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problem: Assume market rate apartments produce net cash flow of USD 10,000/yr in perpetuity, while affordable units provide only USD 5,000. However, if the developer commits that 25 percent of the units will be forever affordable, then she will qualify for a perpetual loan USD 4,375,000 at an interest rate 50 basis points [0.5 percent] below the market interest rate. [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 USD 1,000/yr per low-income unit. If property yields [total returns, opportunity cost of capital] are 10 percent at the PBT level [assume same for market and affordable apartments], loan market interest rates before-tax are 5 percent, yields on otherwise similar municipal bonds [tax-exempt loans] are 4 percent, and the developer faces an income tax rate on investment returns of 20 percent, then should the developer make her 100-unit apartment complex a mixed-income affordable development or a 100 percent market development? Tell why, and how much difference it makes [i.e., evaluate the two alternatives]. Answer this problem from a market value [MV] perspective [but be careful: the LIHTCs are after-tax cash flows].

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