Tony Freedman Responds to Qualified Contracts Blog

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Tony Freedman Responds to Qualified Contracts Blog

Mike and Dirk: 

I am writing in response to your recent blog post concerning the draft Save Affordable Housing Act of 2019 (SAHA), which would prospectively repeal the Qualified Contract exit provision in Code section 42 and modify the manner in which the statutory qualified contract purchase price is calculated for existing properties.  In particular, the blog states that “A consequence of SAHA being enacted would be most, if not nearly all, properties, arguably having [land use restriction] 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.”

I do not share this concern.  While section 42(h)(6) does “[b]roadly speaking” describe a lot of what goes into an extended use agreement (EUA) or LURA with the applicable housing credit agency, its requirements for these agreements are specifically set forth at section 42(h)(6)(A) and (B).  Subparagraph (A) simply provides that no credit is allowed for a building in a year “unless an extended low-income housing commitment is in effect” by the end of such year.  Section 42(h)(6)(B) then tells us what must  be in the EUA in order for it to be “an extended low-income housing commitment.”  Those mandatory provisions are set forth in clauses (i) through (vi) of that subparagraph, including, at clause (i), that the agreement must require “that the applicable fraction (as defined in subsection (c)(l)) for the building for each taxable year in the extended use period will not be less than the applicable fraction specified in such agreement and which prohibits the actions described in subclauses (I) and (II) of subparagraph (E)(ii).” 

As a technical matter, nothing in the SAHA language changes 42(h)(6)(B) or the cross-referenced subparagraph (E)(ii).  Therefore, nothing in the proposed bill language would, it seems, affect whether a LURA containing the provisions required in 42(h)(6)(B) is, in fact, “an extended low-income housing commitment” for purposes of qualifying for credits.  As a practical and substantive matter, all that the SAHA language would do is make it more difficult to exercise a provision under which an owner can terminate the “extended low-income housing commitment,” which would otherwise remain in effect.  It is, therefore, difficult to see how such a change would impair that commitment and, consequently, affect a project’s eligibility for credits. 

In this respect, note, too, that subparagraph (D) of 42(h)(6) explicitly authorizes housing credit agencies to designate longer extended use periods, and further, that many agencies include numerous other requirements in their EUAs, which they often feel free to modify by agreement with the owner. 

It is also worth noting that, if SAHA is enacted as written, the legislative history could make clear that the changes made to 42(h)(6) do not have the effect of causing an EUA that contains language specifically reflecting the prior Code provisions to cease to constitute “an extended low-income housing commitment” when applied in the context of the modified Code. 

I suspect that the example giving rise to the concern expressed in your post was the release of the non-eviction rule of Rev. Rul. 2004-82.  But there are critical distinctions from this instance.  Most importantly, the non-eviction rule directly implicated a mandatory provision of 42(h)(6)(B) for extended low-income housing commitments - clause (i).  If a LURA failed, whether directly or by reference, to include the non-eviction rule, it could not be an extended low-income housing commitment.  This threatened immediate consequences for existing LURAs, since they were entered into in an environment in which the overwhelming consensus of the community had been that the non-eviction language of (E)(ii)(I) and (II) only applied to the 3-year "vacancy decontrol" period following termination.  Instead, 2004-82 said that the Code had - all along - required the non-eviction rule to operate throughout the extended use period.  As a result, we needed to rely on 42(h)(6)(J) to save existing agreements and had to modify many of those agreements in order to bring them into compliance.  Indeed, the Service published Rev. Proc. 2005-37 in order to give time for owners and states to comply and to provide guidance for implementation.

None of those concerns is present here.  Each existing EUA stands as written, and all that is changed is the manner in which one exit route is applied.

It is certainly appropriate for interested parties to discuss the soundness of the policies embodied in SAHA, and to consider whether issues might be raised about the constitutionality of such changes under the contracts or due process clauses.  Those matters, however, ought to be the focus of consideration of this provision, rather than an irrelevant and incorrect technical point.

Anthony Freedman 
Holland & Knight LLP