7.16.1 General Comments and Exceptions

A. Tax Abatement is a reduction of project taxes for a specified term by the taxing authority. Properties with abatement are eligible for additional mortgage funds under certain circumstances. The abatement must run with the real estate and not with the type of sponsorship if it is to secure additional mortgage proceeds based upon value (Criterion 3). The debt service approach (Criterion 5) used for underwriting must include an amount for the expected project taxes (including abatement or PILOT) in the project operating expenses. The terms of the tax abatement must be analyzed and a stress test demonstrating the risk must be performed even if the present owner or its transferee may benefit from the abatement for the term of the mortgage. The risk that a transferee of the project or an assignee of the mortgage in the future might cause the tax abatement to be lost is an unacceptable risk to the insurance fund. Exceptions to these requirements include the following:

1. If the property is subject to LIHTC covenants to maintain affordability, or if over 90% of the units are covered by a Section 8 project based rental assistance contract, and if the tax abatement runs with the sponsorship (Borrower) entity, then the Regional Center Director may waive the MAP Guide so that the underwriting does not have to include a provision for project taxes during the period of the tax abatement. This exception is justified for low loan-to-value mortgages on LIHTC projects and the additional due diligence and oversight by private equity investors. A real estate tax abatement will be recognized in both value (Criterion 3) and underwriting (Criterion 5) calculations even if the abatement runs with the owner rather than with the land, so long as the owner is non-profit sponsored.

2. Some properties are leased from a governmental body to either a non-profit or for-profit Developer, where the project is exempt from taxes and the abatement flows to the leasehold improvements. There is usually a requirement for a percentage of units to be set aside as affordable housing, which is imposed by a land use restriction or regulatory agreement. Regional Center Directors may grant a waiver, after appropriate review, to promote affordable housing.