Understanding Qualified Contracts

As more properties in the Section 42 portfolio reach year 15 and beyond, questions and confusion are arising over the concept of how to get released from the program. Per Section 42, there are only two scenarios under which an extended-use agreement can be terminated: foreclosure or release through qualified contract. Because foreclosure is both more self-explanatory and less desirable, this article will focus solely on termination through qualified contract.

What is a Qualified Contract?

Per §42(h)(6)(E) and §42(h)(6)(F), a qualified contract is “a bona fide contract to acquire (within a reasonable period after the contract is entered into)” a building by “any person who will continue to operate…as a qualified low-income building.” In other words, a qualified contract is an agreement to:

  1. Purchase an existing Section 42 property that has completed its credit and compliance period but is still in extended use and
  2. Maintain compliance for the duration of the extended use period.

This allows the existing ownership to step out of the property while keeping it as affordable housing regulated by Section 42 compliance, therefore meeting the obligations of the recorded extended use agreement.

The qualified contract provisions of the code require the property to be purchased at a determined price. The price for the non low-income portion of a building is the fair market value, while the price of the low-income portion of a building is a calculated amount prescribed in the code. This calculation is complicated and a full explanation is beyond the scope of this article.

Who Is Involved in the Process?

To begin the qualified contract process, the owner of a Section 42 building must make a request to the applicable state housing finance agency asking that the HFA find a person to acquire the building through qualified contract. Release through qualified contract cannot occur until the completion of year 15, but the request can be made by the owner at any time after the completion of year 14. The owner must submit all relevant information pursuant to the specific HFA’s qualified contract policy. The qualified contract regulations provide “administrative discretion” to HFAs, so it is imperative that the owner understands the policies and forms specific to that state before submitting a request.

Upon its receipt, a one-year period begins during which the HFA must offer the building for sale to the general public in an attempt to find a buyer at the determined qualified contract price. The HFA will first review all submitted information for accuracy and to ensure that the qualified contract price was correctly calculated. Failure to provide essential information (including failure to pay administrative fees if required by the HFA) can result in a delay of the beginning of the one-year period.

What Are the Possible Outcomes?

If the HFA is able to find a buyer at the determined price during the one-year period, then the qualified contract is presented to the owner. This should result in the purchase of the property and the new owner becomes responsible for maintaining program compliance for the duration of the extended use period, based on the post-Year 15 compliance requirements set by the applicable HFA. If a qualified contract is presented but the owner rejects the contract, then the owner remains responsible for compliance. In this scenario, the HFA may choose to disallow future requests to find a buyer or to limit the amount of future requests that will be accepted.

If the HFA is unable to find a buyer at the determined price during the one-year period, the extended-use period is terminated effective the date that the one-year period ends. Once it is terminated, the HFA will generally issue a lien release to remove the recorded extended-use agreement from the property. However, two tenant protections remain on the property for a period of three years from the date of termination (sometimes referred to as the “decontrol period”).

First, the owner may not evict or terminate the tenancy of any existing low-income household for other than good cause. Second, the owner may not increase the gross rent of any existing low-income household except as allowable under Section 42 rent limits. These two protections apply only to the existing low-income households in place prior to the date of termination. Households moving in after that date are not protected and have restrictions on neither rent nor income.

Some Considerations Before Requesting a Qualified Contract

Requesting a qualified contract may or may not be the right decision depending on the situation, so the owner should consider a number of factors prior to making such a request. A few questions to consider:

  • Did I waive the right to request a qualified contract? Some state HFAs require owners to waive their right to request a qualified contract or award points in their QAP scoring for owners who choose to waive that right.
  • What administrative burden is involved? As previously mentioned, each state has the administrative discretion to require certain submission items which may include administrative fees. Read the applicable HFA policy.
  • Will this affect my reputation? Some, but certainly not all, HFAs may look poorly upon owners that exercise this right. If you want to do future projects in that state, make sure you understand how requesting a qualified contract will affect your ability to obtain future funding.
  • Am I willing to sell? In many cases the determined price is an obstacle to finding a buyer. However, if the HFA does identify a buyer, are you in fact willing to sell the property? The decision to reject a qualified contract presented by the HFA could limit your ability to make future requests.

Matt Rayburn is the deputy director of compliance and asset management for the Indiana Housing and Community Development Authority (IHCDA). In this position, he directs ongoing compliance monitoring for the LIHTC program, as well as the closeout and ongoing compliance monitoring for projects funded through HOME, CDBG, and IHCDA’s Affordable Housing and Community Development Trust Fund.