Congratulations, you have likely received a coveted allocation of tax credits and secured a Letter of Intent for equity proceeds for your development. It is no easy task to get to this point of the process. The intent of these webpages is to make the rest of the process until closing as easy as possible for you. Please review them and reach out to us if you have any additional questions.
We’ve learned that effective communication and radical transparency is the key for smooth sailing during the underwriting process. With that in mind it is important to let you know that Cinnaire has an unwavering belief that all people deserve the opportunities provided by living in healthy communities. That belief is the fulcrum point for our decision making, and the lens for how we view our transactions and work. We also have a crucial fiduciary duty to our investors. The key item to be aware of there is that we aren’t just purchasing tax credits. We are purchasing a value stream that is highly influence by:
These factors make the “Lease-Up and Timing” page of Cinnaire’s financial projections highly critical so please review that in detail. Developers we have worked with that are most adept at delivering on-time clearly communicate the overall timeline to all partners and inform them on how their part of the project plays into overall critical pathways. This creates buy-in. It also helps with identifying potential hurdles like the NEPA process or other regulatory processes our partners in local and state government are required to work through with public notice/comment periods. Getting closed ASAP also helps mitigate political risk (new elected officials), tariffs, escalating construction costs, interest/credit rate risk, and potential for critical staff turnover at partnering agencies. Plan your work, communicate it, and work your plan is the best advice we can extend here.
Due Diligence Conference Calls: We utilize Zoom, which can be downloaded here. Call-in information and a web link to access the service online will be included in the calendar appointments you receive from the Closing Coordinator or Underwriter. With everyone joining using different technologies sometimes there is a little bit of “lag” that is usually the culprit when people accidently talk over one and another. We will defer to your needs in terms of frequency of due diligence calls, but we have found that it generally works well to start out with bi-weekly calls, move up to weekly call about six to eight weeks prior to closing, and then have two calls the week of and prior to closing. Calls typically last a half-hour.
We are rarely the last hurdle to get the clear to close but do have two critical benchmarks that need to be met. From the information garnered through due diligence your Underwriter will prepare a comprehensive Investment Report that is reviewed by two internal committees: Pre-Review and our Investment Committee. Both meet weekly, typically on Thursday mornings and the report must be completed the preceding Monday by noon. Unanimous approval from the IC members are required prior to closing. Ideally this will occur at least two weeks prior to closing with the Plan and Cost Review (more on that in the next section) in-hand for the smoothest ride to closing. This means that it is ideal to have the construction documentation completed at least one month prior to close. This is the ideal scenario, but we do have flexibility in terms of timing here. If your deal is in Minnesota, it will also require approval of the Minnesota Equity Fund between the Pre-Review and Investment Committees. A Cinnaire representative must do a site visit or virtual site visit pending applicable health orders prior to close as well.
Cinnaire Third-Party Vendors: We are required to order an independent Market Study and Plan & Cost Review for each LIHTC transaction. For Market Studies, we typically engage either Baker Tilly or Vogt Strategic Insights as soon as the due diligence process starts. We do need the Market Study to draft the Pre-Review committee report so if you are contacted by them for additional information or site visits please respond to them in a timely fashion.
There are three vendors we typically use for Plan & Costs Reviews. All have a strong reputation for under promising and over delivering. Our contractual relationship with them is that they have ten business days from receipt of all final construction related documentation to complete their review. In order to save you money, we are happy to share the P&C review with third parties. These vendors do charge a modest fee for additional parties to be added as reliance parties to the initial review as well as monthly construction inspection reports that is a great value compared with lenders engaging another consultant. Please let us know if we can help coordinate that for you.
Developer Third Parties and Lenders: You don’t have to send the same information to multiple parties we are happy to share our due diligence data repository with your team and permission. We utilize a collaboration and documentation service called SmartSheet for that & we will grant you access to prior to the kick-off call. Just specify others who you would like us to grant access to, the project name, and send their contact information to Leigh Middleton. We are also happy to have them join our due diligence calls. This is encouraged.
We will need these for the General Partner/s, Developer, General Contractor, Architect, and Property Manager. All of these forms will be available on your SmartSheet for ease of access. These are used to complete critical parts of the Investment Report. Help us sell your deal by having these be detailed and written in a manner to sell their services. For instance, how does their experience / skill set make them the best firm for the unique facts and circumstances of the development at hand? Quantitative data in supporting those statements is king. Feel free and encourage them to attach firm prospectus, resumes, and other supporting information. Other pointers:
— General Partner / Developer: If you would prefer to provide your own REO schedule that’s fine. Just make sure it incorporates all of the same data points as our template.
— General Contractor: Please have them note how many projects they have done with you and/or the architect of a similar scope. Quantitative data is great here. For instance, “on the following five similar projects we achieved substantial completion on average six weeks early on budget.” If they have a great track record in engaging MBE/WBE/Section 3 sub-contractors or are one themselves, we love that so please tell us!
— Architect: Pretty much the same as above. Please have them speak to radon mitigation efforts in detail, if applicable.
— Property Manager: On their REO schedule we are looking for all properties they manage not just own. It is also important to have the sum of employees’ salaries and benefits in question ten match the financial projections operating expense assumptions. If this is a rehabilitation project and you are aren’t switching management agents how long have the employees worked on-site and do they hold any certifications? How do they handle compliance? How are they uniquely qualified to manage the subject property – IE a high level of experience with this particular special needs population or a high level of experience in that primary market area, etc.
We will need the plans and specs, construction contract, general conditions, trade payment breakdown, P&P Bond or 15% LOC, Builder’s License (if required in State/Municipality), Disclosure Statement, Architectural Contract and building delivery schedule (by trades) to commence the Plan and Cost Review. No need to send them to Reviewer directly, just upload them to SmartSheet.
Pursuant to CERCLA, we will need a Phase One dated within 180 days prior to closing on the land with the appropriate Fund name listed as a reliance party. A reliance letter will suffice if it is not in the Phase One itself. If your deal has significant environmental issues, we may need to engage a third-party environmental consultant to prepare a comfort letter.
If applicable, we will need documentation that the NEPA process was completed prior to the commencement of any “choice limiting actions” and that the Subsidy Layering Review is complete prior to close. NEPA is a common pain point in getting to closing, and the length of that process is determined by the individual facts and circumstances of the project alongside the capacity of the entity awarding the funds. To familiarize yourself with those processes and requirements, we would recommend this resource provided by HUD. Open and frequent communication with the entity responsible for conducting this review is highly encouraged. If your project intends to secure a project-based Section 8 contract, do not commence construction until the AHAP is executed! For additional information: https://www.hudexchange.info/programs/environmental-review/
We have heard a lot of folks say, “Oh, we have so much excess basis the boost doesn’t really matter on this deal.” While that may be true for the aggregate amount of credits awarded for 9% deals, it could be a substantial part of the projected early credit amounts through the application of excess basis on first and second-year credit delivery. As such, we require documentation of the Boost to be a good partner to make sure you won’t face a late adjuster based on that alone. A lot of what we do is watch your back for you.
If you are taking acquisition credits, you will need the appraisal to specifically break out the value of the land. Cinnaire does not need to be listed as a reliance party if we are not doing the debt.
The Partnership will be required to maintain insurance with financially sound insurers licensed in the state of the project with a rating of at least “A-” from Standard & Poors or A. M. Best Co. More specifically:
Owner’s comprehensive general liability insurance in a minimum amount of $1,000,000 for bodily injury and property damage for any single occurrence, and $3,000,000 in the aggregate (which insurance shall cover the Investor Limited Partner(s) as additional insured).
Upon completion, casualty insurance on the property in an amount equal to one hundred (100%) percent of replacement cost of the Partnership Property including furniture, furnishings, fixtures, equipment and other items (whether personal or fixtures) without reduction for depreciation, special coverage “all risk” with an agreed amount endorsement and a building laws endorsement in an amount equal to the greater of ten (10%) percent of the replacement cost or $100,000 with a deductible no greater than $10,000 (provided that if the Project includes multiple properties, the policy shall be in the form of blanket coverage with an agreed amount endorsement) or such other form as acceptable to the Fund. Full replacement cost, as used herein, means, with respect to the Partnership Property, the cost of replacing the Partnership Property without regard to deduction for depreciation, exclusive of the cost of excavations, foundations and footings below the lowest basement floor, and means, with respect to such furniture, furnishings, fixtures, equipment and other items, the cost of replacing the same, in each case, with inflation guard coverage to reflect the effect of inflation, or annual valuation. Each policy or policies shall contain a replacement cost endorsement and either an agreed amount endorsement (to avoid the operation of any co-insurance provisions) or a waiver of any co-insurance provisions. Each policy shall name the Investor Limited Partner as a loss payee. The deductible on the policy shall not exceed $10,000.
Worker’s compensation insurance of not less than the statutory minimum.
During the construction or rehabilitation of the property, all-risk builder’s insurance, replacement cost coverage, in an amount equal to completed construction value, including soft cost coverage, with an agreed amount endorsement unless the Partnership Property is fully insured.
General boiler and machinery insurance coverage is required if steam boilers or other pressure-fired vessels are in operation at the property. Minimum liability amount per accident must equal the greater of the replacement (insurable) value of the property housing such boiler or pressure-fired machinery or $2,000,000.
If the Partnership Property or any part thereof is identified by HUD/FEMA as being situated in an area now or subsequently designated as having special flood hazards (including, without limitation, those areas designated as Zone A or Zone V), flood insurance in an amount equal to the lesser of: (i) the minimum amount required, under the terms of coverage, to compensate for any damage or loss on a replacement basis (or the unpaid balance of the indebtedness secured hereby if replacement cost coverage is not available for the type of building insured); or (ii) the maximum insurance available under the appropriate National Flood Insurance Administration program as such amount may be adjusted from time-to-time. Notwithstanding anything herein to the contrary, any alterations, revisions or changes to the area now or subsequently delegated as being special flood hazards must be approved in writing by Cinnaire.
Loss of rents or loss of business income insurance in amounts sufficient to compensate the Partnership for all rents and profits during a period of not less than one year in which the property may be damaged or destroyed.
In the event that the property constitutes a legal non-conforming use, an ordinance or law coverage endorsement which will contain “Demolition Cost,” “Loss Due to Operation of Law” and “Increased Cost of Construction” coverages.
There may be additional insurance requirements against risks that are of a character usually insured by Persons engaged in a business similar to that being conducted by the Partnership, in such form and amount and covering such risks as is usually carried by such Persons, including, without limitation, the requirement that the insurer give written notice of termination to the Investor Limited Partners at least thirty (30) days prior to the lapse of any such insurance policy.
Any other and/or additional insurance as is required by the terms of the third-party Loan Documents, or any other loan or agreement to which the Partnership is a party.
The Investor Limited Partners shall be named additional insureds on the general liability policy and loss payees on the casualty and builder’s risk policies, and each policy shall provide that the Investor Limited Partners must receive not less than thirty (30) days’ written notice prior to the cancellation or termination of the policy. The name of the Investor Limited Partner(s) needed will be on top of the SmartSheet Contact list for ease of reference.
In the event of a casualty loss and provided that the proceeds of all insurance payable by reason of such loss are made available to the General Partners for such purpose, the General Partners agree to cause the damaged building or buildings to be rebuilt within such time period as will prevent the recapture of Tax Credits claimed by the Investor Limited Partners.
Your Underwriter will prepare an internal transition report, and conduct an internal meeting shortly after closing. Then we will set-up a meeting with your team and one of our Construction Asset Managers. These are competent professionals with significant experience in the LIHTC industry who will be your main point of contact until stabilization (typically three to four months after construction to permanent loan conversion). After that milestone, a Stabilized Asset Manager will then be your main point of contact.
Underwriting contact information will be posted here soon.
The Consortium for Housing and Asset Management (CHAM) – Offers online education, free webinars, and many other resources.
Novogradac: Affordable Housing Resource Center – Find details on tax credit delivery, regulations, online training, resources, such as tax credit guides, etc.
The National Development Council – This Council provides training for people going into development that is very useful when implementing tax credits as a fund source.