Property owners who wish to exit the Section 42 Low-Income Housing Credit (LIHC) Program before the property’s extended use period may consider using the qualified contract process. Any time after the 14th year of the compliance period, a property owner can request the state housing agency find a buyer who will continue to operate the building as a LIHC property. The building price is computed using a formula described in the Section 42 statute and regulations. If the housing agency is unable to find a buyer within a year, the property is relieved of its extended use restrictions and, after a transition period, is free to operate the building at market rate.
The process can be complicated and the filing requirements extensive. Here are five things you should know.
- Save those documents
The building’s qualified contract calculations are based on many factors, including equity contributions made at the project’s origination and distributions throughout the compliance period. Tax returns, financial statement audits, and operating agreements supporting contributions and distributions will be needed. If the property is being acquired from a third-party, obtain the prior year tax returns, financial statement audits, and operating agreements as a condition of the sale.
- Non-low-income spaces need to be assessed
If the property has a commercial component or market rate component, a special appraisal will need to be obtained to assess the value of the non-low-income portion of the building. Small projects may be able to use a county or city assessed valuation. Check your state guidelines for specifics.
- Not all cash is created equal
Cash available to be distributed at the time of the qualified contract calculation reduces the qualified contract building value. Examples may be operating cash in excess of current obligations, excess security deposit cash, or reserve and escrow accounts without restrictions. Cash required to remain with the property is not included.
- The transition to market rate is not immediate
If the state housing agency does not find a buyer at the qualified contract price within one year, the property may transition to market rate housing. However, the transition is not immediate. A three-year decontrol period, as set forth in Section 42, exists whereby the owner may not evict or terminate the lease of any existing low-income tenants and cannot exceed gross rent thresholds.
- Know your regulatory agreements
If the property is subject to more than one regulatory agreement, the qualified contract process may not release the property from affordable housing extended use provisions. Regulatory agreements for affordable financing or other state and local regulatory agreements may continue to enforce the low-income extended use period.
Although the qualified contract process originates and follows the Internal Revenue Code, each state housing agency is responsible for the review and type of reporting required. MarksNelson can help guide you through the process. Give us a call at (816) 743-7700 if we can help.