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Addressing Average Income in LIHTC Extended Use Commitments

Published by Mark Shelburne on Thursday, September 5, 2019 - 12:00AM

According to anecdotal reports, in 2018 many low-income housing tax credit (LIHTC) developers opted for their properties to use the average income minimum set-aside (AI). The number doubtless has increased dramatically in 2019. Some buildings may be under construction or have even been placed in service.

A crucial step at this stage is recording the LIHTC extended use commitment or agreement (EUA). In the AI context, doing so brings together a curious mix of long-standing clarity and brand-new uncertainties:

  • The requirements for EUAs, listed below, are well established.
  • By contrast, there are few mandates and no federal guidance for AI, including what, if anything, about it should be recorded.

The result is a set of issues to be resolved.

EUAs and Third-Party Rights

LIHTC allocating agencies are responsible for drafting EUAs, and Internal Revenue Code (IRC) Section 42(h)(6) covers what they need to contain.

Subsection (h)(6)(B) states:

“(i) the applicable fraction for each taxable year will not be less than specified in the EUA and the actions described subsection (6)(E)(ii) below are prohibited, and
(ii) prospective, current, or former occupants who meet the area median income (AMI) limitations have the right to enforce clause (i) above.”

There are other components not relevant to AI. (The applicable fraction is the lesser of LIHTC-eligible apartments or their share of the floor space.)

Under subsection (h)(6)(E)(ii) regulatory agreements must prohibit owners from

  • evicting or terminating the tenancy (other than for good cause) of an existing LIHTC tenant, or
  • increaing rents above what is allowed under IRC Section 42.

Note, the IRC does not require identifying the minimum set-aside elected. Instead that aspect is officially formalized on the Form 8609. Even so, most EUAs do indicate which set-aside is in effect.

Of particular importance is how subsection (h)(6)(B)(ii) creates third-party beneficiary rights. What this means is past, present, and future occupants can force an owner to comply. Also consequential is the limited extent to which the IRC mandates providing rights.  From a federal perspective tenants must be able to sue to prevent decreasing the applicable fraction, terminations without good cause, and excessive rent increases. Residents being able to enforce anything else in the EUA is entirely optional.

AI and Unit Designations

IRC Section 42(g)(1), which covers the three minimum set-asides, does not mention EUAs. For the original two (40 percent of units at 60 percent AMI or 20 percent of units at 50 percent AMI), if the agency chooses to mention the minimum set-aside, the document does not need to say a great deal.

With AI there is potentially more, namely designating the apartments’ AMI levels. Under subsection (g)(1)(C)(i) at least 40 percent of units must be “rent-restricted and occupied by individuals whose income does not exceed the imputed income limitation designated by the taxpayer with respect to the respective unit.”

Despite designations being a fundamental aspect of AI, the IRC does not explain anything about what the term means, which raises numerous questions. In summary,

  • where are percentages documented,
  • the degree of specificity necessary,
  • can there be changes, and
  • if so, under what circumstances.

In the absence of federal guidance, agencies ultimately will address each of the above. See this post for a more detailed discussion. The EUA may seem like a natural place for policies implementing answers, but it poses potential challenges and risks.

EUA Drafting Considerations

In practice nearly all EUAs provide third party beneficiary rights for the entirely of its provisions, even though doing so is not federally required. The legal consequence is to restrict the agency’s and owner’s ability to amend any part of the document: technically consent from all individuals with third party rights is necessary, but making that happen is a logistical impossibility.

While such a protection for tenants is entirely appropriate for many aspects of the EUA (e.g., terminations and rent amounts), for others it may be overly prescriptive. There may be valid reasons to update what an owner has to do or a property contains.

AI unit designations are an illustration of the very real possibility of wanting to revise expectations. For example, what if the state adopts a higher minimum wage, causing the lowest-targeted apartments to sit empty for lack of qualified households? Or the main employer closes operations and the highest AMI units remain vacant?

In cases such as these it is in everyone’s best interests for the agency and owner to set new designations. The alternatives to avoid the EUA being a barrier are:

  1.  not listing the specifics at all, or
  2.  carving them out of tenants’ third party rights.

With at least the first option, the agency’s compliance staff and property management will need access to the income and rent percentages.


LIHTC allocating agencies should carefully consider what, if anything, to include in EUAs regarding AI designations. Reaching out to interested stakeholders may be worthwhile, especially tax attorneys.

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