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Resource Center
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.
(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.
