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Based on the developer’s cash flow projection, it is possible to estimate the size of a first mortgage for the project. An estimate of how much investor equity can also be made. In some cases, certain soft financing can be identified from state and local financing agencies.

There are many reasons why a financial gap would come up to include cost over-runs, inflated material cost or just plane over cites. These gaps must be filled in order to fund all of the development costs that have been identified. Closing this gap requires obtaining funds that do not require current payments from the project, referred to as “soft” financing.

Among the traditional sources of soft financing are:

Community Development Block Grant (“CDBG”) loans and grants
• Federal HOME loans
• Other federal, state and local financing sources
• The Affordable Housing Program of the FHLB
• Soft loans from public utilities and banks
• Better first mortgage terms
• Reduced acquisition costs
• Deferred developer fees
• General partner loans and equity

Private funds are sometimes a source, including the Affordable Housing Program (“AHP”) of the Federal Home Loan Bank. Some utility companies and banks make soft loans to local projects to cover specific kinds of costs. For instance, some utility companies make loans at beneficial terms in order to cover weatherization costs, such as the conversion of an existing heating system to a more efficient system.

Deferring a portion of the developer fee may be a way to limit capital outlays. Or a developer fee may be paid but lent back to the project with interest to fund project construction costs. In those cases, they may be paid or repaid from the project’s cash flow. Or a developer may be willing to contribute a portion of its development fee back to the project, as general partner capital, as a way of filling the gap. It is important however, to always check and recheck the underwriting of the project prior to closing on the loan to ensure that financial gaps are non-existent or at least minimized.

In some situations, a part of the acquisition price may be deferred and paid from cash flow. Reductions in development costs can also help fill the gap, but that should occur only if it does not impair the quality or economics of the project. Caution should be taken when using federal funds to fill the gap, as there are special rules that apply when using these funds. In addition, gap funding normally should be structured as loans to the partnership, meaning that the terms require repayment. A nonprofit sponsor may make a loan to the partnership using the proceeds of a grant that it has received.