Those were two nuggets of advice from an Oct. 7 panel on negotiating and closing your historic tax credit (HTC) transaction during the Novogradac 2021 Historic Tax Credit Conference in Chicago.

“My advice is to think of the exit,” said Amrit Gill, president and chair of the board of Restoration St. Louis, a real estate development firm focused on historic properties. “First-time developers in a historic deal tend to focus a lot on the deal and don’t give a lot of thought to how they’re going to exit the deal.”

Patrick Laborde, director of the tax credit services underwriting team at Stonehenge, a national leader in financing state and federal credits, agreed and emphasized the importance of getting multiple partners together early.

“Knowing how many very specific underwriting and program requirements there are, it’s helpful to have [partners] engaged early on,” said Laborde. “One thing I’d add is to make sure you’re negotiating complimentary term sheets with different parties. If the lender, investor and other financing parties are not on the same page prior to closing, it can be messy.”

Thus, the importance of the full team.

“One of the most important pieces is assembling the team,” said Emily Cauzillo, director of project management of Huntington Bank, headquartered in Columbus, Ohio. “It takes a whole team to close the transaction, from attorneys to consultants to general contractors. It’s the team that will get you across the finish line. And one of the best pieces of advice is to bring an investor in as soon as possible.”

‘Don’t Get Fixated’ on Pricing

Panel participants said developers, particularly, should keep an open mind in closing a transaction.

“Don’t get too fixated on the credit [equity] pricing,” said Josh Jeffers, founder, president and CEO of J. Jeffers & Co., a mission-driven real estate development and investment firm. “You hear people talk about price, but there are so many other variables that come into play. You need to make sure everything is thought through.”

Those elements can vary with the structure of the agreement.

“It does change depending on whether it’s a direct structure or passthrough or master lease,” said Jeffers. “There are other things, too, like the put option–it’s not just the amount and timing of funding. That’s why I think it’s so important to start working with the investor early.”

Which means finding partners.

Matching Developers, Investors

Panelists agreed that the partnership between investor and developer is the most crucial element.

“I think the fit matters so much,” said Jeffers. “Every single project has to be tailored. We find ourselves working with operating businesses and with every asset class: office, retail, hotels, everything. It’s so important to find an investment partner that has comfort with the asset class with which you’re working. For instance, if you’re doing student housing with an investor who’s done multifamily housing, you’ll find out it’s not the same thing.”

Jeffers stressed that the relationships go beyond financing.

“These are not purely transactional relationships,” he said. “You have a true partnership with an investor for at least five or more years. Once that transaction closes, you have to make sure you’re working together.”

Gill said the past 20 months made that clear.

“The fit is supremely important, especially when you have events like COVID,” said Gill. “During the pandemic, our investors were our biggest cheerleaders because they had full faith in us and knew us really well. I would have hated to go into COVID with an investor in a hotel who didn’t know us. ... It could have been a disaster.”

That search goes both ways, according to investors who look for developers.

“Someone with experience makes it easier,” said Cauzillo. “If they don’t have experience, it goes back to the team that the developer has surrounded themselves with. It’s a partnership and the partnership is for five to seven years. I think open-minded communication is really important. Having a developer and investor who can communicate realistic expectations is also really important.”

Laborde said comfort is crucial.

“We’re ultimately in the people business,” said Laborde. “We want to do business with people we enjoy and who we know can execute and deliver. The goal isn’t to only close the first transaction, but a second and third. On investor side, we’re trying to find that group that has a track record we can grow with.”

Timing, Amendments

Closing transactions is never easy, but the events of 2020 and 2021 amplified those difficulties. It takes much more than 60 days to perform most closings.

“On average, we go into each of our projects with idea it will take at least 12 months to actual closing,” said Jeffers.

As the nation emerges from the COVID-related recession and its complications, there’s a new cause for uncertainty: Possible legislative changes to the HTC. Panelists said potential increases in the HTC percentage and other provisions in proposed legislation should be part of HTC negotiations. Or at least a consideration.

The partnership agreement should talk about the excess credits if they do show up, said Gill.

Jeffers said there isn’t yet a standard practice for whether potential tax credit changes are included in negotiations.

“We’ve done some closings where it has been contemplated,” said Jeffers. “There’s a proposed increase in amount of credits, so some closings have been set up where the operating agreement specifically calls out what the pricing will be if that happens. In other closings, they negotiate a lower price and in other deals, it’s just sort of silent. That’s a little uncomfortable, but some deals don’t need excess credits. It’s been a little bit all over the board for the past year.”

Significance of Numbers, Contingencies

One item that panelists emphasized was the importance of establishing contingencies in agreements.

“Obviously, costs drive the tax credit amount and equity amount at closing,” said Cauzillo. “In terms of how detailed you should be in today’s environment, your contingency is important. That can evolve as you start opening walls.”

Laborde said he’s seeing more focus from investors on contingencies.

“They want to see the budget what the contingency amounts are,” he said. “That is by far the most important line item we’re seeing today. In some cases, it can be an impediment to closing if there’s not a lot of confidence that the contingency is sufficient.”

Cauzillo said developers and investors should also be aware of the likelihood that the National Park Service will require changes before providing a Part 2 approval. That requires consideration in negotiations.

“Almost no buildings will be pristine conditions,” said Cauzillo. “So maybe have some buffers to your timeline in case you get an amendment [to your Part 2 approval]. You’re almost certainly going to have some unforeseen conditions when you get in building.”

That means it’s important to have a solid estimate for the qualified rehabilitation expenditures, which determines HTCs.

“We pay a lot of attention to that,” said Gill. “That is a big topic of discussion, typically, with people doing projections. Everything flows from there.”

Facing Troubles

Panelists said HTC transactions will inevitably have issues that require partners to work together to solve.

“There are so many pitfalls. That’s why it’s so important to have a great team,” said Gill.

Cauzillo agreed.

“Don’t get discouraged by [difficulties],” she said. “There’s always a way to solve the problem, but be mindful that something will happen in the closing process or construction process. Don’t get discouraged, but rely on your partners.”