The Department of Housing and Urban Development (HUD) Office of Multifamily Housing posted a proposed Notice on its Drafting Table on August 15 to close the Qualified Contract loophole. HUD’s proposed guidance would require applicants for Federal Housing Administration (FHA) Multifamily rental and Risk Share transactions to waive their qualified contract option for Low Income Housing Tax Credits (LIHTC).

The Qualified Contract (QC) provision of the Housing Credit program allows owners of Housing Credit properties to exit the program before fulfilling the promised length of affordability. Units in Housing Credit properties are intended to be affordable for a minimum of 30 years: 15 years of official compliance and a minimum 15 years of additional affordability during what is known as the “extended use” period. Housing Finance Agencies (HFAs) responsible for allocating the credits in their state can and often do require or incentivize affordability beyond 30 years, meaning that many Housing Credit property owners across the country have committed to maintaining these properties as much-needed affordable housing for more than 30 years.

According to the National Housing Trust, after the initial 14 years of affordability, however, there is a dangerous loophole: owners are allowed to request a qualified contract ostensibly as part of plans to exit ownership of the property. This begins 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 as affordable for the duration of the promised affordability period.

Unfortunately, this is rarely the outcome when an owner requests a QC. 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, per the rules, the property owner is permitted to convert the property to market-rate on a permanent basis.

To date, more than 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 Drafting Table.

The deadline for comments is September 20.