What's going on, YouTube. It's Matt Faircloth. Thank you for watching this Mentorship Monday
program. My name is Matt and my company's called The DeRosa Group. And this is Mentorship Monday.
And this is a very special one because we are here at the best ever conference. Not really in
Denver. We're kind of in Keystone. We're kind of out in the mountains in the woods. I wish
I could turn these cameras and show you all these beautiful vistas we're looking at here. But we're
at a conference for the Joe Fairless for the best ever conference. I'm so excited to be here. I'm
speaking here tomorrow. And Joe has this really cool podcast and YouTube video studio lined up.
So I want to do... I bumped into a few new friends and I said, "Hey, can you guys come up with a cool
real estate question that we can discuss in the Mentorship Monday program?" So they very gladly
said, "yes". Here's a few things for you guys. If you guys want us to answer your Mentorship
Monday questions on this YouTube channel, just email them to helpme at derosagroup.com,
that is helpme at derosagroup.com. And I will answer your question right here on this YouTube
channel for you and everyone else to learn from. And I appreciate all your questions.
So now my new friends here, I've got Joshua and Thomas from Humboldt Partners. Right? They have
a question for me and they're going to tell a little bit about their company in a second
here. But they've got a real estate question that we can discuss here for the channel. And
what's awesome is I don't know what their question is. This is why this is a really
interesting Mentorship Monday. I hope this isn't like a stump the chump kind of thing,
but let's see what we can do. So Joshua and Thomas let's talk about your question and then
you can tell the audience all about your company too, which I think they'd love to hear about.
Okay. Great. So we're at the Joe Fairless conference.
Yes, we are. We're multi-family investors.
Yes we are. And we are under LOI on a
project near Charlotte, N.C. All right.
We've got an agreement that the contract will be signed on Monday when we send it to the seller.
Okay. It is a LIHTC property,
a low-income housing tax credit, that's ready. Okay.
Mid to late '90s build. Okay.
We're going to start due diligence next week. What are the three to five things that we need
to pay attention to in due diligence related to the tax credit status of the property?
Okay. Pass, next question. No, kidding. Kidding. I got it.
Where were you last night? Yeah. Right. Tell us about your
whereabouts. No. Okay. So for our audience, there's something called low-income housing
tax credits. Okay. I know a good bit about them. I've not done a deal with them yet,
but I will gladly offer my insight on low-income housing tax credits. For you guys watching,
the way that low-income housing tax credits work is the government issues these credits,
and it's called LIHTC. And it is a income tax forgiveness for a certain amount of money that has
to do with the amount of units that you have. And it has to do with what round you applied for.
You can get a four percent tax credit. Or you can get a nine percent tax credit. The nine percents
are competitive, which... And they're very lucrative, but they are... You have to bid on them
and they have to select which developer they're going to give it to. And all that. The four
percents, as of right, you can just get them. So LIHTC is a great program. But the thing with
it is that you have to deal with the low-income. Right? The LI part, right? So it is a low-income
housing tax credit. So there is a certain component you have to deal with and be prepared
to have yourself set up for, right, when you're doing LIHTC deals. For all you guys watching too,
and LIHTC typically doesn't get involved unless your deal's over a certain unit
size. How many units are we talking about here? It's a 58 unit property, $1.8 million purchase.
Great. Okay. So you... Just a few questions. You guys are inheriting those tax credits or... First,
is the property in the second round, or is still in the first round of its tax credits?
And I'll explain to you guys, viewers, what that means in a second, but y'all
should know the answer to that question. I think it's still in the first round.
It's still in the first round. The person who did the development is the
person who got the credits. That's right.
And then we're the next buyers. So the way tax credits work,
that I understand anyway, is it's a 15 year tax credit. And that's that after the 15 years then
it opens up to another 15 years, that's the second round. Second round is a little more
open. You can charge a little more rents and things like that. So I understand. Right?
Let's get to your question, due diligence you guys need to do.
Yes. Number one,
you need to have a property manager lined up that knows how to handle low-income housing. Right?
And it's not just from a tenant perspective. I'm not judging low-income housing. It's a necessary
thing in our society. We need to have low-income housing. What I'm saying is to keep you kosher and
compliant with the LIHTC regulations, you guys need to have a property manager that's vetting
tax returns and that is proving that the folks' income that are living in your units qualify for
the program. Right? Because you can get fined and lose status and things like that if you
get audited by HUD. I believe it's by HUD, the Department of Housing and Urban Development,
that issues those credits. Right? So that's number one. Due diligence. It's a 58 unit. It's kind of
a funny size. It's kind of hard to have one- It's actually two complexes built. And actually
one of them is in the first round and one's in the second round. So it's a little bit of a mix of-
More hair on it. Okay. That's even more. Okay. In case you answered the first question,
we were going to- I got it. I got it.
So you wanted to know what other due diligence you should be doing. Okay.
I would go... And you got to get a copy of the low-income housing covenants.
Yeah. If you haven't read them.
We have. Okay.
Yeah. So that's
big due diligence is these deals come with a ton of paperwork. Right? It's like sacks
like that. So read through it. Get yourself an attorney that knows these kinds of deals.
So you're shaking your heads. You guys already have that done. Right? Okay. Cool.
It sounds you guys are on the right track. So we're halfway there. We have the paperwork.
We've actually read through it because we didn't understand it before. But then now we do think
we have to have a lawyer or an attorney go through it and give us some feedback.
Absolutely. Absolutely. Okay. What else? What do you think you're missing? What do you think your
blind spots are on the deal? Because it sounds you guys are on the right track. I don't know if you
thought about the property management thing, if that's a value add that I can give you there.
So the compliance piece. Yes.
Operating the property is really the big deal. Yes.
The real value add opportunity that we see in this property is that it's running at 70%
expense ratio. Yep.
Whereas properties of this size and this scale in our market should be running at closer to 50%.
Why is it? What are pushing the expenses up? Right. So we've got the rent roll. We've got
the T-12. We've done all the analysis. There's something going on because not only are there
income qualified tenants in the property, but there's also Section 8 HAP tenants in
property. Something is going on with the utilities. The utility expense is out of
whack. And we don't fully understand that yet. I can tell you. Okay. So here's my opinion. Okay.
First of all, low-income housing tax credit deals, typically the developer makes a large chunk,
a developer's fee when they build out these properties. The LIHTC deal that we looked at
in Trenton, the developer we were looking to work with got an enormous fee or was going to get an
enormous fee when they built the property. And then the property was designed to cashflow at a
breakeven. Right. It was designed to do so. There was a heavy payroll. That's the first
thing you got to look at is payroll. Because for 58 units, they might have several full-time
salary staffs on 58 units. Right? Not necessary. That's number one. And LIHTC doesn't require that
you over expense your properties like that. But they're just not designed for cashflow. Well,
if you're doing a LIHTC property as a developer, your money's made in the fees, not in the cashflow
during ownership. Right? Because the tax credit... They have to sell those tax credits. They sell the
tax credits. And the owners of those tax credits are who would be beholden to the
cashflow, but they don't really want the cashflow. They just want the tax credits.
Getting down the rabbit hole there. Right? So secondly, if you are on affordable housing,
there is a cap on how much global living expenses the tenant can pay. Utilities are included in
that. Right? So there is a chance that your property is either all utilities included by
design and maybe needs to be that way. Or that just the, especially your Section 8 tenants,
are just approved for a voucher that's... Let's just say for our conversation it's
a thousand dollars. They're paying you 800, but they can't... The other 200 bucks for utilities
just has to come out of you, too. So you guys your property might be designed for owner-paid
utilities. Do you... Is it a single boiler, single central air? Or are there individual units?
No. Everything's individual units. And in North Carolina we have individual HVACs.
Okay. You got to check the Section 8 contracts. Check the lease. The biggest thing you got to
do is network with the local office. Call the local Section 8 office, see what their rules
are around those kinds of things. So to wrap it up, guys, these LIHTC deals and stuff like that,
they're not common. So it's kind of hard to go out and seek them. There's developers where all
they do is do LIHTC stuff. And if you come across a LIHTC property,
it's just a lot more due diligence you got to do. They can be very lucrative. And typically
you're looking at something that was designed by a developer to build it and get a fee. They weren't
designing it for cashflow. So you're going to have to restructure the property, redesign it
to make a cashflow. That's what you guys do. So real quick before we go, tell us real quickly
about Humboldt Partners and how people can get ahold of you and what you guys are up to,
including making cool stuff happen in North Carolina.
So Humboldt Partners is actually Josh Stack and myself, Thomas Konditi. We have a team that
basically looks at multi-family in the greater Charlotte area. And we look at units anywhere
from... We started off with a 10 unit that we did a full renovation on. We bought a 14, a 52. We're
up to about 80 units and were heading for 400. Do you guys self-manage? Or do you hand it out?
No. All of them are third party property management. [crosstalk 00:09:58] We provide the...
I mean, we manage them, if you will. Yep.
On a weekly basis. You got to manage the manager.
And then we're constantly looking for new properties in the area. We have a team that
underwrites that as well. Cool.
And HumboldtPartners.net. So, if people want to hear
more about you guys or want to potentially hear about North Carolina or just reach out
to you guys, it's Humboldt, H-U-M-B-O-L-D-T. HumboldtPartners.net. Okay. Send these guys an
email, Josh and Thomas. Any final thoughts? Viewers can also sign up for our newsletter
plus minus once a month it's going to come out. And you can hear-
Do that. What we're up to in
the west of Charlotte area and the good deals and the good investing that we're doing.
That's awesome. Good. Thank you guys for letting me blindside you for Mentorship
Monday. I appreciate you. I appreciate you guys for watching. Keep a track on Humboldt Partners,
guys. You guys are going some places. And make sure to reach out to hear what they're
up to. Thanks for watching audience and have a great profitable week.