HCCP Financial Analysis 3 — Questions and Answers
Question 1: A developer underwrites replacement reserves at $350 per unit per year for a 50-unit LIHTC project. What is the annual reserve deposit?
- $15,000
- $17,500 (Correct answer)
- $35,000
- $70,000
Correct answer: $17,500
$350 × 50 units = $17,500 annual replacement reserve deposit.
Question 2: Which of the following best describes 'credit pricing' in a tax credit transaction?
- The interest rate applied to the construction loan
- The cents-per-dollar investors pay for each dollar of tax credit (Correct answer)
- The applicable percentage used to calculate credits
- The per-unit cost cap set by the state agency
Correct answer: The cents-per-dollar investors pay for each dollar of tax credit
Credit pricing is the amount equity investors pay per dollar of allocated tax credit, expressed in cents (e.g., $0.90 per credit dollar).
Question 3: When analyzing a LIHTC permanent loan, an underwriter typically requires that the DSCR not fall below which minimum threshold?
- 1.00
- 1.05
- 1.15 (Correct answer)
- 1.25
Correct answer: 1.15
Most LIHTC lenders require a minimum DSCR of 1.15 to ensure adequate cushion for debt repayment above breakeven.
Question 4: In a tax credit financial model, 'syndication costs' are classified under which category?
- Hard costs
- Soft costs (Correct answer)
- Acquisition costs
- Operating expenses
Correct answer: Soft costs
Syndication costs—including legal, accounting, and partnership fees related to the tax credit transaction—are soft costs in the development budget.
Question 5: A LIHTC project generates $10,000 in annual tax credits for 10 years. At a credit price of $0.92, what is the approximate equity raised?
- $82,000
- $92,000 (Correct answer)
- $100,000
- $110,000
Correct answer: $92,000
Total credits = $10,000 × 10 = $100,000; equity = $100,000 × $0.92 = $92,000.
Question 6: Which financial metric measures the percentage of effective gross income consumed by operating expenses, excluding debt service?
- Loan-to-value ratio
- Debt service coverage ratio
- Operating expense ratio (Correct answer)
- Net income multiplier
Correct answer: Operating expense ratio
The operating expense ratio equals total operating expenses divided by effective gross income and reflects operational efficiency before debt costs.
Question 7: In LIHTC underwriting, 'net equity proceeds' represent which of the following?
- Total tax credits allocated over the compliance period
- Investor equity paid into the deal minus syndication costs (Correct answer)
- Net operating income after all operating expenses
- Gross development cost minus the permanent loan
Correct answer: Investor equity paid into the deal minus syndication costs
Net equity proceeds are the gross investor equity contribution reduced by syndication and transaction costs, representing actual funds available for development.
HCCP Financial Analysis 3
A developer underwrites replacement reserves at $350 per unit per year for a 50-unit LIHTC project.
What is the annual reserve deposit?