News & Insights

By: Jon Ringlein  Since the landscape surrounding real estate has started to evolve over the years, Low-Income Housing Tax Credits (LIHTC) have become increasingly complex. To assist in managing affordability limitations, property owners have access to several resources through the Qualified Contract (QC) option, as outlined in Section 42 of the Internal Revenue Code (IRC).    Below, we will take a deeper dive into the qualified contract option and the information needed to take advantage of this option.    

Understanding the Foundation 

Under IRC Section 42, LIHTC properties commit to a minimum 30-year affordability term, comprising a 15-year Initial Compliance Period and an additional 15-year extended use period regulated by the LIHTC Land Use Restriction Agreement (LURA). Rising property values have posed additional challenges to owners and buyers of LIHTC properties seeking an early release from affordability restrictions.   The QC option, available in year 15 of the Initial Compliance Period, is a strategy for release from stringent LIHTC commitments.   To take advantage of this process…  

• An application is submitted to the State HFA, triggering a one-year period during in which the HFA strives to secure a buyer committed to upholding affordability restrictions throughout the Extended Use Period.  
• If no buyer is secured, the property is released from LIHTC restrictions, with a phased three-year transition for existing tenants. 

 

Calculation of the QCP 

An important aspect of the QC process is assessing the property’s value by calculating the Qualified Contract Price (QCP). This calculation involves a formula based on several components: 

1. Original Equity: The initial investment used to purchase tax credits. 
2. Cost-of-Living Adjustment: An increase based on the first-year tax credits claimed. 
3. Additional Capital Contributions: Any extra contributions not included above. 
4. Cash Distributions: Consideration of income available from the property. 
5. Fair-market Value (FMV) of Land and Non-low-income Portion: An appraisal to assess the FMV of the land and any non-low-income portions. 

Each of these elements contributes to establishing an inflation-adjusted return on the initial equity contribution made for LIHTC acquisition. A CPA with knowledge of the QC process should prepare the calculations and assist with the application process.  A CPA would typically require the following: 

• Reviewed financial reports: From the date the property was used to the end of the most recent year. 
• Tax returns with completed 8609s: From the property’s placed-in-service date to the most recent year-end. 
• End-price verification: Compiled when the project was implemented. 
• Partnership agreement: From inception, including all subsequent amendments. 
• Original loan documents: Detailing the property’s financial structure. 
• Land use restriction agreement/covenants: Outlining the property’s restrictions. 

Property owners must provide the calculation of the QCP with their application. Since the FHA uses this in their pursuit of a buyer, it is imperative to ensure that the property’s FMV aligns with or is lower than the QCP. If the FMV is higher than the QCP, this increases the likelihood of finding a buyer within the one-year period. Typically, this is present in markets with higher-than-average property values.   

Navigating the QC Application 

The IRS has not issued final regulations on the QC process, which is unique to each state, but the differences may include methods of calculating QCP, required documentation, and associated fees. In some states, developers are required to waive QC rights when applying for tax credits, which removes this option.  Property owners need to carefully review their original applications and Tax Credit LURAs, noting any waivers or restrictions.  

• If no waivers exist, you then must determine the status of the property’s Initial Compliance Period and/or Extended Use Period.  
• The QC request can be submitted in the last year of the Initial Compliance Period (after the 14th year) or any time within the Extended Use Period, with additional years potentially added based on original commitments. 

Acceptance of a QC application triggers the State HFA’s responsibility to present the owner with a buyer. In the case of a failed sale due to owner default, the one-year period concludes, and affordability restrictions persist. If no buyer is found by the period’s end, the property is released, with existing low-income tenants granted a three-year de-control period.   Despite the release from LIHTC restrictions, the de-control period ensures a phased transition for existing low-income tenants. During these three years, rent adjustments are typically capped to ease the impact on tenants. As with other aspects of the QC process, the specific rules and conditions of the de-control period may vary by state.   

Considerations Beyond LIHTC Restrictions 

It is important for owners to recognize that the QC option only releases them from LIHTC affordability restrictions. Other restrictions tied to debt instruments may endure, necessitating a comprehensive understanding of individual Restrictive Covenants. 

• Differences in state regulations 
• QCP formulas 
• Application requirements contribute to the nuanced nature of the QC process across states 

Legislative discussions on altering or eliminating the QCP formula have a potential impact on this program’s future viability.   

Maner’s Affordable Housing Experts Are Here for You 

Maner’s affordable housing experts are here to assist property owners in navigating the complex landscape of Low-Income Housing Tax Credits (LIHTC) and the Qualified Contract (QC). As LIHTC properties commit to a 30-year affordability term, including a 15-year Initial Compliance Period and a subsequent 15-year extended use period, our affordable housing experts can guide owners through the QC process available in year 15.   Contact Jon Ringlein, CPA, Senior Manager, at jringlein@manercpa.com or call us directly at 517-323-7500 for more information.