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LIHTC Preservation

As LIHTC properties have increasingly become the vehicle for creating affordable housing, their preservation is vital. The LIHTC program was established in 1986 and for the first few years required that project owners agree to 15-year use restrictions in order to participate. Beginning in 2002, use restrictions on thousands of LIHTC properties began to expire, often requiring preservation efforts targeted to such buildings if rents were below-market.

Fortunately, now there are additional restrictions and tools for preserving LIHTC properties. In 1989, Congress enacted the Revenue Reconciliation Act, which requires LIHTC properties funded after 1990 to commit to at least 30 years of affordability restrictions or to sell the property after the 14th year to certain buyers for a “qualified contract” price. The Omnibus Budget Reconciliation Act of 1990 allows tenant groups, nonprofit organizations, or certain government agencies first right of refusal to purchase for continued affordable use at a specified formula price (hopefully below-market) if the owner wants to exit the program. And individual states have implemented their own preservation requirements, some of which include extended use agreements and other preservation tools as requirements in their Qualified Allocation Plans.

Current Issues
Qualified Contracts
After the fourteenth year of the 15-year compliance period, LIHTC property owners can opt out of the program by selling the property to certain buyers for a qualified contract prices. The owner would have to signal its intent to sell the property to the state Housing Finance Agency, which would then have one year to find a qualified buyer.

Section 42(h)(6)(F) of the Internal Revenue Code states:

the term ''qualified contract'' means a bona fide contract to acquire (within a reasonable period after the contract is entered into) the non low-income portion of the building for fair market value and the low-income portion of the building for an amount not less than the applicable fraction (specified in the extended low-income housing commitment) of –
(i) the sum of -
(I) the outstanding indebtedness secured by, or with respect to, the building,
(II) the adjusted investor equity in the building, plus
(III) other capital contributions not reflected in the amounts described in subclause (I) or (II), reduced by
(ii) cash distributions from (or available for distribution from) the project.

If no qualified buyer is produced within the 365-day period, the owner may be released from all use restrictions and obligations. However, if the owner refuses to sell the property, it must abide by the extended use restrictions enacted by the Revenue Reconciliation Act. Note that this option is only available to owners who did not waive their right to seek a qualified contract or agree to a longer use agreement when signing their restricted use agreement with the state HFA.

Recapitalization
Some LIHTC properties facing the end of their use restrictions face a lack of operating and replacement reserves to ensure that their property is maintained. Without sources of capital to invest in rehabilitation, many properties face deterioration, increased vacancies and a deepening cycle of budget shortfalls. Thus, the properties may lack the resources to continue to operate. In order to keep LIHTC properties viable, properties must be able to identify new sources of capital or otherwise maintain low debt service to increase the availability of funds for proper maintenance and continuing operation, and fund adequate replacement reserves.

Cases

Nordbye v. BRCP/ GM Ellington, No. A141698 (Ore. Ct. App., Oct. 26 2011)

On October 26, 2011, the Oregon Court of Appeals issued a major decision affecting the preservation of Low-Income Housing Tax Credit developments. In Nordbye v. BRCP/GM Ellington, the court ruled that tenants have the right to enforce restrictive covenants that, among other things, do not allow a state credit allocation agency to terminate a property from the program for an owner’s noncompliance...

Materials

Missouri Housing Development Commission Checklist

This sample checklist, created by the Missouri Housing Development Commission, lists steps that one should take when a LIHTC property is nearing the end of its use restriction in order to preserve the property. Additionally, click here for sample letter from an owner to the MHDC requesting that it find a preservation purchaser.

Present Realities, Future Prospects: Chicago's Low Income Housing Tax Credit Portfolio

This Chicago Rehab Network report summarizes information about real operating costs of existing projects, supplemented by information about income and vacancies, cash flow and reserves in Chicago. The report was written as a response to the sudden failure of several large LIHTC portfolios to assess the health of the LIHTC stock. The report analyzes a snapshot of this data and recommends changes to ensure the preservation of LIHTC housing. Both a Summary Report and a Research Analysis are available.

Statutes and Regulations

Proposed Regulations regarding Qualified Contracts

These proposed regulations would provide guidance on determining qualified contract prices. A final rule has not yet been issued.

Comments to Proposed Qualified Contract Rule

These comments explain the preservation concerns with the proposed qualified contract rule.

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