NHT Hails Bill to Eliminate Loss of Affordable Housing Through Qualified Contracts

We are thrilled that this week, legislators introduced The Save Affordable Housing Act, a crucial piece of legislation needed to preserve irreplaceable affordable rental housing serving low-income families.  This important bipartisan and bicameral bill will ensure that properties financed with the Low-Income Housing Tax Credit (Housing Credit) are maintained as affordable for at least 30 years.  This bill will make a correction to Qualified Contract provision in Section 42 of the Internal Revenue to stem the loss of thousands of affordable homes annually from affordability restrictions and enable mission-driven nonprofits to maintain the affordability of Housing Credit properties for the long-term, as Congress intended.  Over the past two years, NHT has led the effort to build congressional understanding and support for this critical legislation. 

The Save Affordable Housing Act was introduced both the Senate and the House. The Senate bill was introduced by Senators Ron Wyden (D-WA) and Todd Young (R-IN) and the House bill was introduced by Representatives Joe Neguse (D-CO-02), Don Beyer (D-VA-08) and Jackie Walorski (R-IN-02).  We appreciate the leadership of these legislators to champion this bill.

What is the Qualified Contract Option and How Does it Work?

Affordable housing stakeholders know that properties financed with Housing Credits are subject to a minimum 30-year affordability commitment: a 15-year initial compliance period enforced by the IRS through tax credit recapture rules, and a minimum 15-year “extended use” period enforced by state administration of the program and a deed restriction recorded against the property.  A number of states either require or incentivize longer affordability periods

There are two exceptions to the requirement that Housing Credit properties remain affordable for 30 years: 1) in the case of foreclosure; and 2) where a Qualified Contract is presented to the state Housing Credit agency.  Under the Qualified Contract provision, an owner of a Housing Credit property may, after Year 14, approach the Housing Credit allocating agency to request a Qualified Contract. This request begins a one-year period during which the allocating agency seeks a qualified buyer to purchase the property and maintain it as affordable for the duration of the extended use period. The required purchase price for a Qualified Contract is stipulated by Section 42 and was designed to prevent backend windfalls to owners and investors by limiting them to an inflation-adjusted return on the original equity contribution.

While the original intent of this provision was to create a limited return and some liquidity for investors at a time when the Housing Credit was an unproven program, it has come to function as a loophole that allows a nearly automatic affordability op-out after just 15 years of affordability. This is because the Qualified Contract formula price in nearly all cases significantly exceeds the market value of the property as affordable housing. As a result, it is extremely rare for the allocating agency to find a buyer willing to pay the Qualified Contract price. If the allocating agency fails to identify a qualified buyer within one year, the property is released from the affordability requirements of the Housing Credit program. At that point, the owner is free to either sell the property at market value without any deed restriction or the owner may continue to own and manage the property charging market rents.  In recent years, some states have adopted policies requiring or incentivizing owners to waive their right to a Qualified Contract, however the option is still available to all properties allocated Housing Credits before those policies were modified.

What is the Scope of the Problem, and Why Now?

In recent years, many rental markets have heated up considerably. According to the U.S. Census Bureau, on average apartment rents have climbed by over 42 percent in the last decade. This means that in many markets, Housing Credit properties could demand far higher rents if they did not have the deed restrictions required by the program. This creates an incentive for owners to seek a way to lift the affordability restrictions on their properties even though such action was not contemplated when the property was originally financed with Housing Credit subsidies. Housing Credit properties located in high opportunity areas or areas that have gentrified since the property was placed in service are most at risk. These neighborhoods are often the most difficult to develop new affordable housing in and/or are experiencing high rates of displacement of low-income households, so preserving existing units is extremely important.

More owners are using Qualified Contracts as a strategy to flip Housing Credit properties to market—and thus capitalize on the differential between affordable and market rents—after only 15 years of affordability, a far shorter affordability period than Congress intended. Recent analyses from the National Council of State Housing Agencies indicate that the Qualified Contract process is resulting in the premature loss of well over 10,000 low-income units annually. As of 2017, approximately 50,000 units nationwide have already been lost, and in that year alone, owners served notice to state allocating agencies that they wanted to begin the Qualified Contract process on additional properties comprising approximately 18,000 units.

NHT is deeply concerned that unless the Qualified Contract process is corrected, the number of Housing Credit properties lost before fulfilling their intended 30-year affordability period will continue to grow at an accelerating rate. Preserving existing affordable housing is cost-effective and critically important given the nation’s rental housing affordability crisis.  That is why we took the lead in educating Members of Congress about the need to close this inadvertent loophole and protect affordable properties and the Housing Credit program itself.

How The Save Affordable Housing Act Would Correct the Qualified Contracts Problem

While some states have or are in the process of implementing policies in an attempt to mitigate the loss associated with Qualified Contracts, federal legislation is required to correct the Qualified Contract provision in Section 42.

The Save Affordable Housing Act of 2019 would simply:

• Repeal the Qualified Contract option in Section 42 for future developments (after December 31, 2018), thus eliminating the Qualified Contract provision from being used as an opt-out for properties awarded Housing Credits or bonds beginning in 2019; and
• Correct the statutory price for purchase of existing properties so that it is based on fair market value of the property as affordable housing.

The repeal of the Qualified Contract provision would only apply to future developments and would not disrupt the Housing Credit industry. Lenders and investors are very willing to finance Housing Credit properties in states where a Qualified Contract is not an option. States with Qualified Contract waivers and other anti-Qualified Contract provisions in their state Qualified Allocation Plans have not experienced any downturn in investor interest or Housing Credit utilization.

Under the legislation, owners of existing properties would retain the option to pursue a Qualified Contract.  The only change is that the statutory price would have the same basis as any other sale: fair market value. By correcting the statute’s pricing formula for existing properties, state Housing Credit agencies would be far more likely to secure a qualified buyer.  A Housing Credit property owner could still opt-out of owning and managing the property and there would be far greater likelihood that a qualified buyer could maintain the property’s affordability, thereby not disrupting the housing security and affordability of its existing tenants.

We believe it is imperative that Congress correct the Qualified Contract loophole to ensure that the Housing Credit can fulfill its intended program goal of financing at least 30 years of affordability for low-income residents.  We are joined in supporting The Save Affordable Housing Act of 2019 by our national partners including Enterprise Community Partners, Housing Partnership Network, Local Initiatives Support Corporation/National Equity Fund, Low Income Investment Fund, National Association of Affordable Housing Lenders, National Association of State and Local Equity Funds, National Council of State Housing Agencies, National Housing Conference, National Housing Law Project, and Stewards of Affordable Housing for the Future.