Marley’s Debt

7 min read

Marley was debt: to begin with. There was no doubt whatever about that.
Adapted from Charles Dickens, A Christmas Carol

The tale I am about to tell has no happy ending, so let us hope it can yet be rewritten.

Many a LIHTC property is encumbered with a ponderous chain of deferred debt from which it cannot break free, and these chains of accruals tighten until escape is impossible. And with all our creativity and our good intentions, these chains of debt are forged by us.

LIHTC properties need increasing amounts of effective subsidy. Affordable housing always costs money, and the greater the desired affordability, the more money it costs (whether as income subsidy or concessionary financing), and in the main it must come from government. Because most people involved in making these government subsidy decisions are unschooled in development financing, their negotiations tend in the direction of adding policy goals that add cost – and hence increase the effective subsidy (or the net present value cost to government) required.

Affordability in high-rent locations (say, growing cities that tend to vote blue), deeper income targeting, mandatory or QAP-incentivized supportive services or social services, green accoutrements, prevailing-wage or Davis-Bacon requirements – though all of these additional policy goals may be Good Things in isolation, each additional policy goal unquestionably increases the per-apartment effective subsidy required to be delivered into the property.

The effective subsidy means increasing amounts of soft debt. Of the three main forms of effective subsidy – appropriated income supplement (vouchers portable or project-based), tax credits, and concessionary debt – the one which absorbs the expanded cost-value gap arising from well-intentioned additional policy goals is always invariably the debt. The reasons are simple: because income subsidy is appropriated annually, it is scarcer than hen’s teeth and more painful than a gouty toe; and because LIHTC is entirely a function of total development cost (not economic value), it is largely a calculated output that doesn’t expand in response to additional policy goals delivered. So debt is the only thing that can expand, and the additional debt can have no mandatory payments, because that debt service would come out of the NOI and all of the NOI that can be pledged will already have been pledged to the underlying first mortgage.

The soft funding has to be debt rather than another capital form. Capital given to a venture not requiring mandatory repayment can of course be structured financially in several ways: grant, equity, or debt. But now our tax friends enter to preclude the first two of these choices. It can’t be a grant because grants would either be excluded from basis (bad, cuts into LIHTC basis and hence equity raise) or taxable income to the recipient (worse). And it can’t take the form of equity because tax benefits must be shared by all equity owners in a fashion which tracks capital accounts, which would dramatically lower the project’s equity raise. So the effective subsidy – HOME, CDBG, city/ state loans, to name a few – becomes soft debt, each separate source a new chain that constricts the property’s freedom of action. Financial necromancy is performed over the resulting capital stack to allow the conclusion that, by the time of Marley’s death, all the soft debt can somehow be repaid.

“I wear the lien I forged in life,” replied the debt. “I accrued it link by link, and year by year; I levered it on of my own free will, and of my own free will I wore it. Is its pattern strange to you?”

Debt that begins as soft petrifies over the years. Today the capital-assembly game becomes a hunt for enough soft debt to fill the widened ‘additional policy goal’ gap – and every year the system ‘works’ because some properties are financed, built, and occupied. With completion comes success … doesn’t it?

Over the ensuing 15 years, two things happen that turn the financing from functional to dysfunctional: (1) The investors consume their LIHTC benefits and as they do, their motivation reverses: from wanting to be in the transaction, they increasingly want out, and (2) that same soft debt gradually petrifies: its balance accretes and its holder forgets the original mission purpose and comes to covet the note as an asset to be collected someday. The note itself contributes to its petrification, because there it is, in black and white – a principal amount, an interest rate, a maturity date, and acceleration provisions. What new local-government administrator can read the note and think anything but This is money we will one day collect? Even more fundamentally, what local-government administrator, when asked by a developer to forgive or roll over the note, would think Why yes, releasing the city’s lien and waiving our right to repayment will surely advance my career?

All the ones I’ve encountered flinch at the very thought.

Cannot we be forgiven? When was the last time a Year 15 recapitalization transaction paid off all its soft debt? And as you answer Never, bear in mind that the debt when it matures cannot practically be forgiven – that’s Cancellation Of Debt Income, CODI, which is bad. Nor can it be pliably extended – that’s very likely a §1001 material modification that triggers a note restatement, likely new OID, and hence also some CODI. So the irony most bitter is that forgiveness, which even Ebenezer Scrooge obtained, is the worst possible tax outcome. At best we contort ourselves to roll over the debt, and roll it over again , and even time we briefly loosen its grip, it returns later, tighter.

Are these the shadows of the things that will be? Here at Recap Advisors, we work predominantly in Year 15 and beyond; every day we see properties that need recapitalization, with changes of partners, exit by the corporate investors, and new financing injected to fund renovation and repositioning – but to achieve this, we must remove or loosen the chains of soft debt that have bound the property and its owner.

The air was filled with phantoms, wandering hither and thither in restless haste, and moaning as they went. Every one of them wore liens like Marley’s debt; some few (they might be guilty governments) were linked together; none were free.

I want a system where Marley’s debt can vanish upon a redemptive act – in which soft debt financing on affordable housing could be forgiven without tax consequences, as part and parcel of suitably earnest or even permanent extension of affordability. Such a system does not exist today, and most likely needs a legislative change.

We won’t be able to do this in isolation; it would stick out politically and have some deficit-increasing scoring consequences. But as tax reform is increasingly likely, some of us should create an elite special tax forces group to have the optimal fix designed and written, ready to go for when the moment arises to add it to sweeping economy-reviving tax legislation.

“Are these the shadows of the things that Will be, or are they shadows of things that May be, only? Assure me that I yet may change these shadows you have shown me, by an altered life.”

I hereby volunteer for such a group.

David A. Smith is Chairman of Recap Real Estate Advisors, a Boston-based real estate services firm that optimizes the value of clients’ financial assets in multifamily residential properties, particularly affordable housing. He also writes Recap’s free monthly essay State of the Market, available by emailing

David A. Smith is founder and CEO of the Affordable Housing Institute, a Boston-based global nonprofit consultancy that works around the world (60 countries so far) accelerating affordable housing impact via program design, entity development and financial product innovations. Write him at