LIHTC Financial Forecast Models Built for Developers, Syndicators and Investors

Published by Karie McMillen on Wednesday, August 4, 2021
Journal Cover Thumb August 2021

Completion of a financial forecast model for an affordable housing property is a tool that can be used throughout a property’s life span. Each property is different and it is important that a financial forecast model be built to include and handle all aspects specific to that property.

Many times, early in the life of the property, there are changes made to timing of closing, tax credit equity and pricing, development costs, etc. It is important that developers, syndicators, and investors have a financial forecast model that can easily be updated for these assumptions and other changes.

The parties involved have different points of focus and purpose for a financial forecast model. A developer’s financial forecast model may focus on total development costs and the timeline for construction completion. A financial forecast for syndicators and investors may analyze several different areas, such as potential capital account issues, internal rate of return and tax credit basis. Each party should have a financial forecast model that is trusted and is centered around areas that are of importance to them.

Financial Forecast Models Updated for Tax Reform

Financial forecast models may become outdated and no longer function in a manner that complies with the most recent tax legislation. Taking on the challenge of updating a financial forecast model for these changes can be cumbersome for the parties. A few examples of these changes in tax legislation are as follows:

  1. Internal Revenue Code (IRC) Section 163(j) interest expense limitation
  2. Bonus depreciation phase-out
  3. American Jobs Plan

IRC Section 163(j) Interest Expense Limitation

H.R. 1 (initially called the Tax Cuts and Jobs Act), passed at the end of 2017, introduced the IRC Section 163(j) interest expense limitation. This limits the amount of business interest that can be deducted. Originally, this limitation was set at 30% of adjusted taxable income (ATI). The Coronavirus Aid, Relief and Economic Security (CARES) Act passed in March 2020 changed that percentage to 50% for 2020 and also gave the option to use the 2019 ATI in place of 2020 ATI. On the other hand, if a partnership makes the election to opt out of the interest expense limitation, then the alternative depreciation system (ADS) is required to be used.

Before the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (TCDTRA), residential rental property held by an electing real property trade or business was required to have a recovery period of 30 years under ADS if placed in service after Dec. 31, 2017, and a recovery period of 40 years under ADS if placed in service before Jan. 1, 2018. However, Section 202 of the TCDTRA retroactively provides a recovery period of 30 years under ADS for certain residential property placed in service before Jan. 1, 2018, which is held by an electing real property trade or business. Further guidance was released by the IRS with Revenue Procedure 2021-28, stating how to account for retroactive treatment. There are three options:

  1. File Form 3115–Application for Change in Accounting Method
  2. File amended returns for 2018, 2019, and 2020 (Rev. Proc. 2021-29)
  3. File Administrative Adjustment Request

Regardless of the option implemented above, there will be an adjustment to depreciation for the change in recovery periods. The parties should ensure their respective financial forecast model is updated for these changes in tax legislation. It would be beneficial for parties to have the ability to toggle between making the election and not making the election to see the outcome of either option.

Bonus Depreciation Phase-Out

Bonus depreciation is accelerated depreciation expense on certain types of property in the year the asset is placed in service.  H.R. 1, passed at the end of 2017, included a phase-out for bonus depreciation.  The amount of basis eligible for bonus depreciation is as follows:

  • In service in 2022-100%
  • In service in 2023–80%
  • In service in 2024–60%
  • In service in 2025–40%
  • In service in 2026–20%

The parties must ensure that this percentage layering is revised in their financial forecast models to accurately reflect losses, capital accounts and minimum gain. The decrease in percentage could remedy potential capital account issues. It is also beneficial for the parties to have the ability to toggle between options of taking bonus depreciation or opting out to see the outcome of either option.

American Jobs Plan

Under President Joe Biden’s proposed American Jobs Plan (AJP), it is anticipated that the corporate tax rate will rise from 21%. There are additional changes expected as part of AJP, including, but not limited to replacing the Base Erosion Anti-Abuse Tax with the Stopping Harmful Inversions and Ending Low-Tax Developments and restricting deductions for domestic interest expense.


Property Level

The parties would benefit from adding state tax credit calculations to their financial forecast model. While some state tax credit programs mirror the federal incentives in terms of tax credit period, others do not and are more complex. This would also not be limited to state tax credits. Other credits, such as the brownfield tax credit or historic tax credit, can add a layer of complexity to investor returns and benefits.

The state that a property is located in may play into how development costs are allocated to building, site improvements and equipment. The qualified allocation plan for each state also provides guidance on limitations on certain fees, such as developer fee and contingency fee. The parties would benefit from customizing their financial forecast model to account for these specifications.

The cash waterfall outlined in partnership agreements is typically similar between properties involving the same parties. A financial forecast model should be built to include a template cash waterfall specific to that property. If not, the cash waterfall can be a problematic area in the financial forecast model.

Another area specific to certain parties is debt financing. Not all partnerships may use bridge loan financing. However, if bridge loan financing is a common source of funding, then having the ability to easily work that into a financial forecast model is important. In addition, some deals may have more soft debt financing than others which would make it necessary to include five to 10 placeholders for soft debt; in other deals, it may only be necessary to include two to three placeholders for soft debt financing.

There are also some parties that would benefit from having an output page that pulls property information and data from within the financial forecast model into one central location. This information could range from property specific information to a summary of sources and uses during construction.

Fund Level

Syndicators and investors would benefit from having a sophisticated macro to aide in combining several property level financial forecasts in to a fund level financial forecast. This would save time and resources.

The number of investments in operating partnerships varies among funds. A financial forecast could include tabs within the spreadsheet for a number of operating partnerships with the ability to hide tabs that are not being used.

Along those same lines, there could be placeholders for investor classes built into a financial forecast model, which would create flexibility for either a proprietary fund or multi-investor fund.


While some financial forecast models may include everything necessary to run accurately, the following enhancements could be a way to make the financial forecast model more dependable and appealing to the user:

  • Including error checks throughout
  • Including the ability for stress testing (i.e., vacancy, rents, etc.)
  • Adding automations throughout.
  • Locking cells throughout
  • Including yield options (i.e., XIRR, quarterly IRR, etc.)
  • Including structure flow chart

How Can Novogradac Help?

Novogradac is available to assist with updating, customizing, or building a financial forecast model from the ground up to fit the specific needs of all parties. Novogradac has helped various parties build and enhance their financial forecast model to account for changes in tax legislation, to make more user-friendly, and to customize for client preferences. Another way Novogradac can assist is through interactive training and development of a user guide. Novogradac also offers a LIHTC financial forecast financial forecast model on CD-ROM.