Viability of Being a Solo/Small Shop LIHTC Developer
I currently work for a market-rate multifamily developer and just got a job offer for a LIHTC Developer who also does Acq/Rehab. My long-term goal in real estate is to start my own real estate firm with a combination of my own capital and money I will inherit from my family (Less than $5MM). My current job has not closed on a single new deal in the last 2.5 years, and I feel like I am wasting my time. Meanwhile, the shop I am interviewing with has a steady pipeline in multiple states, is willing to teach me, and is located in a city I've wanted to move to.
While this seems like good short-term play for experience, how viable is it to get experience in LIHTC and start your own shop? Are there small developers like in market rate or is there a filter that prevents that? Is it a profitable business or is it restrained by its nature normally being 100% affordable?
TLDR: Can a single person become a LIHTC Developer? Is this a profitable business, or are there slim margins because you are building affordable housing?
Answering your TLDR: no, a single person cannot be a LIHTC developer. Source: worked for a LIHTC developer for 2 years.
Reason: LIHTC is the most administratively intensive sect of multifamily development (definitely a top contender for all development). On one hand, the assets themselves are management nightmares. In acq/rehabs the delinquency, and deferred maintenance is going to be some of the worst you’ve seen. This is no class A multifamily. Even with magnificent management (hard to come by in affordable housing, bc it’s honestly a much more difficult and usually lower paying class to work within) each asset requires significant oversight from ownership to execute business plans and to provide guidance on issues that happen daily (murder being one you are likely to encounter). On the other hand, LIHTC deals are deeply political. More so than any other MF deal and again, I’d say a top contender for all RE assets. Financing dollars from the necessary municipalities are limited, and everyone wants their hand in the cookie jar. This is a big simplification of the political complications, but just know it’s a hell of a lot more difficult than a traditional market rate deal. On top of the added difficulties, it’s still a typical development deal with its own nuances. And, LIHTC needs scale, so you cant just acquire 4 units on your own, you need at least a hundred and most 9% deals are financing at least 50 units.
So, no it is definitely not possible to do as a single person. But, it’s certainly possible with a singular great leader.
I’d also argue it’s definitely worth it. Hidden in the difficulties, and administrative bullshit are some potentially great returns. You can do deals with next to no equity if done properly, and you’re producing and protecting one of the most in demand products in the whole country- affordable housing. It’s defensible. Now, just gotta be good at it. I’d highly recommend you deeply consider your opportunity. If you can do LIHTC you can certainly do market rate. The structures are much more complicated, and you’ll learn a great deal about how a truly difficult real estate deal gets completed.
I'll get a longer post on this together, because while I think you land on some big challenges for LIHTC developers, I fervently believe you are WAY off base in your conclusion about the difficulty. Like... 180 degrees off. And part of it is to do with this sentence.
LIHTC is definitely orders of magnitude more difficult than most other forms of development. However, the problem with saying "If you can build LIHTC, you can build market rate" is that while it is true from a skills standpoint, from a balance sheet perspective it is dead wrong. LIHTC is attractive specifically because of the low barrier to entry on the capital side - the moat is political and regulatory, not money.
Someone who spends 5-10 years at a LIHTC developer is going to be way more successful on their own than the guy doing it for Vornado, because you don't need millions of dollars to buy land and build. Up and down the capital stack and development timeline, counterparties will be far more forgiving of a lack of track record or bank account balance because of the inherent nature of affordable housing (no lease up or rental risk), the lack of money needed to actually perform, and the involvement of lots of other oversight entities.
Joe Smith, former VP of development at Hines, has a lot more hurdles to jump through to get that first or second deal done. Why should any bank or investor or anyone give him a dime, when they could just give it to someone who's actually built a handful of assets? In LIHTC, the argument sometimes goes the opposite way; unprepared and undercapitalized people are given opportunities specifically to deepen the pool of potential developers available to partner with.
I hear what you say but I must disagree with your point. On any LIHTC or sub financing funding application, one of the requirements for points is specifically experience. Additionally, the financing sources are significantly more limited for LIHTC than real estate as a broader asset class. To get a LIHTC deal you need to qualify for subsidy financing from a jurisdictional housing authority, or if you’re damn lucky, Amazons fund, and oftentimes you’ll need two subsidy pools. Funds from those pools are highly limited, just like the LIHTC credits themselves: https://www.novoco.com/resource-centers/affordable-housing-tax-credits/2024-federal-lihtc-information-by-state (edited the link)
^^ this is the 2024 allocation of LIHTC credits by state. Considering these credits are intended to fund 30% minimum of a deals capital stack, you’ll see there’s not a lot to go around. To the point in my previous point, it’s highly competitive, and minimal dollars are available to make a true LIHTC deal happen. Jurisdictions are way less likely to award a deal from their tiny pool of credits for an important, highly political deal compared to say, joe schmo private equity shop that has a few hundred million laying around to invest in potentially up and coming operators. Who’s more likely to take aggressive bets- A Local Housing Authority who needs to deliver units for their most disadvantaged population, or some arbitrary collection of wealth from the trillions of dollars in the United States who view real estate as a generally proven investment?
I like your point about the capital stack being open to finding new players. However, I have a hard time seeing a situation where the aggregate number of new players selected as a % of those who want to compete with minimal experience is greater than the pool of people who will be selected across all market rate, esp considering the barriers to prove yourself capable of handling your own deals is smaller (SFR —> friends and family capital).
Shockingly bad take. LIHTC deals we've done still require significant balance sheet support for guarantees, and guarantees are much wider ranging and longer lasting than those for traditional multi.
I and others have posted a fair bit about this in the past, so I'll be as brief as I can (which... usually isn't that brief). To start at the bottom: yes, a single person can become a LIHTC developer, though obviously for your own sanity and if you want to grow, bringing on partners or employees or whatever is a good idea. Generally speaking what I've seen is that you work for Developer ABC for a while, gain experience and knowledge (which takes a lot longer in affordable than anywhere else because of the complexity, fair warning), and then you start your own firm and probably ask your current employer (or someone else with experience) to back you, and then JV with them on a couple of projects so your company has some track record and you can lay off some risk. A great recent example of this is Jamar Adams at Essence Development (which has since grown into more than one person, obviously), who is absolutely crushing NYC right now, and who is partnered with Related on most of his New York deals (and maybe elsewhere).
Second, LIHTC development can be extremely profitable. You get a developer fee based on your total development cost (we'll leave it there for the sake of simplicity, there is, as always, a little more complexity to it than that). Some places that can be 20% across the board, both acquisition and construction basis. Some places it is less, but probably rarely below 10% across the board. It's decided state by state and I don't know every state's QAP, which is why I'm being wishy washy, but lets say 15%. Is that going to blow condo development out of the water? Probably not. But given that there is essentially no lease-up or pricing risk, that's a very attractive number. If you're a one man shop, that's probably the best you can hope for. But if you've got a real pipeline of deals, you can make way more. GC's generally run a very cyclical business and have a lot of mouths to feed, and don't want to lay those people off and lose all that experience, just to have to hire them back again in 24 months when the market changes again. So you go to them and say you've got 4 deals over the next 5 years which will require a dedicated affordable construction team, and ask for a cut of their profits as well in return for the JV which promises to give them the first look. Everyone wins; the GC gets certainty of deal flow (since affordable housing doesn't really have "down" cycles, they can count on those 4 deals happening), a couple more jobs, and some training for their staff in a new business line. You get a partner whose interests are suddenly way more aligned with yours, a standardized team with more and more experience, and some percentage of the GC fees and profits. The money on the construction side can be absolutely staggering, so that's how you turn LIHTC development from a well-paid, low risk career track to an enormously profitable, low-risk career track.
As to your specific situation, if development and specifically affordable housing development is an area you're interested in, I'd say go for it. I think of a lot of firms that were started very recently, like last 10 years, by just a couple of people and which have absolutely blown up (and grown a ton in the process, of course). I sort of discussed it below so I won't dwell on it, but I think it is far far easier to start your own LIHTC development shop versus doing market rate, for a lot of reasons. You need knowledge, not a large amount of capital, and you'll get that knowledge working for someone else (and lets be honest, you won't get enough money to really build a real estate business being a W2 employee in 999/1000 cases). You can grow your business more quickly, because each deal is less risky and requires less money. One of the major new things I've been noticing over the last 5 years in this industry is the proliferation of platform investing - there are no shortage of PE firms panting to give you money to expand in return for a piece of your business. Whether you think that is a good idea or not... well, who knows, but the possibility exists. The entire industry is basically immune to economic cycles, so you won't be having 2.5 year periods where nothing pencils. There is a ton of bipartisan political support for affordable housing, so it is only going to get easier and there are only going to be more dollars thrown at it. The places that need it, really need it, so this isn't some niche asset class that absolutely fucking blows up and sort of vanishes implodes 5 years later like last mile industrial or data centers. And perhaps most importantly, it isn't sexy and it is highly regulated, which tie together in interesting ways. It means you don't get scam artists like Rise48 or Grant Cardone or Nitya or Tides pouring in and driving up pricing by essentially defrauding their investors. You don't see bubbles of the sort we just saw pop in the Southwest, because (a) you can't make money fast enough to effectively scam anyone, and (b) you need regulatory sign off and it's harder to get that when you're running a fraud. No one makes $50mm overnight because they had a vision for a major condo conversion and timed the market perfectly, a la Michael Stern. So you don't see a ton of competition in the space, which is nice - most of the people making the stupid decisions in CRE and driving up prices for every responsible operators are the people who want to be rich tomorrow without doing any of the work and who think they're way, way smarter than they are. That problem is much much smaller in affordable. Which isn't to say it doesn't exist, but not in near the same proportion
The comments from Ozy and Basic Name are both amazingly insightful and equally true despite the apparent disagreement... Such is the convoluted nature of affordable housing.
Speaking from an elementary understanding of affordable, yes, it seems feasible to start a small shop with the knowledge and connections gained over many years working with an experienced developer... with a huge emphasis on connections. Small developers are invariably tied to the community in some way and that provides the aforementioned advantage over the Related's of the world. A small developer I'm acquainted with has seemingly cornered a MA's city affordable market. They're mission driven, provide a decent place to live and print money virtually risk free. Get local or get lost is my understanding. The connections required is the greatest investment and seems to be where the most risk lies.
Also, there seems to be an assumption here that affordable = ground up development. There's incredible potential in many cities for conversion of existing pre-war multifamily and blighted commercial properties into LIHTC which has been happening for many years now and will only continue with the declining office market. Granted, a conversion could be as expensive as ground up but there are often tax credits for that too. Also easier to get across a politicians desk.
OP, would love to chat and hear more about your situation as affordable is something I'm deeply interested in.
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