HUD Moves to Close Qualified Contract Loophole
(Aug. 20, 2024) On Aug. 15th, the U.S. Department of Housing and Urban Development (HUD) Office of Multifamily Housing posted a proposed Notice on its Policy Drafting Table to close the Qualified Contract (QC) loophole in the Low-Income Housing Tax Credit (LIHTC) program. HUD’s proposed guidance would require applicants for Federal Housing Administration (FHA) Multifamily rental and Risk Share transactions to waive their QC option for LIHTCs.
Units in LIHTC properties are intended to be affordable for a minimum of 30 years: 15 years of official compliance and a minimum of 15 years of additional affordability during what is known as the “extended use” period. Moreover, state Housing Finance Agencies (HFAs) responsible for allocating the credits can and often do require or incentivize affordability beyond 30 years, meaning that many LIHTC property owners across the country have committed to maintaining these properties as much-needed affordable housing for more than 30 years.
However, the QC provision of the LIHTC program allows owners of LIHTC properties to exit the program before fulfilling the promised length of affordability. According to the National Housing Trust, after the initial 14 years of affordability, this creates a dangerous loophole: owners are allowed to request a QC, ostensibly as part of plans to exit ownership of the property. This triggers a one-year period during which an HFA is required to seek a buyer for the property. If the property is purchased through this process, the new owner is required to maintain the property’s affordability for the duration of the promised period.
Unfortunately, this is rarely the outcome when an owner requests a QC. Because 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, more often than not, the resulting price far exceeds the value of the property, and the HFA is unable to find a willing buyer. Consequently, the rules permit the owner to convert the property to market rate on a permanent basis.
To date, over 100,000 affordable homes have been lost to QCs. Many states have worked to close this loophole at the state level, but federal action is necessary to protect the affordability of LIHTC homes nationwide.
LeadingAge supports closing the QC loophole and will be commenting via the Policy Drafting Table. The deadline for comments is Sept. 20th.
Contact: Annalyse Komoroske Denio, akomoroskedenio@leadingageny.org, 518-867-8866