Affordable Housing Investors Council Issues New Underwriting Guidelines

The Affordable Housing Investors Council (AHIC) has revised their guidelines for the underwriting of low-income housing tax credit projects, calling for increased scrutiny of development and management teams.

The revised recommendations include the following:

• Investors should closely investigate developer backgrounds, adequacy of funding sources, operating projections, reserve funding and guarantees, and financing packages;

• Background checks should be conducted on development team members no sooner than 45 days before closing and updated annually. The checks should look for compliance violations, arrests, and any other information relating to the ability of the development team to protect the interests of the investors;

• Investors should visit previous projects of new tax credit developers;

• Experienced developers should be required to have developed at least five affordable housing projects comparable in size and scope to the transaction under consideration;

• Developers and guarantors should be required to have net worth and liquidity sufficient to cover obligations, with a minimum net worth equal to the greater of $5 million or five percent of total development costs (TDC). Liquid assets should be the greater of $1 million or five percent of TDC;

• Background and credit checks should also be conducted on property managers. Management companies should also be examined relative to their tax credit compliance procedures and tenant approval policies. The guidelines recommend that property managers have a minimum of ten year experience, including three years of tax credit or other affordable housing management; and

• General contractors should have experience with similar projects, the financial capacity to handle all work on their table, and a performance bond from a financially sound national bonding company.

The new guidance also suggests that other development team members, such as architects, accountants, and lawyers also have tax credit experience.

These new guidelines continue the trend of the past few years during which investors have become much more demanding with regard to the LIHTC deals they will enter into, and once in, close scrutiny of management operations is now common.