HUD Proposes Closing Qualified Contract Loophole

HUD recently proposed guidance impacting Low-Income Housing Tax Credit (LIHTC) projects involved in Federal Housing Administration (FHA) Multifamily Rental and Risk Share programs. The proposed guidance is meant to close the qualified contract loophole in the LIHTC program.

One level deeper: The qualified contract provision in the LIHTC program allows owners to exit affordability requirements after 15 years rather than the intended 30 years. After Year 14, a site owner can request that the state housing credit allocating agency find a qualified buyer who will purchase the property and maintain its affordability. 

If the agency cannot find a buyer within one year at the specified "qualified contract" price, which often exceeds the property's market value as affordable housing, the owner is released from affordability obligations. This results in the qualified contract loophole, where many sites prematurely exit the program, reducing the availability of affordable housing.

The bottom line: According to the proposed requirement, LIHTC site owners seeking access to FHA’s rental and risk share insurance programs will be required to waive their right to the Qualified Contract (QC) provision in the LIHTC statute. The new requirement will apply to projects starting in 2025.

HUD is interested in any general or specific feedback on the proposed HUD guidance and is accepting comments on the proposed guidance through Sept. 20. You can see the draft publication and get more information on submitting feedback here.