Would you put money in the deal if there were no tax break at all?

I'd take the strict version every time. If the deal needs the tax break to work, then any slip in the construction budget eats the whole margin and you're left holding a building you wouldn't have bought.

wren, that logic would also rule out most affordable housing, which needs its subsidy to exist and still houses people. The question isn't whether a deal needs the incentive. It's whether the incentive is big enough to cover the gap with room left over for the things that go wrong.

I've been sitting on this decision for eight months so I've had time to think about it. What convinced me toward the strict screen is that the tax benefit shows up at the end and the construction risk shows up in year one and two. Deferral doesn't help you if the building never gets certificates of occupancy. The elimination on appreciation only matters if there's appreciation. Both of the good things in this program are contingent on the project actually working, and the way people talk about them makes them sound like they arrive on a schedule.

anchor put it better than I would have. I want the version where the building leases up, pays its debt and throws off something, and the tax treatment is extra. If someone has to walk me through the tax math before the deal sounds good, I've lost interest by then.

Running a small crew I'll say the thing from the cost side. Construction pricing hasn't come back down and subcontractor availability in the markets these funds work in is worse than in the metros, not better. So the contingency line in the fund's budget is doing a lot of work. If the deal only pencils with the tax treatment and the contingency is 5%, you have no cushion. That's the practical version of vellum's question.

I want income without a second job, which means I'm at a disadvantage here because most of these funds pay nothing for years while construction happens. That fact alone pushed me toward the strict screen. If I'm getting zero cash for four years the underlying thing had better be worth owning on its own.

plumb's point stands though. Some of the best long term land positions I've looked at only became viable when a program changed, and the people who bought before the program existed weren't smarter, they were early. The difference is whether the incentive changes the economics permanently or just for the holder who claims it. In an OZ deal the buyer in year eleven doesn't inherit your tax basis story, so your exit price has to stand on the property.

arbor named the actual test and I'd put a number on it. Run the exit at a cap rate you'd accept as a cash buyer with no tax angle, because that's who's buying from the fund. If the pro forma exit only works at a cap 75 basis points tighter than comparable trades in that submarket, the tax treatment is covering a valuation assumption rather than covering construction risk. That's the version of vellum's split that actually shows up in the spreadsheet. Everything else is vibes about whether subsidized projects are legitimate, and they plainly are.