Before examining the tax credit program itself, it is important to understand what sources of financing there are for the project. The developer prepares an estimate of a project’s development costs. This estimate needs to cover the cost of acquiring the property. The sources of financing must cover these acquisition and development costs. In addition, potential lenders and investors will want additional funds to be set-aside as reserves against specific operating risks. They also may require the developer to provide financial guarantees to protect them further.
There often is substantial tension among the parties as project cost, project performance, and construction and operating risks are identified, and as risk mitigation is negotiated to conclusion and incorporated into the final closing documents.
There are only three general kinds of financing for a project
o Project debt
o Grants to the project, and
Project debt often comes from several different sources. The project may utilize a combination of:
o Conventional debt that may come from an insurance company, bank, institutional source or other lender. Debt service is payable currently and the loan carries a market rate of interest.
o So-called “soft” debt from state or local government lenders. Interest rates often are lower on these projects, and may be accrued if project cash flow is not adequate to cover debt service. Also, Federal HOME and CDBG loans are often used in these projects.
All of these sources of debt can be used with the tax credit program, if properly structured. Careful structuring will provide funds to the project in a way that does not jeopardize the availability of tax credits to the project or the amount of the tax credits allocated.