Suppose market rate apartments produce net cash flow of $10,000/yr in perpetuity, while affordable units provideonly $5,000. However, if the developer commits that 25% of the units will be forever affordable, then she will qualifyfor a perpetual loan $4,375,000 at an interest rate 50 basis points (0.5%) below the market interest rate. (However,this is not a tax-exempt loan - its interest is taxable.) Also, the developer can receive perpetual (and transferable)annual Low Income Housing Tax Credit (LIHTC) equal to $1,000/yr per low-income unit. If property yields (totalreturns, opportunity cost of capital) are 10% at the PBT level (assume same for market and affordable apartments),loan market interest rates before-tax are 5%, yields on otherwise similar tax-exempt bonds are 4%, then should thedeveloper make her 100-unit apartment complex a mixed-income affordable development or a 100% marketdevelopment? Tell why, and how much difference it makes (i.e., evaluate the two alternatives). Note that the LIHTCsare after-tax cash flows.

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Answer i Given the information provided the developer should make her 100unit apartment complex a mixedincome affordable development This is because w... View the full answer