Best Practices

Due Diligence & Closing

Asset Management collaborates with Acquisitions staff in the analysis of potential investments during the due diligence and underwriting process. The goal is to structure partnerships that have a high likelihood of performing in accordance with projected operating budgets, achieving occupancy goals, and delivering projected tax benefits.

Typically a syndicator’s Acquisitions staff coordinates with its counsel to address minimum standards in partnership documents for issues impacting the proposed transaction as both a real estate investment and a tax strategy. Asset Management assumes the responsibility to monitor (1) the developer’s compliance with contractual requirements, (2) long-term performance of the real estate, and (3) realizing the targeted investment return.


  • Participate in a due diligence site inspection.
  • Review the proposed development’s physical aspects and financial structure, assess its suitability and competitive strengths/weaknesses related to long-term marketability and management of the property.
  • Review market studies and projected operating budgets, compare proforma rents and operating expenses with market knowledge and historic portfolio trends, evaluate any significant plan and budget to provide tenant services, and assess the adequacy of proposed rent-up, operating and replacement reserves.
  • Evaluate qualifications of proposed property managers and accountants with regard to their real estate operations, affordable housing finance and Section 42 experience. Review and approve proposed management contracts and management plans.
  • Review investment partnership legal documents to ensure that updated asset management and compliance monitoring requirements and standards are incorporated. Confirm that the Developer/General Partner’s contractual role and obligations are clearly defined, as well as events of default and Syndicator/Investor Partner’s remedies. Documents should contemplate Investor Partner’s authority over potential encumbrance, sale and disposition of part or all of partnership assets. Assess scope and terms of Developer guaranties given risk factors of proposed investment.

Underwriting Standards

Capital Contributions: A percentage of equity as well as some or all of developer’s fees should be withheld prior to reaching certain milestones such as construction completion, final cost certification, receipt of 8609’s, the closing of permanent financing, verification of qualified initial occupancy, and achievement of stabilized occupancy and/or break-even operations for a specified period of time. Capital contribution schedules should provide for credit adjusters for those projects not delivering tax credits as projected.

Operating Reserve: Minimum Operating Reserve should be capitalized by closing of permanent financing equal to a percentage of annual projected operating expenses plus “must pay” debt service payments plus deposits to Replacement Reserve. Factors to be considered in setting initial reserve levels include project location, competitive advantages or disadvantages in the market, design specifics, security, projected vacancies, potential for reductions in expected rent subsidies, and expectations for erosion in operating margins over time.

Rent-up Reserve: A reserve should be funded by permanent closing to cover likely operating shortfalls during the initial leasing period prior to stabilized operations. Factors to be considered include the development’s market study, population to be served, availability of rent subsidy or other partnership funding sources, and the mix of market and LIHTC units.

Replacement Reserve: Also capitalized at permanent closing, but with subsequent periodic deposits for the intended investment holding period, a Replacement Reserve will be restricted to pay for replacement of capital items. A minimum deposit equal to $250 to $400 per unit should be established at closing for new construction, with potentially a higher amount, based upon a capital needs study if possible, for rehabilitation projects. That initial capitalized amount should be increased annually by a fixed inflation factor and should be considered part of the development’s annual operating expenses.

Uses of Restricted Reserves: Expenditures of funds from the reserve accounts should be monitored. The syndicator may control disbursements of any amount or only for defined thresholds, depending on several factors including the prior performance and experience of the developer and property manager, and any unique risk factors. Syndicators may also require the General Partner to fund any deficits during the rent-up period if the Rent-up Reserve is depleted, thereby preserving the Operating Reserve until certain occupancy and debt coverage benchmarks have been achieved. Furthermore, syndicators may mandate advances by General Partners to pay affiliated property management fees during deficit operations.

Insurance Requirements: This discussion of types of insurance serves as a general guideline. Standard coverage limits tend to change over time, so consultation with the project’s or syndicator’s insurance agents may be prudent. Where appropriate, syndicators should incorporate the insurance requirements of a project’s lender(s). Additional types and different amounts of coverage may be required in some cases. Asset management should routinely verify the types and amounts of insurance coverage in force, develop a tracking system to ensure renewal of policies and respond to any lapses, and confirm that commercial space located in the project is separately and appropriately insured. In addition, property managers should provide evidence of insurance covering MultiplePeril, Liability, Fidelity Bond, and Errors and Omissions (if feasible).

Investment Partnerships should provide evidence of the following types of insurance protection, in accordance with Operating Agreements. Insurance companies should have minimum AM Best ratings of A+. General Liability Insurance is suggested in a minimum amount of $2,000,000 per occurrence. Coverage by All Risk Casualty (or during construction, Builder’s All Risk) Insurance should equal the replacement value of all improvements (review for hazardous materials and soft costs). Following are additional aspects of routine coverage that should be considered:

  • Inflation guard endorsement.
  • Title Insurance Flood Insurance, if a project is located in a flood plain.
  • Earthquake insurance if located in identified areas of risk based on earthquake analysis results.
  • Rental Interruption Insurance: amount of coverage should equal six to twelve months gross rental income.
  • Equipment Breakdown (formerly known as Boiler & Machinery) Insurance on a comprehensive form, including repair and replacement for mechanical and electrical systems, where appropriate.
  • Loss of historic tax credits (federal/state) if partnership is to receive same.
  • Investor Limited Partner(s) to be named as Additional Insured. Other additional insured parties may include Operating Entity and Management Agent, with Permanent Lender as Loss Payee.

Reporting Requirements: Syndicators should establish specific project reporting requirements, which should be incorporated in project Operating Agreements. More detailed standards for these requirements are discussed under the Operations section below.

Minimum requirements for Property Managers and Accountants: Asset managers should establish written criteria for approval of property managers and accountants to be engaged by lower tier partnerships.