HCCP Financial Analysis 2 — Questions and Answers
Question 1: In an LIHTC pro forma, which line item represents the gap between gross potential rent and effective gross income?
- Operating expense ratio
- Vacancy and collection loss allowance (Correct answer)
- Debt service coverage ratio
- Replacement reserve deposit
Correct answer: Vacancy and collection loss allowance
Vacancy and collection loss allowance accounts for the expected shortfall between 100% occupancy gross rents and the income actually collected.
Question 2: A tax credit property has an annual debt service of $180,000 and a net operating income of $216,000. What is the DSCR?
- 0.83
- 1.15
- 1.20 (Correct answer)
- 1.35
Correct answer: 1.20
DSCR = NOI ÷ Annual Debt Service = $216,000 ÷ $180,000 = 1.20.
Question 3: Which measure expresses total development costs relative to the number of affordable units being created?
- Cost per unit (Correct answer)
- Gross rent multiplier
- Net present value
- Break-even occupancy rate
Correct answer: Cost per unit
Cost per unit is calculated by dividing total development costs by the number of affordable units and is a key underwriting benchmark.
Question 4: For LIHTC purposes, what does a 'basis boost' of up to 30% allow in Qualified Census Tracts?
- Increases the applicable percentage
- Increases eligible basis to generate more credits (Correct answer)
- Reduces required investor equity
- Extends the compliance period
Correct answer: Increases eligible basis to generate more credits
The 30% basis boost in a QCT or Difficult Development Area increases eligible basis, thereby generating a larger credit amount without changing the applicable percentage.
Question 5: Which ratio do lenders and allocating agencies use most frequently to assess a project's ability to service debt from operations alone?
- Loan-to-value ratio
- Debt service coverage ratio (Correct answer)
- Operating expense ratio
- Break-even occupancy ratio
Correct answer: Debt service coverage ratio
The debt service coverage ratio measures how many times NOI covers annual debt service, directly reflecting debt repayment capacity.
Question 6: If a tax credit project's annual operating expenses total $320,000 and effective gross income is $500,000, what is the operating expense ratio?
- 56%
- 60%
- 64% (Correct answer)
- 68%
Correct answer: 64%
Operating expense ratio = $320,000 ÷ $500,000 = 0.64, or 64%.
Question 7: In a Housing Credit deal, the term 'hard costs' most specifically refers to which category of development expenses?
- Architectural and engineering fees
- Loan origination and financing costs
- Land acquisition and brokerage fees
- Construction labor and materials (Correct answer)
Correct answer: Construction labor and materials
Hard costs are direct construction expenditures including labor and materials, as opposed to soft costs such as design fees, legal fees, or financing costs.
HCCP Financial Analysis 2
In an LIHTC pro forma, which line item represents the gap between gross potential rent and effective gross income?