HTC Panelists Agree That Building a Successful Deal Flow Pipeline is About Experience, Relationships

Published by Caroline Gallegos on Thursday, November 5, 2020
Journal Cover Thumb November 2020

Panelists at the Novogradac 2020 Historic Tax Credit Virtual Conference Sept. 24-25 discussed best practices and strategies for building a deal flow pipeline when using historic tax credits (HTCs). Panelists discussed the keys to building a successful pipeline, including the importance of relationships, things to look for in a development or developer, lessons learned and their outlook for the future of HTCs.

“As far as building a pipeline goes, I think we all know this is just a small industry,” said panelist Chip Windisch, senior vice president, capital markets, Old National Bancorp. “For me that means that means that so much is driven by relationships and the experience that we have.”

Starting a Pipeline

Windisch said many potential projects come from referrals. Sometimes finding projects also involves reaching out to a developer after a project is complete for future opportunities.

“We’re not opposed to being aggressive and reaching out when we see an opportunity,” said Windisch. “Someone on our team somewhat recently saw an article in the newspaper and completely cold-called on a historic deal. We closed that deal and it’s been a tremendous investment for us.”

Other panelists talked about matching up investments with investors.

“The question of how we build a pipeline since we have multiple investors has multiple answers,” said Eric Darling, partner at Carlisle Tax Credit Advisors. “Our job is to locate a particular investment that an investor wants to make. Whether they’re large, small, residential or commercial, located in big cities … it all depends on what the investor wants. We’re really in the business of trying to please our clients.”

Darling also said that finding new deals isn’t always logical–there is an art to finding deals for investors.

“When you have a series of deals, which do you show to which investors?” said Darling. “It sorts itself out because the investors are different, but sometimes you have to discuss who should take what deal and why. What makes the whole things fun is it’s not a cookie-cutter business. Every deal, project and investor is different and putting those puzzle pieces together is what makes a successful investment.”

Success when pairing investors and potential investments is easier said than done.

“It really is a balance between pairing up development partner and investment partner,” said Matt Prickett, acquisitions agent for Foss & Company, a national institutional investment management firm. “We have a lot of capital and that capital wants to be deployed in various ways. We want to pair those up and make the best match we can so they can get the best returns or Community Reinvestment Act (CRA) benefits. We’re trying to balance the two relationships. While we have our responsibility to our investors, we also have a similar responsibility to development partners.”

Panelists also discussed social impacts and what investors are looking for in HTC projects.

“We’re starting to see more and more that investors are aware of the social impacts of their investment,” said Prickett. “Many developments are in distressed areas. Being able to come in and make an investment that otherwise wouldn’t have happened–particularly with other incentives–is really good. Investors will make investments not because of CRA, but because it’s a good story and it’s in a community they care about.”

Successfully pairing investors with investments can harbor more success later in the deal pipeline

“When you’re successful at that [pairing] you get a churn in your deal pipeline,” said Prickett. “When you have a pipeline and have developed some relationships … you kind of rinse, wash and repeat. You get this sort of churn and that’s the epitome really of a good pipeline. The takeaway is it’s a little bit of art, a little bit of science and a ton of relationship building.”

The Pursuit

Part of finding potential deals for investors is knowing which developments are worth pursuing. Panelists discussed important attributes and what makes certain projects more attractive than others.

“Before we think about investors or any of that, we’re presented with a project,” said Darling. “We are presented with a lot of projects and the question is how we whittle through all the deals to find the ones either that we think will be successful in the marketplace and ones that are a match with our investors. The [most important] thing is the developer. … You have to know who you’re dealing with.”

Prickett and Windisch agreed.

“When you find a developer and the relationship is right, all the other pieces fall into place,” said Windisch. “We have developers that we’ll do every deal they bring to us and we have other developers who we won’t work with again.”

“[And] developers can be good in different ways,” Darling continued. “Some developers are good because they do what they said they were going to do and they solve their own problems. It’s not always just money, experience and standing behind their work, it’s when things go wrong are they really going to work to fix things.”

Red Flags and Best Practices

Things will go wrong during construction or before closing a deal, but panelists discussed potential red flags when meeting with developers and how to avoid losing on a deal.

“We closed a deal earlier this year where we had [some red flags]” said Darling. “That’s why one of our criteria is historic experience. If it’s an experienced developer that’s never dealt with HTCs before, they won’t be used to the compromises you have to make. We still do deals with new developers, and the first deal is often really tough, but we also find that they keep coming back. Once you closed the deal and you’ve advanced your money, things become clear to them.”

“Thankfully I haven’t experience that a ton,” said Prickett. “In the few that I have experienced, the developers tip themselves a little bit. The developer isn’t 100 percent sure or they’re thinking of using the credits for themselves, these are maybe subtle or maybe not-so-subtle cues that you can use. The only way I’ve seen this when [a red flag] presents itself, is a breakage fee or developer penalty to say hey we’re going to spend time, money and effort on this so if you go away, there will be a penalty.”

Panelists agree that problems or issues aren’t always altogether avoidable or controllable, and you can’t always spot them.

“Two [red flags] jump out to me,” said Windisch. “One is when you’re walking project site and talking about work performed and talking about who’s going to do the crazy difficult historic work and the answer is ‘We’ll do it ourselves’ or ‘I know a guy.’ There’s a reluctance to hire someone who will truly do the historic work. You can’t cut corners when it comes to historic architect. The other is getting unrealistic projections. It makes me think someone is trying to get away with something.”

“I’ve never seen a deal without a red flag,” said Prickett. “You’ll always be dealing with flags on transactions. … There’s not always a red flag, but maybe it’s an orange or yellow flag.”

Darling suggests that a good way to avoid “red flags” is criteria that developers or properties should meet before moving forward.

“Rather than red flags, we think of them as criteria,” said Darling. “We all have checklists, track records, minimal financial strength, we have background checks, financial checks to try to avoid those problems, but nothing can be totally avoided. … After every deal our checklist gets longer.”

Darling notes that on bigger projects, Carlisle Tax Credit Advisors brings in its own historic consultant. Windisch and Prickett said that communication and getting involved early in the pipeline are the easiest way to resolve or spot red flags.

“One lesson I’ve learned is you just have to overcommunicate in these things,” said Prickett. “It’s the only way to address bad things early and find timely solutions. Communication has to be rock solid both ways with whoever you’re chatting with. Not all deals are bad, but bad things happen. You have to be able to work through difficult things.”

“We like to be involved very early if given the chance,” said Windisch. “We feel like we can add value by connecting to other capital sources. If we’re involved early, we can have the hard discussions first so everyone can go into a project [with] eyes wide open and when we get to a term sheet, there are no surprises. We spend a lot of time on those before sending anything out the door. If those discussions are going well, we’ll start due diligence in earnest.”

“Some things are too important to leave to chance,” said Darling. “Sometimes these things are truly unpredictable, but very often if you look hard enough, you can see them. [It means that] closing takes longer now, but the project itself with be better.”

Looking Ahead

The market is still uncertain in the wake of the COVID-19 pandemic, but panelists discussed the potential for a turnaround in the market and what things need to happen for a better outlook.

“Uncertainty is such a big element to all of this,” said Prickett. “The notion of being able to see around the corner is usually helpful, but we can’t even find the corner to look around. What form does that take? If we can find the corner, we can look around it. Smart folks can make smart decisions and we can create some certainty. One thing I think will help is the efforts on Capitol Hill for enhancements to the HTC. The contents of some legislation could help us make a significant bounce back.”

In the current market, there are some transactions and developments that are just more feasible than others.

“One of the advantages from having done this too long is that we can look back to history,” said Darling. “Ten years ago, we were in a deep recession and deals now are starting to look like deals then. No hotels, very few offices and a lot of residential because that’s what can be financed. Moving forward we need a [COVID] vaccine, we need the underlying problem to get fixed. I see all the big deals that are $10 million and up are on hold and hospitality is being redesigned or put on mothballs. That has mostly to do with financing. Until banks and lenders feel comfortable putting money out there, you’re just not going to make it. Some people may get shaken out, but five years from now we’ll be rocking and rolling.”