Under this approach, the developer approaches a financial institution (e.g., bank) that is a member of the Federal Home Loan Bank System. The member bank obtains an advance under the CIP program from one of the 12 district Federal Home Loan Banks. The member bank adds a spread and re-lends the funds to the developer at a below-market rate, providing cheap money that the sponsor can use to bridge the equity proceeds by pushing the timing of the investor’s capital contributions further out. The sponsor repays the loan when the capital contributions are received. Ratti suggested this could boost the projected IRR for a deal by as much as 1 to 2 percentage points. He noted the current all-in 12-month borrowing rate for a developer could be 3% to 4%.
In a different approach, a Maryland developer tapped the CIP program for construction, permanent, and second mortgage financing for an LIHTC project. (See Tax Credit Advisor, May 2009, p. 9.)
