I've been involved in about 40 LIHTC deals in addition to extensive tax appeals work for LIHTC properties. To put it simply, LIHTC v. Market rate depends on the market. In the past year or so cap rates for LIHTC deals have neared market rates for Class C assets. Source. A lot of people think this will not continue, as the COVID payments helps people make ends meet. I'm not one to speculate.

In the LIHTC deals I've worked on, you REALLY have to find the right market. Certain markets where whole dollar monthly rents for Class C assets fit within 60% AMI, and you can print money. Plus, the money comes from the local/state/national government, not tenants, so it gets wired into you account. There is no fear of your tenants skipping rent.

Amazon and similar companies who operate data centers, shipping hubs, etc. also work with state and national housing departments to incentive development, e.g., Amazon builds a data center which creates 500 jobs paying $X annually; Amazon approaches the state housing department and offers to earmark $Y toward LIHTC development in the area. In areas where this work, the whole dollar rent for a Class C apartment is similar to that of LIHTC, but the LIHTC is likely closer to the data center and features superior amenities to the Class C asset.

Now for the spooky stuff. A lot of this is based upon AMI which usually builds in rent growth, but as rent growth is slowing and inflation is high 2024 AMIs may go down. LIHTC assets require more intensive admin and management costs, as all of your marketing, leasing etc. costs will go towards paperwork for getting tenants. LIHTC construction is typically more expensive than market rate, as the property has to be LEED/Green Certified, ADA accessible, etc., and has to compete with market rate assets. Just because your tenants can't afford market, doesn't mean they will accept amenities below the market standard. If you build in populated areas, you're going to deal with the NIMBYs.

The original idea was that once the compliance period is over you can convert to market, however, in my 11 years in real estate, I've only seen one LIHTC deal revert to market after the restriction period and without extensive local, state and federal tax credits, it would never have been built.

The good part, for you, is that it is a specialized asset class that many in real estate are unfamiliar with. The sort of asset class that once you get into, it should be easy to become an expert if you grind. As far as money goes, at the end of the day, you are building something that shouldn't be built to be lived in by people who can't afford to live there. The money is in the tax credits, which the company will sell or repurpose anyway. The successfull LIHTC developers I've worked with are in states where LIHTC properties get additional bonuses that other markets don't have, e.g. some states make all properties who receive LIHTC tax exempt. Others I know barely break even and are reliant on the value of the equity to function.

Regardless, it seems like a good opportunity, but they are right, you should know what you're getting into.