LIHTC Preservation and Compliance

Resources / June 22, 2022

Tags: Affordable Housing Preservation, Low-Income Housing Tax Credit

Compliance

Although LIHTC properties must commit to at least 30 years of affordability, they are only subject to a 15-year “compliance period.” This is the period of time where the tax credits that have been given to developers can be taken away or “re-captured” if the property fails to comply with LIHTC regulations. A re-capture is only used in extreme cases.

During the following 15 years (or more) the property is still required to maintain affordability and comply with LIHTC rules and regulations. However, without the ability to take back the credits, the state allocating agencies do not have much of an enforcement arm in which to ensure compliance. The IRS has not issued guidance regarding this issue. However, state tax allocating agencies are authorized to develop their own enforcement mechanisms and advocates should utilize the QAP process and other avenues to advocate for enforcement. For example, California has authorized it’s agency to impose fines on LIHTC properties for non-compliance.

LIHTC Preservation Issues

Qualified Contracts

The qualified contract process allows LIHTC property owners to opt out of the program after the first 15 years. To utilize this process, the owner has to inform the state tax allocating agency of its intent to sell and the agency would then have one year to find a qualified buyer. If no qualified buyer is produced within the 365-day period, the owner may be released from all use restrictions and obligations. However, if the owner refuses to sell the property, it must abide by the extended use restrictions. Note that this option is only available to owners who did not waive their right to seek a qualified contract or agree to a longer use agreement when signing their restricted use agreement with the state HFA.

“Planned Foreclosures”

The Internal Revenue Code allows properties to leave the LIHTC program early if the property is subject to a foreclosure. However, advocates have started to see instances of “planned foreclosures,” which are planned actions by partners in LIHTC developments that are designed to result in a foreclosure, or deed-in lieu, to wipe out the affordability restrictions on these properties. Although Congress specifically gave the Treasury Secretary the authority to determine that such intentional transactions do not qualify as foreclosures that terminate the LIHTC affordability requirements, the IRS has declined to issue any guidance or to take any action regarding this issue.

Recapitalization/Expiring Uses

Use restrictions on LIHTC properties have begun to expire, often requiring preservation efforts targeted to such buildings to maintain affordability. Some LIHTC properties facing the end of their use restrictions face a lack of operating and replacement reserves to ensure that their property is maintained. Without sources of capital to invest in rehabilitation, many properties face deterioration, increased vacancies and a deepening cycle of budget shortfalls. Thus, the properties may lack the resources to continue to operate. To keep LIHTC properties viable, properties must be able to identify new sources of capital or otherwise maintain low debt service to increase the availability of funds for proper maintenance and continuing operation, and fund adequate replacement reserves.

Cases

In Nordbye v. BRCP/ GM Ellington, 246 Or.App. 209, 266 P.3d 92 (Or. Ct. App. 2011), the court ruled that tenants have the right to enforce restrictive covenants that, among other things, do not allow a state credit allocation agency to terminate a property from the program for an owner’s noncompliance. Read NHLP’s amicus brief.

Other Materials (Updated January 2021)

NHLP and our national partners’ 2017 comments to the IRS regarding qualified contracts and planned foreclosures.
2017 NHLP and HJN comments to the National Council of State Housing Agencies regarding compliance issues, qualified contracts, planned foreclosures, and other LIHTC issues.
NHLP’s Comments on the IRS’s proposed changes to the LIHTC program’s Average Income Test (AIT)
NHLP submitted comments on the IRS’s proposed rule that would prohibit owners of LIHTC AIT properties from redesignating a unit’s imputed income limitation. The comment letter advocates for the IRS to give owner’s the ability to re-designate a unit’s imputed income limitation when necessary to comply with fair housing and VAWA obligations and when necessary to accommodate the floating unit designations allowed by other subsidy programs.