Affordable housing stakeholders know that properties financed with Low-Income Housing Tax Credits (Housing Credits) are subject to a minimum 30-year affordability commitment. A number of states either require or incentivize longer affordability periods.
Recently, however, the affordable housing community has discovered that the qualified contract provision in Section 42 of the Internal Revenue Code, which permits owners to exit the Housing Credit program requirements after just 15 years, is leading to the loss of thousands of affordable units each year. NHT and its partners are working to raise awareness of this significant threat to the preservation of the Housing Credit portfolio. We urge all state Housing Finance Agencies (HFAs) to require or incentivize owners to waive their rights to qualified contracts.
How do qualified contracts work?
Under the qualified contract provision, an owner who wants to release their property from the extended use restriction must approach the state Housing Credit allocating agency sometime after Year 14. This triggers a one-year period during which the agency must pursue a qualified buyer who will maintain the remaining 15-year affordability commitment on the property. The purchase price under this qualified contract is established under the Housing Credit statute and is designed to give the owner an inflation-adjusted return on its original equity contribution.
After one year, if the Housing Credit allocating agency is unable to find a buyer, the original owner is released from the Housing Credit affordability restrictions.
What happens to Housing Credit properties if an owner requests a qualified contract and is ultimately released from affordability restrictions?
The qualified contract formula price almost always exceeds the market value of the property. As a result, it is extremely rare for the Housing Credit agency to find a buyer and the original owner is let out of the affordability restrictions. As owners then raise rents, affordable housing is lost. Industry research and reports from state HFAs indicate that the qualified contract process is becoming more commonly used, as some owners seek to take advantage of strong multifamily rental markets across the country. In recent years, thousands of Housing Credit units have been released from affordability restrictions annually due to the qualified contract provision.
How can state agencies limit Qualified Contracts?
Some states exercise their authority under the law to require applicants to waive their right to use qualified contracts at the time a Housing Credit allocation is made. Other states effectively eliminate the qualified contract option by providing scoring incentives in their Qualified Allocation plans to Housing Credit applicants that agree to forgo their rights to a qualified contract. A number of states, however, are silent on this issue or have established a specific procedure for taking properties through the qualified contract process.
According to NHT’s research, today 44 states either require Housing Credit applicants to waive their right to submit a qualified contract or give extra points in the scoring process under the 9 percent Credit program. In nine of those states, however, the waiver is for less than 15 years. For the 4 percent Credit program, only 20 states require or encourage applicants to waive the right to submit a qualified contract. It is also important to note that most of these restrictions and incentives have been imposed in recent years, which means that the most of Housing Credit properties allocated Credits in earlier years still retain the right to the qualified contract option.
Take action to stop the loss of affordable units
Certain property owners are utilizing the qualified contract option to escape the 30-year minimum affordability period required by the Housing Credit statute. This practice directly contradicts the intent of Congress to create a public-private partnership that provides housing affordability over the long-term.
NHT is working with its partners, including other nonprofit developers, state agencies, syndicators, and tenant advocates to propose repeal of the qualified contract option as soon as possible. A change in federal law could take years. So, states must take action immediately, both to require that all new Housing Credits allocations include a requirement to waive the qualified contract option, and to discourage current owners from utilizing the qualified contract option.
In December 2017, the National Council of State Housing Agencies released a revision of its “Recommended Practices in Housing Credit Administration,” recommending that all states require Housing Credit applicants to waive their right to submit a qualified contract for both 9% and 4% Credits. It also recommends that states establish in their QAPs disincentives for owners to undertake the qualified contract process for existing developments, including potentially awarding negative points on future applications. In addition, states are encouraged to formulate other policies that will discourage and curtail the use of qualified contracts by owners of existing developments, including conditioning the approval of transfers of Housing Credit properties or interest in Housing Credit property ownership entities on a waiver of the qualified contract option by the purchaser/transferee. In some cases, particularly in rural areas, state agencies can help owners find a solution to meeting the needs of a struggling property without resorting to the qualified contract.
We encourage everyone who is committed to the preservation of affordable rental housing to encourage their state agencies to require or incentivize owners to waive their rights to qualified contracts. For more information, please contact Ellen Lurie Hoffman, NHT’s Federal Policy Director, or Laura Abernathy, NHT’s State and Local Policy Director.