Doing Deals w/ Low Income Housing Tax Credits - YouTube

What's going on, YouTube. It's Matt Faircloth.  Thank you for watching this Mentorship Monday  

program. My name is Matt and my company's called  The DeRosa Group. And this is Mentorship Monday.  

And this is a very special one because we are  here at the best ever conference. Not really in  

Denver. We're kind of in Keystone. We're kind  of out in the mountains in the woods. I wish  

I could turn these cameras and show you all these  beautiful vistas we're looking at here. But we're  

at a conference for the Joe Fairless for the best  ever conference. I'm so excited to be here. I'm  

speaking here tomorrow. And Joe has this really  cool podcast and YouTube video studio lined up.  

So I want to do... I bumped into a few new friends  and I said, "Hey, can you guys come up with a cool  

real estate question that we can discuss in the  Mentorship Monday program?" So they very gladly  

said, "yes". Here's a few things for you guys.  If you guys want us to answer your Mentorship  

Monday questions on this YouTube channel,  just email them to helpme at derosagroup.com,  

that is helpme at derosagroup.com. And I will  answer your question right here on this YouTube  

channel for you and everyone else to learn  from. And I appreciate all your questions.  

So now my new friends here, I've got Joshua and  Thomas from Humboldt Partners. Right? They have  

a question for me and they're going to tell  a little bit about their company in a second  

here. But they've got a real estate question  that we can discuss here for the channel. And  

what's awesome is I don't know what their  question is. This is why this is a really  

interesting Mentorship Monday. I hope this  isn't like a stump the chump kind of thing,  

but let's see what we can do. So Joshua and  Thomas let's talk about your question and then  

you can tell the audience all about your company  too, which I think they'd love to hear about.  

Okay. Great. So we're at the  Joe Fairless conference.  

Yes, we are. We're multi-family investors.  

Yes we are. And we are under LOI on a  

project near Charlotte, N.C. All right.  

We've got an agreement that the contract will be  signed on Monday when we send it to the seller.  

Okay. It is a LIHTC property,  

a low-income housing tax credit, that's ready. Okay.  

Mid to late '90s build. Okay.  

We're going to start due diligence next week.  What are the three to five things that we need  

to pay attention to in due diligence related  to the tax credit status of the property?  

Okay. Pass, next question. No,  kidding. Kidding. I got it.  

Where were you last night? Yeah. Right. Tell us about your  

whereabouts. No. Okay. So for our audience,  there's something called low-income housing  

tax credits. Okay. I know a good bit about  them. I've not done a deal with them yet,  

but I will gladly offer my insight on low-income  housing tax credits. For you guys watching,  

the way that low-income housing tax credits  work is the government issues these credits,  

and it's called LIHTC. And it is a income tax  forgiveness for a certain amount of money that has  

to do with the amount of units that you have. And  it has to do with what round you applied for.  

You can get a four percent tax credit. Or you can  get a nine percent tax credit. The nine percents  

are competitive, which... And they're very  lucrative, but they are... You have to bid on them  

and they have to select which developer they're  going to give it to. And all that. The four  

percents, as of right, you can just get them. So LIHTC is a great program. But the thing with  

it is that you have to deal with the low-income.  Right? The LI part, right? So it is a low-income  

housing tax credit. So there is a certain  component you have to deal with and be prepared  

to have yourself set up for, right, when you're  doing LIHTC deals. For all you guys watching too,  

and LIHTC typically doesn't get involved  unless your deal's over a certain unit  

size. How many units are we talking about here? It's a 58 unit property, $1.8 million purchase.  

Great. Okay. So you... Just a few questions. You  guys are inheriting those tax credits or... First,  

is the property in the second round, or is  still in the first round of its tax credits?  

And I'll explain to you guys, viewers,  what that means in a second, but y'all  

should know the answer to that question. I think it's still in the first round.  

It's still in the first round. The person who did the development is the  

person who got the credits. That's right.  

And then we're the next buyers. So the way tax credits work,  

that I understand anyway, is it's a 15 year tax  credit. And that's that after the 15 years then  

it opens up to another 15 years, that's the  second round. Second round is a little more  

open. You can charge a little more rents and  things like that. So I understand. Right?  

Let's get to your question, due  diligence you guys need to do.  

Yes. Number one,  

you need to have a property manager lined up that  knows how to handle low-income housing. Right?  

And it's not just from a tenant perspective. I'm  not judging low-income housing. It's a necessary  

thing in our society. We need to have low-income  housing. What I'm saying is to keep you kosher and  

compliant with the LIHTC regulations, you guys  need to have a property manager that's vetting  

tax returns and that is proving that the folks'  income that are living in your units qualify for  

the program. Right? Because you can get fined  and lose status and things like that if you  

get audited by HUD. I believe it's by HUD, the  Department of Housing and Urban Development,  

that issues those credits. Right? So that's number  one. Due diligence. It's a 58 unit. It's kind of  

a funny size. It's kind of hard to have one- It's actually two complexes built. And actually  

one of them is in the first round and one's in the  second round. So it's a little bit of a mix of-  

More hair on it. Okay. That's even more. Okay. In case you answered the first question,  

we were going to- I got it. I got it.  

So you wanted to know what other due  diligence you should be doing. Okay.  

I would go... And you got to get a copy  of the low-income housing covenants.  

Yeah. If you haven't read them.  

We have. Okay.  

Yeah. So that's  

big due diligence is these deals come with  a ton of paperwork. Right? It's like sacks  

like that. So read through it. Get yourself  an attorney that knows these kinds of deals.  

So you're shaking your heads. You guys  already have that done. Right? Okay. Cool.  

It sounds you guys are on the right track. So we're halfway there. We have the paperwork.  

We've actually read through it because we didn't  understand it before. But then now we do think  

we have to have a lawyer or an attorney go  through it and give us some feedback.  

Absolutely. Absolutely. Okay. What else? What do  you think you're missing? What do you think your  

blind spots are on the deal? Because it sounds you  guys are on the right track. I don't know if you  

thought about the property management thing, if  that's a value add that I can give you there.  

So the compliance piece. Yes.  

Operating the property is really the big deal. Yes.  

The real value add opportunity that we see  in this property is that it's running at 70%  

expense ratio. Yep.  

Whereas properties of this size and this scale in  our market should be running at closer to 50%.  

Why is it? What are pushing the expenses up? Right. So we've got the rent roll. We've got  

the T-12. We've done all the analysis. There's  something going on because not only are there  

income qualified tenants in the property,  but there's also Section 8 HAP tenants in  

property. Something is going on with the  utilities. The utility expense is out of  

whack. And we don't fully understand that yet. I can tell you. Okay. So here's my opinion. Okay.  

First of all, low-income housing tax credit deals,  typically the developer makes a large chunk,  

a developer's fee when they build out these  properties. The LIHTC deal that we looked at  

in Trenton, the developer we were looking to work  with got an enormous fee or was going to get an  

enormous fee when they built the property. And  then the property was designed to cashflow at a  

breakeven. Right. It was designed to do so. There was a heavy payroll. That's the first  

thing you got to look at is payroll. Because  for 58 units, they might have several full-time  

salary staffs on 58 units. Right? Not necessary.  That's number one. And LIHTC doesn't require that  

you over expense your properties like that. But  they're just not designed for cashflow. Well,  

if you're doing a LIHTC property as a developer,  your money's made in the fees, not in the cashflow  

during ownership. Right? Because the tax credit...  They have to sell those tax credits. They sell the  

tax credits. And the owners of those tax  credits are who would be beholden to the  

cashflow, but they don't really want the  cashflow. They just want the tax credits.  

Getting down the rabbit hole there. Right? So secondly, if you are on affordable housing,  

there is a cap on how much global living expenses  the tenant can pay. Utilities are included in  

that. Right? So there is a chance that your  property is either all utilities included by  

design and maybe needs to be that way. Or that  just the, especially your Section 8 tenants,  

are just approved for a voucher that's...  Let's just say for our conversation it's  

a thousand dollars. They're paying you 800, but  they can't... The other 200 bucks for utilities  

just has to come out of you, too. So you guys  your property might be designed for owner-paid  

utilities. Do you... Is it a single boiler, single  central air? Or are there individual units?  

No. Everything's individual units. And in  North Carolina we have individual HVACs.  

Okay. You got to check the Section 8 contracts.  Check the lease. The biggest thing you got to  

do is network with the local office. Call the  local Section 8 office, see what their rules  

are around those kinds of things. So to wrap it  up, guys, these LIHTC deals and stuff like that,  

they're not common. So it's kind of hard to go  out and seek them. There's developers where all  

they do is do LIHTC stuff. And if  you come across a LIHTC property,  

it's just a lot more due diligence you got to  do. They can be very lucrative. And typically  

you're looking at something that was designed by a  developer to build it and get a fee. They weren't  

designing it for cashflow. So you're going to  have to restructure the property, redesign it  

to make a cashflow. That's what you guys do. So real quick before we go, tell us real quickly  

about Humboldt Partners and how people can  get ahold of you and what you guys are up to,  

including making cool stuff  happen in North Carolina.  

So Humboldt Partners is actually Josh Stack  and myself, Thomas Konditi. We have a team that  

basically looks at multi-family in the greater  Charlotte area. And we look at units anywhere  

from... We started off with a 10 unit that we did  a full renovation on. We bought a 14, a 52. We're  

up to about 80 units and were heading for 400. Do you guys self-manage? Or do you hand it out?  

No. All of them are third party property  management. [crosstalk 00:09:58] We provide the...  

I mean, we manage them, if you will. Yep.  

On a weekly basis. You got to manage the manager.  

And then we're constantly looking for new  properties in the area. We have a team that  

underwrites that as well. Cool.  

And HumboldtPartners.net. So, if people want to hear  

more about you guys or want to potentially  hear about North Carolina or just reach out  

to you guys, it's Humboldt, H-U-M-B-O-L-D-T.  HumboldtPartners.net. Okay. Send these guys an  

email, Josh and Thomas. Any final thoughts? Viewers can also sign up for our newsletter  

plus minus once a month it's going  to come out. And you can hear-  

Do that. What we're up to in  

the west of Charlotte area and the good deals  and the good investing that we're doing.  

That's awesome. Good. Thank you guys for  letting me blindside you for Mentorship  

Monday. I appreciate you. I appreciate you guys  for watching. Keep a track on Humboldt Partners,  

guys. You guys are going some places. And  make sure to reach out to hear what they're  

up to. Thanks for watching audience  and have a great profitable week.