Congress Considering Retroactive Changes Affecting Low-Income Housing Tax Credit Property Owners, Part II

Published by Dirk Wallace, Michael Novogradac on Friday, July 26, 2019 - 12:00am

Two bills recently introduced in Congress would retroactively alter rights of existing owners of low-income housing tax credit (LIHTC) properties; one bill changes the terms of rights of first refusal (ROFR) and the other alters qualified contract exit price calculation. Part I of this blog post reviewed rights of first refusal. Part II below reviews qualified contracts.

Qualified Contracts

Under current law, LIHTC eligibility generally requires that a building owner commit to affordability for at least 30 years: an initial 15-year compliance period, plus an additional 15-year extended-use period enforced by state allocating agencies (though some states extend the extended-use period beyond 15 years). The affordability period is subject to three exceptions: foreclosure, sale to existing tenant households, and the qualified contract process. The last of these is available only to the extent not precluded by state law.

Where the qualified contract process is permitted, after Year 14 of the compliance period, a property owner can request a qualified purchase contract from the appropriate LIHTC allocating agency. The agency then has one year to find a qualified buyer to purchase the property and maintain it as affordable for the remainder of the extended-use period.

Finding a buyer can be difficult. The qualified contract price is set by statute in section 42(h)(6)(F), and, in many cases, the price is greater than the fair market value for the property on an unrestricted basis. If no buyer is found, the owner can choose to terminate the affordability requirements for the property after as little as 15 years (at the expiration of the state’s one year period to find a buyer, following the property owner’s qualified contract request in year 14 of the compliance period).  For a period of three years afterwards, the owner may neither raise the rents of existing households (beyond what would be allowed under LIHTC limits) nor terminate tenancies without good cause.

The National Council of State Housing Agencies (NCSHA) reports that about 10,000 low-income units a year are losing their LIHTC rent and income restrictions because of the qualified contract process. As of 2017, about 50,000 affordable housing units lost their tax credit rent and income restrictions, according to NCSHA.

Save Affordable Housing Act of 2019 – Qualified Contract Provision

On June 25, the Senate and House introduced companion legislation: the Save Affordable Housing Act of 2019 (the SAHA, or S. 1956 in the Senate and H.R. 3479 in the House). The SAHA alters the qualified contract exception on both a prospective and retroactive basis.

Prospective change

Prospectively, the SAHA proposes to eliminate the qualified contract option for all recipients of LIHTCs starting in 2019.

Retroactive change

At a high level, the existing formula for the minimum contract price takes into account the following:

  • Fair market value of the non-low-income portion of the building; plus
  • The applicable fraction specified in the LIHTC commitment multiplied by the sum of
    • Outstanding indebtedness secured by, or with respect to, the building,
    • Adjusted investor equity in the building, plus
    • Other capital contributions, less
    • Cash distributions from (or available for distribution from) the project.

The SAHA would change this price such that none of the existing debt, owners’ equity, capital contributions, nor cash distributions, is taken into account. Rather, the price would be the fair market value of the building as a whole (non-low-income and low-income units both), taking into account rent restrictions. This would likely increase the success of states in identifying a buyer by aligning the purchase price more closely to fair market value on a rent-restricted basis, which may help prevent conversion of LIHTC units.

The SAHA has retroactive impact, as it would modify the qualified contract price for existing building owners where a building received its allocation of LIHTCs before Jan. 1, 2019 and submitted a request after the date of enactment. Due to the application of SAHA to existing buildings and commitment agreements, LIHTC recipients’ contractual right or anticipated contractual right to receive the section 42(h)(6)(F) minimum price, may be impacted.

However, these properties are governed by existing land use regulatory agreements (LURAs), which are governed by state law. Depending upon their language, they may or may not be affected by a change in tax law. 

Broadly speaking, 42(h)(6) describes what is required in order to qualify for LIHTCs.  A consequence of SAHA being enacted would be most, if not nearly all, properties, arguably having agreements inconsistent with the revised law.  If so, existing properties might not be eligible for LIHTCs due to their LURA containing an invalid qualified contract provision.

The effective date of the proposed change adds a complication in that the amendment price calculation applies to buildings for which a written request is submitted.  This may mean existing properties are not at risk of being invalid until such time the owner submits a request.  Under that interpretation, all requests would need to wait until after year 15, since that is when an invalid LURA does not create a tax problem.

Conclusion

Additional information on the SAHA, including scope of impact of the current qualified contract exception and Congressional support of SAHA, is contained in the July 2, 2019 Tax Credit Tuesday podcast (transcript here). It is notable that the SAHA enjoys bipartisan sponsorship, with several sponsors in each chamber serving as members of the tax-writing committees to which the legislation was referred. Novogradac will continue to monitor for updates and will post new information as it is available.