Hi everyone --- to re-open this discussion. I, too, am starting to look into tax credits in order to purchase & renovate apartment buildings. I understand how they work in general, but my question specifically is: how do they work in terms of the capital stack?
For instance, let's suppose a project cost $400,000 for an existing apt building and that $1,000,000 will be required for rehabilitation, for a total project cost of $1.4M. Assume that 100% of the 30 units will be used for low-income housing. Assuming you get 4% tax credits, 4% of $1.4M is $56,000 per year in tax credits, times 10 years is $560,000 in total tax credits. Finally, assume that the tax credits can be sold in the open market at 80 cents on the dollar to raise a total of 80% x $560,000 = $448,000 for your project.
How does this $448K in tax credit equity fit into the capital stack of the project?
Specifically:
Total Project Cost: $1.4M
Minus Tax Credit Equity: $448,000
Balance: $952,000
I know that I can get a construction and development loan for 75% of the total project cost, which would be $1,050,000, which would easily cover the $952K required. So the actual loan amount would be $952,000 which would be an LTV of 68%.
Is my understanding correct, then, that the capital stack looks like this and will NOT require any other equity from investors?
| Tax Credit Equity | $ 448,000 | 32% |
| Construction and Development Loan | $ 952,000 | 68% |
| TOTAL | $ 1,400,000 |
Thanks for shedding any insights on this last missing piece of the puzzle -;)
Michael
