The Department of Housing and Urban Development has proposed guidance meant to close the qualified contract loophole in the Low Income Housing Tax Credit program for Federal Housing Administration multifamily rental and risk share transactions.
The LIHTC program provides a capital subsidy and in return, requires developers and owners to maintain affordability for 30 years, including a 15-year tax compliance period and another 15 years of extended use subject to a deed restriction. In its Aug. 15 proposal, however, HUD noted that “the QC [qualified contract] provision in the LIHTC regulation allows LIHTC investors and developers, under certain circumstances, to avoid the affordability requirements after only 15 years resulting in the potential loss of thousands of affordable housing units annually to the program and the housing market.”
According to the National Low Income Housing Coalition, “the qualified contract loophole allows for properties to prematurely end their affordability requirements, and the use of this loophole results in the loss of approximately 10,000 affordable housing units annually.” The group is one of several urging the Federal Housing Finance Agency to close the qualified contract loophole and “maintain LIHTC affordability.”
LeadingAge also supports closing the loophole. The association noted that 14 years into receiving tax credits, owners of low-income housing can request a qualified contract in anticipation of selling a property but that during the 15th year, the FHA must look for a buyer, and that buyer then would be required to maintain affordability for the duration of the 30-year period.
“Unfortunately, this is rarely the outcome when an owner requests a QC. The sale price at which a property is offered during this one-year period is set by federal statute and designed to give an inflation-adjusted return to the investor,” LeadingAge noted. “More often than not, the resulting price far exceeds the value of the property, and the FHA is unable to find a willing buyer. Consequently, per the rules, the property owner is permitted to convert the property to market-rate on a permanent basis.”
HUD is accepting comments on the proposed guidance through Sept.20.
