For emerging developers, relationships are key to success in underwriting LIHTC deals

As is often the case, who you know could be the reason your project moves forward or falls apart. Fortunately, there are ways that can help a new relationship progress quickly into a true partnership, but it relies on work from both parties for that to happen.

During a session at Baker Tilly’s affordable housing workshop, DevelUP, a panel of industry professionals representing different types of developer partners and lenders discussed the best practices and fundamentals in the process of attaining underwriting for a low-income housing tax credit (LIHTC) transaction.

Katelyn Taylor, a financial analyst in the Baker Tilly’s real estate advisory practice, moderated the panel comprising Sean O’Brien, developer at Northpointe Development; Allison Porter-Bell, director in community development lending at BMO Harris Bank; Shreedhar Ranabhat, manager of commercial lending at the Wisconsin Housing and Economic Development Authority (WHEDA); and Brian Robinson, senior vice president in originations and capital markets for the National Affordable Housing Trust.

Build long-lasting relationships

All of the panelists agreed that when they are looking at developer partners, they are hoping to create long-term relationships, not one-off projects. No one wants to invest the time and money into something that they can’t build upon in the future.

O’Brien, who worked for 15 years at WHEDA before becoming a developer, said forming co-developer partnerships has always been difficult, particularly for Black, Indigenous and People of Color (BIPOC) developers, and even more so during the pandemic since it was harder to meet people in person.

When Northpointe invests the resources in a partnership in the affordable housing development space, where it can take a while to collect any kind of financial outcome, it needs to be with someone they work and communicate well and with whom they share mutual goals. On top of that, both parties have to understand that they will be connected for LIHTC’s 15-year compliance period.

“How do you turn a piece of property into a tax credit award and eventually into housing? Basically, how can we evolve that relationship into working on projects where we’re going to municipalities together to get entitlements and turning in tax credit applications,” O’Brien said. “Really, even though we’re building separate companies, we’re also building this partnership at the same time.”

From the start, he said they are creating a partnership that should be beneficial to both parties, which will reach the end goal efficiently and in a way that they will be able to recreate again over time.

Porter-Bell echoed those sentiments. She said if you aren’t comfortable enough to talk with your investor partner, they’re not the right one for you.

“You need to interview and make sure you have a good working relationship or have some energy,” she said. “That you are vibing to some extent, where you can ask questions.”

Communicate from the beginning

Robinson said, from the syndication side, his organization expects to be in continuous communication with their developer partners, especially right now with unpredictable changes in prices which could spell delays. If the developer partner shares those issues with its investor partner, they could work on solutions together. In some instances, that could mean pre-purchasing materials or more of an advance on their equity.

Sometimes, the developer needs interaction and involvement of their financial intermediaries to sign off on certain things. They also may know how to negotiate certain things or find solutions the developer can’t on its own.

Robinson said the developer’s first inclination may be to wait to get in front of its investor partner until it’s absolutely necessary, however, that could be a mistake.

“You may think ‘I don’t want them to think that I don’t know what I’m doing,’ but in these times, with all of the fluctuation going on within the marketplace and pricing, it’s OK,” Robinson said. “You should feel like you should be able to pick up the phone. They’re your partner.”

Porter-Bell agreed, saying transparency is crucial to keep everyone abreast of the situation, particularly in current conditions with rising interest rates.

“We have to make some assumptions [in underwriting] and oftentimes we might overreach somewhat in those assumptions just to be conservative,” she said, “but it’s so we structure in a manner that we’re covering every base.”

Developers are going through a perfect storm with staffing shortages, rising rates, increasing prices, etc., so every monthly delay could translate into additional costs.

O’Brien said when he’s been in a pinch, he’s been surprised by how willing his investor partners have been in trying to overcome whatever challenges he’s facing.

“They know their own strengths. What can they be flexible on and what they can't be? If you ask the right questions, they may be able to say, ‘Well, we can be more flexible on waving a fee, or we have maybe some extra bonds that we can carry over from one project over to your project if it makes sense’ or whatever the reason or the answer might be,” O’Brien said. “If you make the phone call and you ask people to be creative, people will be creative and they'll help. Everyone wants the projects to happen. They all want to be supportive and they all want to celebrate the wins.”

It’s essential from the underwriting perspective, too, that as they go into the projects, thinking about where they can find resources and what are some things that investor partners can be flexible on in their underwriting and where they can’t, O’Brien said.

Generate interest in the project

What will also help is the investor’s interest in the project. Porter-Bell said when she is truly interested in a project, she will do whatever she can to advocate for it. If a lender is just running numbers and not asking many questions about the project, they typically don’t have the same personal investment in its success.

“I want you to know that when I pass that term sheet to you, I had a better-than-average chance that I’m going to get this approved by credit at the end of the day,” she said. “That’s super important to me. It should be important to you, too, because you don’t have a lot of time.”

Lead with transparency

Ranabhat stressed the significance of disclosure. He said he can understand why a developer may be hesitant to be completely honest with its investor partner, but it should want to be in good standing so that its deal moves forward.

“At the end of the day, our primary goal is to produce housing and to build affordable units. If that’s in alignment, it’s an easy ask,” Ranabhat said.

The housing authority has a lot of resources to deploy if it and the developer’s objectives are in alignment.

“Just like you form partnerships with other partners, we are a partner at WHEDA,” Ranabhat said.

Learn more

Baker Tilly’s DevelUP: affordable housing workshop is an event designed to help underrepresented developers conquer affordable housing, scale their business and build diversity. Through comprehensive consulting services, Baker Tilly assists emerging developers of affordable housing by helping them navigate the many steps necessary to bring a project to successful completion — from funding to project management.

For more information on this topic or to learn about services for underrepresented developers, contact our team.