Guiding an affordable housing developer through complex LIHTC ownership transfer

Client background

An affordable housing and multifamily developer focused on developing, acquiring, managing and transforming affordable housing in the U.S. Midwest.

Business challenge and scope of work

The developer engaged Baker Tilly to perform a valuation of the membership interests across a portfolio of 50 properties. The analysis was conducted to assist with the value of membership interests subject to a related party transaction. Given the nature of the Low-Income Housing Tax Credit (LIHTC) capital structure, the valuation required careful consideration of tax compliance implications and deal structuring.

Strategy and solution

Baker Tilly’s real estate valuation and advisory team conducted a valuation using the discounted cash flow (DCF) method of the income approach, applying appropriate capitalization and discount rates supported by detailed property-level analyses and associated risks to the various membership interests.

Key components of our approach included:

• Custom valuation template: Developed to project property-level cash flows and assess membership interests.
• Equity-level discount rate and tax adjustments: Applied a build-up method to derive equity-level discount rates. Integrated tax adjustments including deferred developer fees, entity-level taxes and modeled tax credit impacts.
• Ownership and distribution analysis: Analyzed the entity’s capital stack and ownership breakdown, including general, limited and special limited partners. Assessed allocation of operating cash flows, sale proceeds and tax losses. Modeled projected partner allocations from a hypothetical sale and performed a discounted cash flow of GP interest, applying discounts for lack of control and marketability.
• Market and rent analysis: Conducted a comparable rent study using similar properties to benchmark market rents by unit type and size.
• Debt review: Evaluated existing debt structures and forecasted cash distributions at the end of the LIHTC compliance period. [1]

Unique challenges

• Complex structuring: Many deals were mid-structuring, requiring real-time adjustments and sensitivity to pre- and post-LIHTC phases.
• Time sensitivity: Several transactions were undergoing active restructuring, demanding rapid turnaround and coordination across teams.
• Data collection: Gathering comprehensive property-level data was time consuming due to the number of assets.
• Valuation constraints: The sales comparison approach was not viable due to LIHTC timing restrictions and compliance requirements.

Outcome

We completed valuations on many of the properties and developed waterfall calculations showing the membership interests being transferred.

Need support navigating complex LIHTC ownership transfers or affordable housing valuations? Baker Tilly’s real estate valuation and advisory specialists bring deep expertise in tax credit structures, deal modeling and membership interest analysis. Contact us today to learn how we can support your next transaction.