was added which the “extended use requirement,” … · randall will discuss the approach of the...
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LIHTC COMPLIANCE AFTER THE COMPLIANCE PERIOD: ONCE THE CREDITS ARE GONE
INTRODUCTION
Section 42 was enacted in 1986, and in 1989, Sec. 42(h)(6) (reprinted below) was added which the “extended use requirement,” obligating all LIHTC project to be subject to an affordability covenant lasting at least 30 years (i.e., for the 15-year Compliance Period, plus an additional 15 years). This panel will discuss various policy, legal and practical aspects of the extended use requirement.
* * * * * * * * A. Laura Abernathy. Not surprisingly, extended use restrictions can have a substantial effect on future affordability of housing developed under the Housing Credit program. Extended restrictions prevent an escalating loss of affordability and allow the assisted stock to grow, ensuring that units remain affordable to low-income families in the long term. Starting with the general policy considerations of long-term affordability, Laura will explore the various ways in which Housing Finance Agencies use their Qualified Allocation Plans to incentivize and in some cases require affordability beyond the federally mandated 30 years. The topic of qualified contracts and how this relates to long-term affordability will also introduced; the presentation will explore the trend among HFAs of requiring Housing Credit applicants to waive their rights to a qualified contract. B. Mark Shelburne. Mark will discuss the legal context of two ways to terminate the extended use period. Owners across the country continue to request qualified contacts, which is the start of a complex process. Mark will explain some of the specific statutory provisions, including both calculation of the statutory “price” and process for handling requests. He also will discuss whether QCs lead to significant numbers of sales. Fortunately foreclosures are a far less frequent way out of extended use. The rate for LIHTC properties is lower than for any other form of real estate. However, even with these small numbers, there is a concern with how they could occur. In a few isolated instances, foreclosures appear to have been planned as a way to end affordability. Mark will describe these and a proposal in the recently filed Affordable Housing Credit Improvement Act legislation (aka Cantwell-Hatch) to address this potential problem. C. Katie Day. It is not uncommon for developers of affordable housing projects to seek to modify the terms of the extended use agreement prior to its expiration, e.g., an amendment that relaxes or reduces affordability requirements. Some credit agencies have been willing to entertain these requests. However, it’s not clear that credit agencies have the authority to make these modifications, particularly in light of the statutory language of Section 42(h)(6)(B)(ii) of the Code, which allows former, current and prospective tenants who meet the income eligibility requirements to enforce the provisions of the extended use agreement and the decision of the Oregon Court of Appeals in Nordbye v. BRCP/GM Ellington (holding that a former tenant of a low-income
housing project has the right to enforce an extended use commitment despite a release agreement between the owner of the project and the state housing credit agency to terminate the agreement early). D. Randall Shorr. Randall will discuss the approach of the Ohio Housing Finance Agency (“OHFA”) to these issues, including its post-Year 15 monitoring requirements, its handling of qualified contract requests and its policies relating to requests for amending the LURA. Ohio has a significant portfolio of single-family lease purchase units, and of course the covenant must be released in order to deliver clear title to lease-purchase buyers, which still providing protections to renters who remain in these projects. Many multifamily projects reaching the end of the compliance period are facing severe financial challenges, and OHFA has developed a set of policies for considering requests for modifications to affordability covenants to allow these projects to remain financially viable.
* * * * * * * *
§42(h)(6) Buildings eligible for credit only if minimum long-term
commitment to low-income housing
(A) In general
No credit shall be allowed by reason of this section with respect to any
building for the taxable year unless an extended low-income housing
commitment is in effect as of the end of such taxable year.
(B) Extended low-income housing commitment
For purposes of this paragraph, the term "extended low-income housing
commitment" means any agreement between the taxpayer and the housing
credit agency -
(i) which requires that the applicable fraction (as defined in subsection
(c)(1)) for the building for each taxable year in the extended use period
will not be less than the applicable fraction specified in such agreement
and which prohibits the actions described in subclauses (I) and (II) of
subparagraph (E)(ii),
(ii) which allows individuals who meet the income limitation applicable to
the building under subsection (g) (whether prospective, present, or
former occupants of the building) the right to enforce in any State court
the requirement and prohibitions of clause (i),
(iii) which prohibits the disposition to any person of any portion of the
building to which such agreement applies unless all of the building to
which such agreement applies is disposed of to such person,
(iv) which prohibits the refusal to lease to a holder of a voucher or
certificate of eligibility under section 8 of the United States Housing Act
of 1937 because of the status of the prospective tenant as such a holder,
(v) which is binding on all successors of the taxpayer, and
(vi) which, with respect to the property, is recorded pursuant to State law as
a restrictive covenant.
(C) Allocation of credit may not exceed amount necessary to
support commitment
(i) In general
The housing credit dollar amount allocated to any building may not
exceed the amount necessary to support the applicable fraction specified
in the extended low-income housing commitment for such building,
including any increase in such fraction pursuant to the application of
subsection (f)(3) if such increase is reflected in an amended low-income
housing commitment.
(ii) Buildings financed by tax-exempt bonds
If paragraph (4) applies to any building the amount of credit allowed in
any taxable year may not exceed the amount necessary to support the
applicable fraction specified in the extended low-income housing
commitment for such building. Such commitment may be amended to
increase such fraction.
(D) Extended use period
For purposes of this paragraph, the term "extended use period" means the
period -
(i) beginning on the 1st day in the compliance period on which such
building is part of a qualified low-income housing project, and
(ii) ending on the later of -
(I) the date specified by such agency in such agreement, or
(II) the date which is 15 years after the close of the compliance period.
(E) Exceptions if foreclosure or if no buyer willing to
maintain low-income status
(i) In general
The extended use period for any building shall terminate -
(I) on the date the building is acquired by foreclosure (or instrument in
lieu of foreclosure) unless the Secretary determines that such
acquisition is part of an arrangement with the taxpayer a purpose of
which is to terminate such period, or
(II) on the last day of the period specified in subparagraph (I) if the
housing credit agency is unable to present during such period a
qualified contract for the acquisition of the low-income portion of
the building by any person who will continue to operate such
portion as a qualified low-income building. Subclause (II) shall not
apply to the extent more stringent requirements are provided in the
agreement or in State law.
(ii) Eviction, etc. of existing low-income tenants not
permitted
The termination of an extended use period under clause (i) shall not be
construed to permit before the close of the 3-year period following such
termination -
(I) the eviction or the termination of tenancy (other than for good
cause) of an existing tenant of any low-income unit, or
(II) any increase in the gross rent with respect to such unit not
otherwise permitted under this section.
(F) Qualified contract
For purposes of subparagraph (E), the term "qualified contract" means a bona
fide contract to acquire (within a reasonable period after the contract is entered
into) the nonlow-income portion of the building for fair market value and the
low-income portion of the building for an amount not less than the applicable
fraction (specified in the extended low-income housing commitment) of -
(i) the sum of -
(I) the outstanding indebtedness secured by, or with respect to, the
building,
(II) the adjusted investor equity in the building, plus
(III) other capital contributions not reflected in the amounts described
in subclause (I) or (II), reduced by
(ii) cash distributions from (or available for distribution from) the project.
The Secretary shall prescribe such regulations as may be necessary or
appropriate to carry out this paragraph, including regulations to prevent
the manipulation of the amount determined under the preceding
sentence.
(G) Adjusted investor equity
(i) In general
For purposes of subparagraph (E), the term "adjusted investor equity"
means, with respect to any calendar year, the aggregate amount of cash
taxpayers invested with respect to the project increased by the amount
equal to -
(I) such amount, multiplied by
(II) the cost-of-living adjustment for such calendar year, determined
under section 1(f)(3) by substituting the base calendar year for
"calendar year 1987". An amount shall be taken into account as an
investment in the project only to the extent there was an obligation
to invest such amount as of the beginning of the credit period and
to the extent such amount is reflected in the adjusted basis of the
project.
(ii) Cost-of-living increases in excess of 5 percent not
taken into account
Under regulations prescribed by the Secretary, if the CPI for any
calendar year (as defined in section 1(f)(4)) exceeds the CPI for the
preceding calendar year by more than 5 percent, the CPI for the base
calendar year shall be increased such that such excess shall never be
taken into account under clause (i).
(iii) Base calendar year
For purposes of this subparagraph, the term "base calendar year" means
the calendar year with or within which the 1st taxable year of the credit
period ends.
(H) Low-income portion
For purposes of this paragraph, the low-income portion of a building is the
portion of such building equal to the applicable fraction specified in the
extended low-income housing commitment for the building.
(I) Period for finding buyer
The period referred to in this subparagraph is the 1-year period beginning on
the date (after the 14th year of the compliance period) the taxpayer submits a
written request to the housing credit agency to find a person to acquire the
taxpayer's interest in the low-income portion of the building.
(J) Effect of noncompliance
If, during a taxable year, there is a determination that an extended low-income
housing agreement was not in effect as of the beginning of such year, such
determination shall not apply to any period before such year and subparagraph
(A) shall be applied without regard to such determination if the failure is
corrected within 1 year from the date of the determination.
(K) Projects which consist of more than 1 building
The application of this paragraph to projects which consist of more than 1
building shall be made under regulations prescribed by the Secretary.
Materials for “LIHTC Compliance after the Compliance Period”
2017 ABA Forum Annual Conference; submitted by Mark Shelburne
The statute governing the Housing Credit, known as Section 42, requires owners to abide
by income, rent, suitability and other restrictions for at least 30 years (known as the
“extended use period”). Congress also gave owners a way out after the first 15 years.
The opt-out process begins with the owner informing the allocating agency of its
intention to terminate the program restrictions. If the owner meets certain requirements,
the agency has one year to find a buyer willing to purchase the project for a price
determined under Section 42. The owner is released from the restrictions if the agency
does not find such a buyer.
Starting the process
Owners may request a QC after the 14th
year of the initial 15-year compliance period.
For projects with multiple buildings and different compliance periods, the time period
will start with the last one placed in service. For example, if five buildings in the project
began their credit periods in 1999 and one started in 2000, the 15th
year for the entire
project would be 2014.
A few owners received more than one allocation of Housing Credits for the same project.
In those cases the later allocation re-starts the applicable time period. For example, if a
project received its first allocation in 2001 and a subsequent award in 2003, the 15th
year
for the purposes of a Request would be 2017.
If the project is past the 14th
year, the first step is sending a preliminary inquiry to the
allocating agency. This does not start the one-year period. The purpose is to allow an
initial evaluation of whether the project is eligible. Owners of many projects waived the
right to request a QC either entirely or for a certain number of years.
Documentation requirements
If the project is eligible, the owner must compile and submit documentation required by
the agency. The list below is a representative sample. The first five can be burdensome,
but are necessary for determining the QC price. The second five are basic due diligence
matters that will be reviewed by potential buyers.
1) first year 8609s,
2) annual partnership tax returns for all years of operation since the start of the
compliance period,
3) annual project financial statements for all years,
4) loan documents for all secured debt during the compliance period,
5) partnership agreement (original, current and all interim amendments),
6) physical needs assessment for the entire project,
7) appraisal for the entire project,
8) market study for the entire project,
9) title report, and
10) Phase I environmental site assessment (Phase II if necessary).
In most cases the one-year period starts when the agency determines the owner has met
all submission requirements.
Owners who expect to take advantage of the QC option have a corresponding duty to
maintain the records necessary to allow the computation of the QC price. There are three
options for owners who have not fulfilled this responsibility:
a) the agency deems the project ineligible for consideration,
b) an accountant deduces missing information (interpolation), or
c) the owner agrees to accept a three-year period and fair market value.
The agency will determine which will apply. An example of item (b) is to re-create what
would have been the project’s financial statement using accountant work papers.
Closing the deal, or not
Under Section 42(h)(6)(E)(i)(II), the allocating agency’s obligation is to present a bona
fide contract to acquire the project for the QC price. More specifically, the 30-year
extended use period terminates if “the agency is unable to present... a qualified contract”.
Therefore, once the agency presents such a contract, the possibility of terminating the
extended use period is permanently removed. The project will remain bound to the
provisions in the LURA for at least 30 years.
There is no requirement in Section 42 that the prospective buyer actually purchase the
project. Whether the seller executes a contract and closes the transaction is a separate,
legally unrelated matter.
Conclusion
While the QC process does have a limited role to play in the overall Year 15 context,
agencies and owners need to understand its limitations. Each side can reduce the need for
this confrontation through cooperation, flexibility, and creativity.
§ 1.42-18 Qualified contracts.
(a) Extended low-income housing commitment —(1) In general. No credit under section 42(a) is allowed by reason of section 42 with respect to any building for the taxable year unless an extended low-income housing commitment (commitment) (as defined in section 42(h)(6)(B)) is in effect as of the end of such taxable year. A commitment must be in effect for the extended use period (as defined in paragraph (a)(1)(i) of this section).
(i) Extended use period. The term extended use period means the period beginning on the first day in the compliance period (as defined in section 42(i)(1)) on which the building is part of a qualified low-income housing project (as defined in section 42(g)(1)) and ending on the later of—
(A) The date specified by the low-income housing credit agency (Agency) in the commitment; or
(B) The date that is 15 years after the close of the compliance period.
(ii) Termination of extended use period. The extended use period for any building will terminate—
(A) On the date the building is acquired by foreclosure (or instrument in lieu of foreclosure) unless the Commissioner determines that such acquisition is part of an arrangement with the taxpayer (“the owner”) a purpose of which is to terminate such period; or
(B) On the last day of the one-year period beginning on the date (after the 14th year of the compliance period) on which the owner submits a written request to the Agency to find a person to acquire the owner's interest in the low-income portion of the building if the Agency is unable to present during such period a qualified contract for the acquisition of the low-income portion of the building by any person who will continue to operate such portion as a qualified low-income building (as defined in section 42(c)(2)).
(iii) Owner non-acceptance. If the Agency provides a qualified contract within the one-year period and the owner rejects or fails to act upon the contract, the building remains subject to the existing commitment.
(iv) Eviction, gross rent increase concerning existing low-income tenants not permitted. Prior to the close of the three year period following the termination of a commitment, no owner shall be permitted to evict or terminate the tenancy (other than for good cause) of an existing tenant of any low-income unit, or increase the gross rent for such unit in a manner or amount not otherwise permitted by section 42.
(2) Exception. Paragraph (a)(1)(ii)(B) of this section shall not apply to the extent more stringent requirements are provided in the commitment or under State law.
(b) Definitions. For purposes of this section, the following terms are defined:
(1) As provided by section 42(h)(6)(G)(iii), base calendar year means the calendar year with or within which the first taxable year of the credit period ends.
(2) The low-income portion of a building is the portion of the building equal to the applicable fraction (as defined in section 42(c)(1)(B)) specified in the commitment for the building.
(3) The fair market value of the non-low-income portion of the building is determined at the time of the Agency's offer of sale of the building to the general public. The fair market value of the non-low-income portion also includes the fair market value of the land underlying the entire building (both the non-low-income portion and the low-income portion). This valuation must take into account the existing and continuing requirements contained in the commitment for the building. The fair market value of the non-low-income portion also includes the fair market value of items of personal property not included in eligible basis under section 42(d) that convey under the contract with the building.
(4) Qualifying building costs include —
(i) Costs that are included in eligible basis of a low-income housing building under section 42(d) and that are included in the adjusted basis of depreciable property that is subject to section 168 and that is residential rental property for purposes of section 142(d) and § 1.103-8(b);
(ii) Costs that are included in eligible basis of a low-income housing building under section 42(d) and that are included in the adjusted basis of depreciable property that is subject to section 168 and that is used in a common area or is provided as a comparable amenity to all residential rental units in the building; and
(iii) Costs of the type described in paragraph (b)(4)(i) and (ii) of this section incurred after the first year of the low-income housing building's credit period under section 42(f).
(5) The qualified contract amount is the sum of the fair market value of the non-low-income portion of the building (within the meaning of section 42(h)(6)(F) and paragraph (b)(3) of this section) and the price for the low-income portion of the building (within the meaning of section 42(h)(6)(F) and paragraph (b)(2) of this section) as calculated in paragraph (c)(2) of this section. If this sum is not a multiple of $1,000, then when the Agency offers the building for sale to the general public, the Agency may round up the offering price to the next highest multiple of $1,000.
(c) Qualified contract purchase price formula —(1) In general. For purposes of this section, qualified contract means a bona fide contract to acquire the building (within a reasonable period after the contract is entered into) for the qualified contract amount.
(i) Initial determination. The qualified contract amount is determined at the time of the Agency's offer of sale of the building to the general public.
(ii) Mandatory adjustment by the buyer and owner. The buyer and owner under a qualified contract must adjust the amount of the low-income portion of the qualified contract formula to reflect changes in the components of the qualified contract formula such as mortgage payments that reduce outstanding indebtedness between the time of the Agency's offer of sale to the general public and the building's actual sale closing date.
(iii) Optional adjustment by the Agency and owner. The Agency and owner may agree to adjust the fair market value of the non low-income portion of the building after the Agency's offer of sale of the building to the general public and before the close of the one-year period described in paragraph (a)(1)(ii)(B) of this section. If no agreement between the Agency and owner is reached, the fair market value of the non-low-income portion of the building determined at the time of the Agency's offer of sale of the building to the general public remains unchanged.
(2) Low-income portion amount. The low-income portion amount is an amount not less than the applicable fraction specified in the commitment, as defined in section 42(h)(6)(B)(i), multiplied by the total of—
(i) The outstanding indebtedness for the building (as defined in paragraph (c)(3) of this section); plus
(ii) The adjusted investor equity in the building for the calendar year (as defined in paragraph (c)(4) of this section); plus
(iii) Other capital contributions (as defined in paragraph (c)(5) of this section), not including any amounts described in paragraphs (c)(2)(i) and (ii) of this section; minus
(iv) Cash distributions from (or available for distribution from) the building (as defined in paragraph (c)(6) of this section).
(3) Outstanding indebtedness. For purposes of paragraph (c)(2)(i) of this section, outstanding indebtedness means the remaining stated principal balance (which is initially determined at the time of the Agency's offer of sale of the building to the general public) of any indebtedness secured by, or with respect to, the building that does not exceed the amount of qualifying building costs described in paragraph (b)(4) of this section. Thus, any refinancing indebtedness or additional mortgages in excess of such qualifying building costs are not outstanding indebtedness for purposes of section 42(h)(6)(F) and this section. Examples of outstanding indebtedness include certain mortgages and developer fee notes (excluding developer service costs not included in eligible basis). Outstanding indebtedness does not include debt used to finance nondepreciable land costs, syndication costs, legal and accounting costs, and operating deficit payments. Outstanding indebtedness includes only obligations that are indebtedness under general principles of Federal income tax law and that are actually paid to the lender upon the sale of the building or are assumed by the buyer as part of the sale of the building.
(4) Adjusted investor equity —(i) Application of cost-of-living factor. For purposes of paragraph (c)(2)(ii) of this section, the adjusted investor equity for any calendar year equals the unadjusted investor equity, as described in paragraph (c)(4)(ii) of this section, multiplied by the qualified-contract cost-of-living adjustment for that year, as defined in paragraph (c)(4)(iii) of this section.
(ii) Unadjusted investor equity. For purposes of this paragraph (c)(4), unadjusted investor equity means the aggregate amount of cash invested by owners for qualifying building costs described in paragraph (b)(4)(i) and (ii) of this section. Thus, equity paid for land, credit adjuster payments, Agency low-income housing credit application and allocation fees, operating deficit contributions, and legal, syndication, and accounting costs all are examples of cost payments that do not qualify as unadjusted investor equity. Unadjusted investor equity takes an amount into account only to the extent that, as of the beginning of the low-income building's credit period (as defined in section 42(f)(1)), there existed an obligation to invest the amount. Unadjusted investor equity does not include amounts included in the calculation of outstanding indebtedness as defined in paragraph (c)(3) of this section.
(iii) Qualified-contract cost-of-living adjustment. For purposes of this paragraph (c)(4), the qualified-contract cost-of-living adjustment for a calendar year is the number that is computed under the general rule in paragraph (c)(4)(iv) of this section or a number that may be provided by the Commissioner as described in paragraph (c)(4)(v) of this section.
(iv) General rule. Except as provided in paragraph (c)(4)(v) of this section, the qualified-contract cost-of-living adjustment is the quotient of—
(A) The sum of the 12 monthly Consumer Price Index (CPI) values whose average is the CPI for the calendar year that precedes the calendar year in which the Agency offers the building for sale to the general public (The term “CPI for a calendar year” has the meaning given to it by section 1(f)(4) for purposes of computing annual inflation adjustments to the rate brackets.); divided by
(B) The sum of the 12 monthly CPI values whose average is the CPI for the base calendar year (within the meaning of section 1(f)(4)), unless that sum has been increased under paragraph (c)(4)(iii)(D) of this section.
(v) Provision by the Commissioner of the qualified-contract cost-of-living adjustment. The Commissioner may publish in the Internal Revenue Bulletin (see § 601.601(d)(2) of this chapter) a process pursuant to which the Internal Revenue Service will compute the qualified-contract cost-of-living adjustment for a calendar year and make available the results of that computation.
(vi) Methodology. The calculations in paragraph (c)(4)(iv) of this section are to be made in the following manner:
(A) The CPI data to be used for purposes of this paragraph (c)(4) are the not seasonally adjusted values of the CPI for all urban consumers. (The U.S. Department of Labor's Bureau of Labor Statistics (BLS) sometimes refers to these values as “CPI-U.”) The BLS publishes the CPI
data on-line (including a History Table that contains monthly CPI-U values for all years back to 1913). See www.BLS.gov/data.
(B) The quotient is to be carried out to 10 decimal places.
(C) The Agency may round adjusted investor equity to the nearest dollar.
(D) If the CPI for any calendar year (within the meaning of section 1(f)(4)) during the extended use period after the base calendar year exceeds by more than 5 percent the CPI for the preceding calendar year (within the meaning of section 1(f)(4)), then the sum described in paragraph (c)(4)(i)(B) is to be increased so that the excess is never taken into account under this paragraph (c)(4).
(vii) Example. The following example illustrates the calculations described in this paragraph (c)(4):
Example. (i) Facts. Owner contributed $20,000,000 in equity to a building in 1997, which was the first year of the credit period for the building. In 2011, Owner requested Agency to find a buyer to purchase the building, and Agency offered the building for sale to the general public during 2011. The CPI for 1997 (within the meaning of section 1(f)(4)) is the average of the Consumer Price Index as of the close of the 12-month period ending on August 31, 1997. The sum of the CPI values for the twelve months from September 1996 through August 1997 is 1913.9. The CPI for 2010 (within the meaning of section 1(f)(4)) is the average of the Consumer Price Index as of the close of the 12-month period ending August 31, 2010. The sum of the CPI values for the twelve months from September 2009 through August 2010 is 2605.959. At no time during this period (after the base calendar year) did the CPI for any calendar year exceed the CPI for the preceding calendar year by more than 5 percent.
(ii) Determination of adjusted investor equity. The qualified-contract cost-of-living adjustment is 1.3615962171 (the quotient of 2605.959, divided by 1913.9). Owner's adjusted investor equity, therefore, is $27,231,924, which is $20,000,000, multiplied by 1.3615962171, rounded to the nearest dollar.
(5) Other capital contributions. For purposes of paragraph (c)(2)(iii) of this section, other capital contributions to a low-income building are qualifying building costs described in paragraph (b)(4)(ii) of this section paid or incurred by the owner of the low-income building other than amounts included in the calculation of outstanding indebtedness or adjusted investor equity as defined in this section. For example, other capital contributions may include amounts incurred to replace a furnace after the first year of a low-income housing credit building's credit period under section 42(f), provided any loan used to finance the replacement of the furnace is not secured by the furnace or the building. Other capital contributions do not include expenditures for land costs, operating deficit payments, credit adjuster payments, and payments for legal, syndication, and accounting costs.
(6) Cash distributions —(i) In general. For purposes of paragraph (c)(2)(iv) of this section, the term cash distributions from (or available for distribution from) the building include—
(A) All distributions from the building to the owners or to persons whose relationship to the owner is described in section 267(b) or section 707(b)(1)), including distributions under section 301 (relating to distributions by a corporation), section 731 (relating to distributions by a partnership), or section 1368 (relating to distributions by an S corporation); and
(B) All cash and cash equivalents available for distribution at, or before, the time of sale, including, for example, reserve funds whether operating or replacement reserves, unless the reserve funds are legally required by mortgage restrictions, regulatory agreements, or third party contractual agreements to remain with the building following the sale.
(ii) Excess proceeds. For purposes of paragraph (c)(6)(i) of this section, proceeds from the refinancing of indebtedness or additional mortgages that are in excess of qualifying building costs are not considered cash available for distribution.
(iii) Anti-abuse rule. The Commissioner will interpret and apply the rules in this paragraph (c)(6) as necessary and appropriate to prevent manipulation of the qualified contract amount. For example, cash distributions include payments to owners or persons whose relation to owners is described in section 267(b) or section 707(b) for any operating expenses in excess of amounts reasonable under the circumstances.
(d) Administrative discretion and responsibilities of the Agency —(1) In general. An Agency may exercise administrative discretion in evaluating and acting upon an owner's request to find a buyer to acquire the building. An Agency may establish reasonable requirements for written requests and may determine whether failure to follow one or more applicable requirements automatically prevents a purported written request from beginning the one-year period described in section 42(h)(6)(I). If the one-year-period has already begun, the Agency may determine whether failure to follow one or more requirements suspends the running of that period. Examples of Agency administrative discretion include, but are not limited to, the following:
(i) Concluding that the owner's request lacks essential information and denying the request until such information is provided.
(ii) Refusing to consider an owner's representations without substantiating documentation verified with the Agency's records.
(iii) Determining how many, if any, subsequent requests to find a buyer may be submitted if the owner has previously submitted a request for a qualified contract and then rejected or failed to act upon a qualified contract presented by the Agency.
(iv) Assessing and charging the owner certain administrative fees for the performance of services in obtaining a qualified contract (for example, real estate appraiser costs).
(v) Requiring all appraisers involved in the qualified contract process to be State certified general appraisers that are acceptable to the Agency.
(vi) Specifying other conditions applicable to the qualified contract consistent with section 42 and this section.
(2) Actual offer. Upon receipt of a written request from the owner to find a person to acquire the building, the Agency must offer the building for sale to the general public, based on reasonable efforts, at the determined qualified contract amount in order for the qualified contract to satisfy the requirements of this section unless the Agency has already identified a willing buyer who submitted a qualified contract to purchase the project.
(3) Debarment of certain appraisers. Agencies shall not utilize any individual or organization as an appraiser if that individual or organization is currently on any list for active suspension or revocation for performing appraisals in any State or is listed on the Excluded Parties Lists System (EPLS) maintained by the General Services Administration for the United States Government found at www.epls.gov.
(e) Effective date/applicability date. These regulations are applicable to owner requests to housing credit agencies on or after May 3, 2012 to obtain a qualified contract for the acquisition of a low-income housing credit building.
[T.D. 9587, 77 FR 26178, May 3, 2012]
LIHTC Compliance After the Compliance Period:
Once the Credits are Gone Materials submitted by Laura Abernathy, Director of State and Local Policy at the National
Housing Trust
Extended use restrictions can have a substantial effect on future affordability of housing
developed under the Low Income Housing Tax Credit (Housing Credit) program by
preventing an escalating loss of affordability and allowing the assisted stock to grow.
Section 42 of the Internal Revenue Code requires Housing Credit properties to be
affordable for 30 years – an initial 15-year compliance period, followed by a 15-year
extended use period. Many state Housing Finance Agencies use their Qualified
Allocation Plans to incentivize and in some cases require affordability beyond the
federally mandated 30 years.
Owners can “opt-out” of use restrictions during the 15-year extended use period through
a Qualified Contract. After the 14th year of the 15-year compliance period, an owner can
request that the Housing Finance Agency find a buyer for the property who is willing to
operate it as a Housing Credit property for the duration of the extended use period. If,
after one year’s time, the Agency is unable to find a qualified buyer, the land use
restrictions terminate. The existing owner can operate the building at market rate. Many
states require or incentivize applicants to waive their right to a Qualified Contract, either
indefinitely or for a specified number of years, ensuring that properties remain affordable.
The table below illustrates the ways in which states require or incent long-term
affordability in the Housing Credit Program.
Table 1: Affordability by State
Housing Finance
Agency
QAP Year Years of
Affordability
Requirement Incentive
(points)
Alabama 2017 20* x
Alaska 2016 30 x
Arizona 2017 30 x
Arkansas 2016 35 x
California 2016 55** x
Colorado 2016 40 x
Connecticut 2016 40 x
DC 2012 50 x
Delaware 2016 60 x
Florida 2016 50 x
Georgia 2016 20 x
Hawaii 2017 61 x
Idaho 2016 40 x
Illinois 2016 30 x
Indiana 2016-2017 30 x
Iowa 2016 30 x
Kansas 2016 30 x
Kentucky 2017-2018 20* x
Louisiana 2016 35 x
Maine 2017 45 x
Maryland 2016 40 x
Massachusetts 2016 50+ x
Michigan 2017-2018 45 x
Minnesota 2017 30 x
Mississippi 2017-2018 40 x
Missouri 2016 30 x
Montana 2016 46 x
Nebraska 2016 45 x
Nevada 2016 50 x
New Hampshire 2016 99 x
New Jersey 2015 45 x
New Mexico 2016 45 x
New York 2016 50 x
North Carolina 2016 30 x
North Dakota 2016 30 x
Ohio 2016-2017 30 x
Oklahoma 2016 30 x
Oregon 2016 60 x
Pennsylvania 2016 30 x
Rhode Island 2016 30 x
South Carolina 2016 35 x
South Dakota 2016 40 x
Tennessee 2017 35 x
Texas 2016 35 x
Utah 2016 50 x
Vermont 2016 Perpetuity x
Virginia 2016 30 x
Washington 2016 37 x
West Virginia 2016 30 x
Wisconsin 2017 30 x
Wyoming 2016 55 x
*applicants are required to waive their right to a Qualified Contract for 5 years, meaning
that properties remain affordable for a minimum of 20 years.
**properties located on tribal land are required to maintain affordability for 50 years.
1
FILED: October 26, 2011
IN THE COURT OF APPEALS OF THE STATE OF OREGON
SARAH NORDBYE, individually and on behalf of all others similarly situated,
Plaintiff-Appellant,
v.
BRCP/GM ELLINGTON, an Oregon limited liability corporation;
and the OREGON HOUSING AND COMMUNITY SERVICES DEPARTMENT, Defendants-Respondents.
Multnomah County Circuit Court 071113782
A141698
Dale R. Koch, Judge. Argued and submitted on December 07, 2010. Alice Warner argued the cause for appellant. With her on the briefs was Edward Johnson. Thomas H. Tongue argued the cause for respondent BRCP/GM Ellington. With him on the brief were Brian R. Talcott and Dunn Carney Allen Higgins & Tongue LLP. Judy C. Lucas, Senior Assistant Attorney General, argued the cause for respondent Oregon Housing and Community Services Department. With her on the brief were John R. Kroger, Attorney General, and David B. Thompson, Interim Solicitor General. Jeffrey B. Litwak filed the brief amicus curiae for Columbia River Gorge Commission. Dennis Steinman and Kell Alterman & Runstein, LLP, filed the brief amicus curiae for National Housing Law Project. Mark Manulik, Sara Kobak, and Schwabe, Williamson & Wyatt, P.C., filed the brief amicus curiae for Oregon Land Title Association. Before Haselton, Presiding Judge, and Armstrong, Judge, and Duncan, Judge. HASELTON, P. J. Reversed and remanded.
2
HASELTON, P. J. 1
Plaintiff, a former tenant of a residential rental property that was financed, 2
at least in part, through the federal Low-Income Housing Tax Credit (LIHTC) program, 3
appeals.1 Plaintiff challenges (1) the trial court's allowance of summary judgment, on 4
grounds of "Chevron deference,"2 against her claims for injunctive and declaratory relief 5
pertaining to the enforceability of certain "use restrictions" related to the LIHTC 6
program; and (2) the court's denial of her cross-motion for summary judgment. As 7
described below, we conclude that Chevron deference is inapposite. We further conclude 8
that, as a matter of law, plaintiff is entitled to enforce the disputed use restrictions 9
pertaining to the operation of the property as low-income housing. Accordingly, we 10
reverse and remand. 11
Before turning to the particular circumstances of this dispute, it is not only 12
useful, but essential, to describe the LIHTC program. The purpose of the LIHTC 13
program is to encourage the development of low-income rental housing through the 14
allocation of tax credits pursuant to section 42 of the Internal Revenue Code (IRC). Oti 15
Kaga v. South Dakota Housing Dev. Authority, 188 F Supp 2d 1148, 1152 (D SD 2002), 16
1 Defendant BRCP/GM Ellington (BRCP) is the current owner of the property.
Defendant Oregon Housing and Community Services Department (the Department) is
responsible for monitoring property owners' compliance with LIHTC program
requirements, as was its predecessor entity, the Oregon Housing Authority. For ease of
reference, we refer to both entities as "the Department."
2 Chevron USA, Inc. v. Natural Res. Def. Council, 467 US 837, 104 S Ct 2778, 81 L
Ed 2d 694 (1984).
3
affd, 342 F3d 871 (8th Cir 2003). In general, the federal government allocates tax 1
credits, and state housing agencies are responsible for distributing the credits and 2
monitoring recipient projects for compliance with program requirements. Treas Reg § 3
1.42-1T; Treas Reg § 1.42-5. The LIHTC program is regulated by, and state housing 4
agencies report to, the Internal Revenue Service. IRC § 42(l), (n). Further, as a general 5
rule, the tax credits are claimed annually by the recipient taxpayer over the first 10 years 6
of a project. IRC § 42(f)(1); Treas Reg § 1.42-1T(a)(1). In return for receiving the tax 7
credits, the taxpayer must commit to maintain the project as low-income housing for 30 8
years. The 30-year term is comprised of an initial 15-year compliance period and an 9
additional 15-year "extended use period." IRC § 42(h)(6). 10
For our purposes, it is not necessary to describe the LIHTC program rental 11
and occupancy restrictions in detail. Suffice it to say there are three salient features. 12
First, the taxpayer agrees that a specified number of units in the project will be rented for 13
a restricted amount of rent to tenants whose income is a certain percentage less than the 14
median income of the geographical area in which the project is located. See IRC § 42(g). 15
Second, federal law requires that the taxpayer and state housing agency enter into an 16
"extended low-income housing commitment," which is to be "binding on all successors 17
of the taxpayer," and recorded as a restrictive covenant pursuant to state law. IRC § 18
42(h)(6)(A), (B). Third, "individuals who meet the income limitation applicable to the 19
building * * * (whether prospective, present, or former occupants of the building)" have 20
4
the right to enforce the extended low-income housing commitment "in any State court."3 1
IRC § 42(h)(6)(B)(ii). 2
Consistently with those requirements, in December 1990, Rose City Village 3
Limited Partnership, the original owner of the project, entered into a Low-Income 4
Housing Tax Credit Reservation and Extended Use Agreement (the extended use 5
agreement) with the Department. The original owner agreed, among other things, that it 6
would maintain 100 percent of the project as low-income housing for 30 years and that, 7
as a condition precedent to the issuance of tax credits, it would record a "declaration of 8
land use restrictive covenants." 9
In the Declaration of Land Use Restrictive Covenants for Low-Income 10
Housing Tax Credits (the declaration), which was recorded in Multnomah County, the 11
original owner acknowledged the obligations and restrictions imposed under the extended 12
use agreement. Section 2(b) of the declaration provides: 13
"The Owner intends, declares and covenants, on behalf of itself and all 14
future Owners and operators of the Project during the term of this 15
Declaration, that this Declaration and the covenants and restrictions set 16
forth in this Declaration regulating and restricting the use, occupancy and 17
transfer of the Project ([1]) shall be and are covenants running with the 18
Project land, encumbering the Project for the term of this Declaration, 19
binding upon the Owner's successors in title and all subsequent Owners and 20
Operators of the Project[,] ([2]) are not merely personal covenants of the 21
Owner, and ([3]) shall bind the Owner (and the benefits shall inure to the 22
Department and any past, present or prospective tenant of the Project) and 23
3 BRCP argued before the trial court that plaintiff did not meet the income
limitation applicable to the building and, thus, that she lacked standing to bring this
action. The trial court found that plaintiff satisfied the IRC section 42 income limitations,
and BRCP does not challenge that finding on appeal.
5
its respective successors and assigns during the term of this Declaration. 1
The Owner hereby agrees that any and all requirements of the laws of the 2
State of Oregon to be satisfied in order for the provisions of this 3
Declaration to constitute deed restrictions and covenants running with the 4
land shall be deemed to be satisfied in full, and that any requirements of 5
privileges [sic] of estate are intended to be satisfied, or in the alternate, that 6
an equitable servitude has been created to insure that these restrictions run 7
with the Project. For the longer of the period this Credit is claimed or the 8
term of this Declaration, each and every contract, deed or other instrument 9
hereafter executed conveying the Project or portion thereof shall expressly 10
provide that such conveyance is subject to this Declaration, provided, 11
however, the covenants contained herein shall survive and be effective 12
regardless of whether such contract, deed or other instrument hereafter 13
executed conveying the Project or portion thereof provides that such 14
conveyance is subject to this Declaration." 15
Further, and of critical significance, section 8 of the declaration, which is 16
captioned "Enforcement of Section 42 Occupancy Restrictions," provides, in part: 17
"(b) The Owner acknowledges that the primary purpose for requiring 18
compliance by the Owner with restrictions provided in this Declaration is to 19
assure compliance of the Project and the Owner with IRC Section 42 and 20
the applicable regulations, AND BY REASON THEREOF, THE OWNER 21
IN CONSIDERATION FOR RECEIVING LOW-INCOME HOUSING 22
TAX CREDITS FOR THIS PROJECT HEREBY AGREES AND 23
CONSENTS THAT THE DEPARTMENT AND ANY INDIVIDUAL 24
WHO MEETS THE INCOME LIMITATION APPLICABLE UNDER 25
SECTION 42 (WHETHER PROSPECTIVE, PRESENT OR FORMER 26
OCCUPANT) SHALL BE ENTITLED, FOR ANY BREACH OF THE 27
PROVISIONS HEREOF, AND IN ADDITION TO ALL OTHER 28
REMEDIES PROVIDED BY LAW OR IN EQUITY, TO ENFORCE 29
SPECIFIC PERFORMANCE BY THE OWNER OF ITS OBLIGATIONS 30
UNDER THIS DECLARATION IN A STATE COURT OF COMPETENT 31
JURISDICTION. The owner hereby further specifically acknowledges that 32
the beneficiaries of the Owner's obligations hereunder cannot be adequately 33
compensated by monetary damages in the event of any default hereunder." 34
(Uppercase in original.) 35
The Department allocated more than $2 million of LIHTC tax credits to the 36
project and monitored the project for conformity with LIHTC program requirements. 37
6
The project experienced compliance problems over the years. In the course of trying to 1
remediate those problems, the Department learned that, in 2002 or 2003, the original 2
owner had transferred ownership of the project to Rose City Village Affordable Housing 3
Limited Partnership (the middle owner). The manner in which the original owner 4
transferred the project violated the terms of the declaration. The declaration requires, 5
among other things, that the owner notify the Department prior to any transfer of 6
ownership and that the owner obtain the agreement of any buyer "that such acquisition is 7
subject to the requirements of" the declaration and IRC section 42. Those requirements 8
were not satisfied. 9
The Department ultimately concluded that, although the middle owner had 10
made substantial progress in some respects, the project could not be brought into full 11
compliance with all of the requirements of the LIHTC program.4 In 2004, a Department 12
compliance officer notified the Internal Revenue Service (IRS) of that conclusion in a 13
letter, which stated, in part: 14
"Due to the severity of the noncompliance issues relating to this project, it 15
has been determined that this project is not currently, is unlikely to be in the 16
future, and may not have ever been in compliance. It is apparent that the 17
Owner failed to make reasonable attempts to comply with the requirements 18
of the Program. Therefore, because of the egregious nature of the 19
noncompliance, it is the decision of [the Department] to remove this project 20
from the Low-Income Housing Tax Credit Program." 21
4 A Department employee subsequently identified the "largest problem" as the
original owner's failure to properly document the income eligibility of the initial project
tenants. Although the parties disagree about whether the Department was justified in
determining that full compliance was an impossibility, we need not resolve that dispute in
that it is immaterial to our analysis and disposition.
7
With that letter, the Department also submitted multiple IRS 8823 forms, entitled "Low-1
Income Housing Credit Agencies Report of Noncompliance or Building Disposition."5 2
The Department checked the same preprinted box on each form, indicating that the 3
"[p]roject is no longer in compliance nor participating in the low-income housing tax 4
credit program[.]" The federal government ultimately recaptured a portion of the tax 5
credits that had been allocated to the project.6 6
In 2005, the middle owner and the Department entered into a Settlement, 7
Satisfaction and Partial Release Agreement (the release agreement). The release 8
agreement recites that "the parties desire to resolve all outstanding issues between them 9
by means of this Agreement" and provides, in part: 10
"1. MUTUAL RELEASE. 11
"The parties hereby release one another from all claims, causes of action, 12
suits, and other liabilities, actual or potential, arising out of or related to the 13
allocation and subsequent rescission of the low-income housing tax credits 14
and the execution and recording of the related Declaration referenced 15
above, except as specifically indicated herein. 16
"2. SATISFACTION AND PARTIAL RELEASE OF DECLARATION. 17
"The Department hereby provides its satisfaction and partial release of that 18
Declaration except with respect to Section 6 (c)[7]
thereof which shall 19
5 The Department submitted a separate form for each building in the project.
6 From the record before us, the extent of that recoupment is unclear.
7 Section 6(c) of the declaration provides:
"Notwithstanding subsection (b) above, IRC Section 42 rent requirements
shall continue for a period of three years following the termination of the
extended use requirement pursuant to the procedures specified in
subsection (b) above for those tenants existing as of the date of termination.
8
remain in effect for three years from the date of this Agreement. For the 1
three years that Section 6 (c) remains in effect, the [middle owner], and any 2
successor in interest thereto, or other owner of the Property, shall not evict 3
or terminate the tenancy of an existing tenant of any low-income unit on the 4
Property other than for good cause and shall not increase the gross rent 5
above the maximum allowed under the IRC with respect to such low-6
income units." 7
Shortly after it was executed, the release agreement was recorded in Multnomah County. 8
In 2006, the middle owner sold the project to the present owner, BRCP, for 9
a very substantial profit. Later in that same year, and despite the three-year "safe harbor" 10
provision of the release agreement, BRCP issued a 30-day, no-cause eviction notice to 11
plaintiff, among other tenants. Plaintiff stated in her declaration that, by the time she 12
vacated her apartment in response to the eviction notice, almost all of her neighbors had 13
moved, and the project "was like a ghost town." BRCP does not operate the project in a 14
manner that complies with the restrictions of the LIHTC program and declaration. For 15
example, at the time of the summary judgment proceedings below, BRCP did not screen 16
tenants for income eligibility or rent exclusively to tenants who qualified as "low-17
income" under section 42 of the Internal Revenue Code. 18
Plaintiff subsequently filed this action, seeking declaratory and injunctive 19
During such three year period, the Owner shall not evict or terminate the
tenancy of an existing tenant of any low-income unit other than for good
cause and shall not increase the gross rent above the maximum allowed
under the IRC with respect to such low-income unit."
"Subsection (b)" of the declaration referenced in the excerpt set forth immediately above,
along with section 6(c) of the declaration, mirrors, in substance, IRC § 42(h)(6)(E), set
out below. See ___ Or App at ___ n 11 (slip op at 10 n 11).
9
relief to enforce the original owner's commitment to maintain the property as low-income 1
housing for the remainder of the declaration's 30-year term. BRCP and the Department 2
jointly moved for summary judgment, arguing that the release agreement is "valid and 3
enforceable against plaintiff and other current and future tenants[.]" In so contending, 4
defendants asserted, in part, that Chevron deference should be accorded to the 5
Department's decision to execute the 2005 release agreement. Plaintiff opposed 6
defendants' motion for summary judgment and filed a cross-motion, asserting that the 7
release agreement did not, and could not, abrogate her right to obtain specific 8
performance of the declaration. 9
The trial court granted defendants' motion for summary judgment and 10
denied plaintiff's cross-motion. The court determined that the Department's decisions to 11
"terminate" the project from participation in the LIHTC program and enter into the 12
release agreement effectively abrogated the ability of low-income tenants to obtain 13
specific performance of the declaration.8 That holding was predicated on the trial court's 14
conclusion that the Department's decisions to remove the project from the LIHTC 15
8 The release agreement does not explicitly address the rights conferred on low-
income tenants in the declaration. Instead, the middle owner and the Department state in
the release agreement that they "desire to resolve all outstanding issues between them"
and that they are releasing "one another." (Emphasis added.) Although an argument
could be made that the parties never intended that the release agreement would have any
effect on the right of a qualified tenant to enforce the use restrictions set forth in the
declaration, no such argument was made before the trial court or has been made on
appeal. It appears that the parties and the trial court assumed that the middle owner and
the Department intended that the release agreement would extinguish the enforcement
rights conferred on low-income tenants.
10
program and enter into the release agreement with the middle owner were entitled to 1
deference under the principles set forth in Chevron USA, Inc. v. Natural Res. Def. 2
Council, 467 US 837, 104 S Ct 2778, 81 L Ed 2d 694 (1984). The court thereafter 3
entered a general judgment of dismissal. 4
Plaintiff appeals, assigning error to the allowance of defendants' motion for 5
summary judgment and to the denial of her cross-motion for summary judgment.9 In an 6
appeal from a judgment that results from cross-motions for summary judgment, 7
"if both the granting of one motion and the denial of the other are assigned 8
as error, then both are subject to review. Each party that moves for 9
summary judgment has the burden of demonstrating that there are no 10
material issues of fact and that the movant is entitled to judgment as a 11
matter of law. We review the record for each motion in the light most 12
favorable to the party opposing it." 13
Eden Gate, Inc. v. D&L Excavating & Trucking, Inc., 178 Or App 610, 622, 37 P3d 233 14
(2002) (citations omitted). As amplified below, we conclude that deference under 15
Chevron is not warranted and that the 2005 release agreement did not abrogate plaintiff's 16
right to enforce the original use restrictions prescribed in the 1990 declaration. 17
Accordingly, the trial court erred in granting defendants' motion for summary judgment 18
and in denying plaintiff's cross-motion. 19
We begin with the trial court's basis for disposition--viz., deference in 20
9 Earlier in this appeal, BRCP filed a motion to dismiss for lack of jurisdiction,
arguing that this court lacks jurisdiction because plaintiff's exclusive remedy is under the
Administrative Procedures Act (ORS chapter 183). The Appellate Commissioner denied
the motion, and BRCP renews its jurisdictional argument in its answering brief. We deny
BRCP's renewed motion to dismiss for the reasons stated by the commissioner in the
court's order entered on April 29, 2010.
11
accordance with the principles set forth in Chevron.10
In Friends of Columbia Gorge v. 1
Columbia River (S055722), 346 Or 366, 378, 213 P3d 1164 (2009), the court generally 2
described the application of deference under Chevron: 3
"A long line of federal cases, beginning with Chevron, * * * holds that, 4
when a federal agency has been charged by Congress with implementing a 5
federal statute, courts should defer to that agency's interpretation of the 6
statute, treating that interpretation as controlling as long as it is reasonable." 7
However, deference is appropriate only where "Congress has not directly addressed the 8
precise question at issue[.]" Chevron, 467 US at 843. "If the intent of Congress is clear, 9
that is the end of the matter; for the court, as well as the agency, must give effect to the 10
unambiguously expressed intent of Congress." Id. at 842-43. 11
Here, invoking Chevron deference, the trial court noted that the Internal 12
Revenue Code explicitly identifies two situations in which the extended-use period will 13
terminate early (neither of which was applicable in the circumstances of this case).11
14
10
Although the Department argued before the trial court that Chevron-style
deference was appropriate, it has abandoned that argument on appeal and, in fact, now
argues that Chevron deference is inapposite. BRCP, however, defends the trial court's
rationale.
11 IRC section 42(h)(6)(E) provides:
"(i) In general.--The extended use period for any building shall terminate--
"(I) on the date the building is acquired by foreclosure (or instrument
in lieu of foreclosure) unless the Secretary determines that such
acquisition is part of an arrangement with the taxpayer a purpose of
which is to terminate such period, or
"(II) on the last day of the period specified in subparagraph (I) if the
housing credit agency is unable to present during such period a
qualified contract for the acquisition of the low-income portion of
12
Nevertheless, the court reasoned that that identification was not necessarily exclusive 1
and, thus, "Congress was silent" as to whether, in other circumstances, local housing 2
agencies can voluntarily terminate a project's participation in the LIHTC program before 3
the end of the extended-use period. Proceeding from that premise, the trial court 4
concluded that, 5
"[i]n light of the fact that some areas of noncompliance could never be 6
remedied[,] it was reasonable for the agency to determine that the property 7
owner would be unable to bring the property into compliance. Because [the 8
Department] acted reasonably, the court will defer to its interpretation of 9
the statute. This leaves the remaining question as to whether [the 10
Department and the middle owner] needed to give the tenants notice and 11
obtain their consent prior to modification of the Declaration." 12
As to that "remaining question," the court concluded that Congress had not directly 13
addressed the subject and that the "actions" of the parties to the release agreement "were 14
reasonable and will be entitled to deference." 15
The court's invocation of Chevron deference was erroneous because the 16
the building by any person who will continue to operate such portion
as a qualified low-income building.
"Subclause (II) shall not apply to the extent more stringent requirements are
provided in the agreement or in State law.
"(ii) Eviction, etc. of existing low-income tenants not permitted.--The
termination of an extended use period under clause (i) shall not be
construed to permit before the close of the 3-year period following such
termination--
"(I) the eviction or the termination of tenancy (other than for good
cause) of an existing tenant of any low-income unit, or
"(II) any increase in the gross rent with respect to such unit not
otherwise permitted under this section."
13
Department is not an entity to which deference is warranted under Chevron. The 1
Department is an agency established under state statute. See ORS 456.555(1). "A state 2
agency's interpretation of federal statutes is not entitled to the deference afforded a 3
federal agency's interpretation of its own statutes under Chevron * * *." Orthopaedic 4
Hosp. v. Belshe, 103 F3d 1491, 1495 (9th Cir 1997). 5
BRCP suggests, nevertheless, that deference to the Department is warranted 6
under Chevron because the circumstances here are analogous to those in Friends of 7
Columbia Gorge. We disagree. 8
In Friends of Columbia Gorge, the Oregon Supreme Court held that 9
interpretations by the Columbia River Gorge Commission (Gorge Commission) of certain 10
provisions of the Columbia River Gorge National Scenic Area Act, 16 USC §§ 544-544p, 11
were entitled to Chevron deference. In so holding, the court pointed to specific features 12
of the federal authorizing legislation--including those requiring the Gorge Commission to 13
develop, implement, and administer a management plan "in cooperation and consultation 14
with the United States Secretary of Agriculture"--and emphasized that, as a matter of 15
Congressional intent, "[t]he Act clearly contains gaps that the [Gorge] commission is 16
charged with filling." 346 Or at 369-70, 381-82. 17
Here, in contrast, nothing in the authorizing legislation for the LIHTC 18
program delegates to the Department or other state housing agencies the expansive type 19
of "rulemaking" authority conferred on the Gorge Commission. To the contrary, section 20
42(n) of the Internal Revenue Code provides that "[t]he Secretary shall prescribe such 21
14
regulations as may be necessary or appropriate to carry out the purposes of this 1
section[.]" 2
BRCP contends, alternatively, that Chevron deference applies because an 3
IRS employee's advice informed the Department's decision to remove the project from 4
the LIHTC program. In particular, BRCP points to evidence that an IRS employee 5
advised the Department in a phone conversation that the project could be "kicked out of" 6
the LIHTC program for noncompliance with program requirements.12
That argument is 7
unavailing. Only those administrative interpretations that Congress and the agency 8
intend to have the force of law are entitled to Chevron deference. United States v. Mead 9
Corp., 533 US 218, 226-27, 121 S Ct 2164, 150 L Ed 2d 292 (2001). The oral advice of 10
a federal employee, given on an ad hoc basis to a state agency, simply does not qualify. 11
In sum, the trial court erred in granting defendants' summary judgment 12
motion based on its application of Chevron deference. That, however, is merely the 13
beginning, not the end, of our inquiry. That is so because, as noted, plaintiff has also 14
challenged the denial of her cross-motion for summary judgment, and defendants, 15
individually and collectively, proffer alternative legal bases for affirming the trial court's 16
dismissal of plaintiff's claims. None of the parties suggests that those cross-cutting 17
contentions implicate disputed issues of material fact. For the reasons that follow, we 18
conclude that the 2005 release agreement did not abrogate plaintiff's entitlement to 19
12
The official position held by the IRS employee is not clear from the record. One
Department employee described the IRS employee as being a LIHTC compliance "guru,"
and another said the IRS employee was in charge of LIHTC compliance at the IRS.
15
enforce the use restrictions prescribed in the 1990 declaration and that defendants' 1
asserted defenses to the enforcement of those restrictions fail as a matter of law. 2
Accordingly, the trial court erred in denying plaintiff's cross-motion for summary 3
judgment. 4
We begin with the pertinent provisions of the declaration. In section 2(b) 5
of the declaration, the original owner of the project and the Department agreed that the 6
use restrictions set forth in the declaration would be "covenants running with the Project 7
land," encumbering the project for the term of the declaration and binding all successors 8
in title for the stated duration. See ___ Or App at ___ (slip op at 3-4). Section 2(b) 9
further provides that the "benefits" of the covenants and restrictions "shall inure to the 10
Department and any past, present or prospective tenant of the Project." (Emphasis 11
added.) Finally, under section 8(b) of the declaration, both the Department and "any 12
individual who meets the income limitation applicable under section 42 (whether 13
prospective, present or former occupant) shall be entitled * * * to enforce specific 14
performance" of obligations owed under that document. (Emphasis omitted.) Thus, 15
under the declaration, plaintiff is an intended third-party beneficiary of the use 16
restrictions and, pursuant to section 8(b), she is independently entitled to enforce those 17
use restrictions, even if the Department has waived its ability to do so. 18
BRCP contends, however, that the release agreement abrogated the use 19
restriction, precluding plaintiff or any other intended beneficiary from enforcing those 20
restrictions. That argument fails because, under Oregon law--which is expressly made 21
16
applicable by both section 8(e) of the declaration and section 4 of the release agreement--1
a grantor and grantee cannot terminate a restrictive covenant without the consent of the 2
intended beneficiary. Snashall et ux v. Jewell et ux, 228 Or 130, 137-38, 363 P2d 566 3
(1961). 4
In Snashall, the parties lived in the same subdivision and received their 5
deeds from common grantors. 228 Or at 132. The defendants' deed contained a 6
restrictive covenant prohibiting buildings over one story in height and also contained a 7
covenant that building plans be approved by the common grantors. The defendants, in 8
an attempt to defeat the restrictive covenant, transferred the property back to the original 9
grantors, who then reconveyed the land to the defendants, with the deed of reconveyance 10
effectively omitting the building restriction. Id. at 133. The plaintiffs subsequently, 11
successfully brought an action for breach of contract, asserting that the defendants' home 12
violated the restrictive covenants. 13
The defendants appealed, and the Supreme Court affirmed. In so holding, 14
the court determined that 15
"[t]his [reconveyance] maneuver did not, however, operate to change the 16
binding effect of the restrictions contained in the original deed because the 17
covenants which became operative upon the execution of the first deed to 18
defendants inured to the benefit of the other lot owners in the tract and 19
would continue to bind defendants as to those other owners unless the latter 20
were to release defendants from the obligations of the covenants. 21
Defendants treat the deed provision calling for the grantors' approval of 22
building plans as vesting in the grantors a dispensing power permitting the 23
lifting of the restriction on any lot at the will of the grantors. We do not so 24
construe the provision; it was intended to provide machinery in the aid of 25
the enforcement of the covenants rather than to provide a means by which 26
the common plan could be weakened by modification. It is manifest from 27
17
the content of the restrictive covenants that they were imposed for the 1
benefit of the owners of the several lots within the tract rather than for the 2
personal benefit of the grantors." 3
Id. at 137-38 (emphasis added). The Supreme Court concluded that, "by reason of either 4
the theory of third party beneficiary or the theory of implied reciprocal servitude, [the] 5
plaintiffs are entitled to enforce the restrictive covenant contained in [the] defendants' 6
deed." Id. at 138. See also Menstell et al. v. Johnson et al., 125 Or 150, 167, 262 P 853 7
(1927), reh'g den, 125 Or 169, 266 P 891 (1928) (restrictive covenant may not be 8
modified "without the consent or acquiescence of the [beneficiaries]"). 9
Plaintiff contends (we believe correctly) that Snashall is dispositive. 10
Notwithstanding plaintiff's invocation of Snashall, defendants do not directly address 11
Snashall, Menstell, and the other related cases cited by plaintiff13
--and offer no principled 12
basis for distinguishing those cases. Defendants appear to suggest, however, that 13
plaintiff's claim is foreclosed by the release agreement because the declaration does not 14
expressly require that qualified tenants consent to release of their interests. The problem 15
with that argument is that the declaration and the release agreement do expressly 16
incorporate Oregon law--including Snashall--and nothing in Snashall (or any related 17
case) conditions the right of an intended beneficiary to enforce a restrictive covenant on 18
the existence of an express contractual provision requiring the third-party beneficiary's 19
13
See, e.g., Stan Wiley v. Berg, 282 Or 9, 15-16, 578 P2d 384 (1978) (a promisor and
promisee generally cannot materially alter or abrogate the rights of an intended third-
party beneficiary once the beneficiary has "accepted, adopted, or acted upon" the promise
made for his or her benefit).
18
consent to the material modification or termination of the covenant. 1
BRCP further argues that, in all events, it is not bound by the use 2
restrictions set forth in the declaration because the declaration did not succeed in creating 3
covenants that run with the land at law.14
To create a covenant running with the land and 4
binding on successors, four requirements must be met: 5
"(1) there must be privity of the estate between the promisor and his 6
successors; (2) the promisor and promisee must intend that the covenant 7
run; (3) the covenant must touch and concern the land of the promisor; and 8
(4) the promisee must benefit in the use of some land possessed by him as a 9
result of the performance of the promise." 10
Johnson v. Highway Division, 27 Or App 581, 584, 556 P2d 724 (1976), rev den, 277 Or 11
99 (1977) (emphasis omitted). Specifically, BRCP argues that the first and fourth 12
requirements are not satisfied. 13
BRCP's argument fails because the declaration itself expressly provides that 14
all of the requirements under Oregon law for creation of a restrictive covenant running 15
with the land are deemed satisfied. In section 2(b), the parties to the declaration agreed 16
"that any and all requirements of the laws of the State of Oregon to be satisfied in order 17
for the provisions of this Declaration to constitute deed restrictions and covenants 18
running with the land shall be deemed to be satisfied in full[.]" BRCP does not cite, and 19
we are not aware of, any authority supporting the proposition that such an agreement is 20
legally ineffective. 21
14
The trial court determined that the declaration was recorded as a restrictive
covenant in the property's chain of title, and the Department does not dispute that the
declaration successfully created covenants running with the land.
19
In all events, even if the requisites of the covenant running with the land 1
were somehow not satisfied, BRCP would nevertheless be subject to enforcement of the 2
use restrictions as an equitable servitude. That is so because the original owner and the 3
Department agreed in section 2(b) of the declaration that, in the event that the declaration 4
somehow failed to create covenants running with the land at law, an equitable servitude 5
would be created "to insure that [the] restrictions run with the Project." In Ebbe v. Senior 6
Estates Golf, 61 Or App 398, 404-05, 657 P2d 696 (1983), we summarized the elements 7
of an equitable servitude: 8
"The general rule is that, even if all technical requirements for a 9
covenant to run with the land are not met, a promise is binding as an 10
equitable servitude if (1) the parties intend the promise to be binding; (2) 11
the promise 'concern[s] the land or its use in a direct and not a collateral 12
way'; and (3) 'the subsequent grantee [has] notice of the covenant * * *.' 20 13
Am Jur 2d Covenants, § 26 (1965)." 14
An equitable servitude creates a burden that will fall on subsequent holders of the 15
property "'with the single qualification that a subsequent owner who acquires the legal 16
estate for value and without notice takes it free from this burden.'" Hall v. Risley and 17
Heikkila, 188 Or 69, 99, 213 P2d 818 (1950) (quoting John Norton Pomeroy, 4 18
Pomeroy's Equity Jurisprudence § 1295, 850 (5th ed)). Either actual or constructive 19
notice of the covenant is sufficient to bind a subsequent owner. Ebbe, 61 Or App at 405. 20
BRCP remonstrates that an equitable servitude is inapposite because it did 21
not have actual or constructive notice of the use restrictions set forth in the declaration. 22
The uncontroverted evidence is to the contrary--and, indeed, BRCP had both actual and 23
constructive notice of the covenants. In particular, the individual in charge of due 24
20
diligence for BRCP's acquisitions acknowledged that she had learned of the existence of 1
the declaration and the covenants included therein before BRCP purchased the project. 2
Thus, BRCP acquired the project with actual notice of the use restrictions. In addition, 3
the recording of the declaration operated to give BRCP constructive notice of the use 4
restrictions imposed by that document. ORS 93.643 (addressing constructive notice from 5
recordation of interest in real property); see also Huff v. Duncan, 263 Or 408, 411, 502 6
P2d 584 (1972). 7
BRCP argues, however, that it should not be bound by the use restrictions 8
imposed in the declaration because, in deciding to purchase the project, it reasonably 9
relied on the intervening release agreement. BRCP maintains that the release agreement 10
appeared to be a valid release of the declaration "on its face," rendering the explicit use 11
restrictions of the recorded declaration of "no import." We disagree. 12
As a threshold matter, BRCP's "facial" characterization of the release 13
agreement is insupportable. As noted, see ___ Or App at ___ n 8 (slip op at 8 n 8), 14
nothing in the release agreement expressly addresses the enforcement rights of qualified 15
low-income tenants as third-party beneficiaries of the declaration's use restrictions. 16
Regardless, a purchaser of real property has a duty to examine all documents in the 17
property's chain of title and is "bound by the recitals in the conveyances necessary to his 18
chain of title." Phair v. Walker, Coe, 277 Or 141, 144, 559 P2d 882 (1977); see also 19
Jennings v. Lentz, 50 Or 483, 490, 93 P 327 (1908) (purchaser must use reasonable 20
diligence in conducting search of documents in chain of title or "assume the risk" of 21
21
taking property subject to competing interest). BRCP cites no authority in support of its 1
argument that it was entitled to rely on only the release agreement simply because the 2
release agreement was the most recently recorded document in the project's chain of 3
title.15
Indeed, BRCP's purported reliance on the release agreement in isolation is 4
especially unreasonable given that section 3(o) of the declaration expressly provides that 5
the rights and obligations created by that document will survive and control in the face of 6
inconsistent provisions in later documents.16
7
Finally, BRCP posits that the release agreement extinguished plaintiff's 8
enforcement rights because the declaration provides that it can be amended "as may be 9
necessary to comply with the [Internal Revenue Code], any and all applicable rules, 10
regulations, policies, procedures, rulings or other official statements pertaining to the 11
[LIHTC program]." Again, that contention is unavailing. Even assuming that the release 12
15
The Oregon Land Title Association (OLTA), as amicus curiae, filed a brief in
support of BRCP. OLTA argues that we should apply the reasoning of Willamette Col. &
Credit Serv. v. Gray, 157 Or 77, 70 P2d 39 (1937), to this case. The court in Willamette
Col. & Credit held that, "where a release or satisfaction of a mortgage has been entered
by the record owner, a subsequent purchaser, for value and without notice, will be
protected against the lien of a prior unrecorded assignment of the mortgages." Id. at 85.
Willamette Col. & Credit has no application here for the reason that the competing
interest at issue in that case was unrecorded. Here, plaintiff's interest was timely
recorded in the project's chain of title.
16 That provision states:
"The Owner warrants that it has not and will not execute any other
Declaration with provisions contradictory to, or in opposition to, the
provisions hereof, and that in any event, the requirements of this
Declaration are paramount and controlling as to the rights and obligations
herein set forth and supersede any other requirements in conflict herewith."
22
agreement could somehow be deemed a mere "amendment" to the declaration, its content 1
does not "comply" with the Internal Revenue Code or other applicable law. Rather, 2
abrogation of the enforcement rights conferred on plaintiff is inconsistent with the proper 3
application of IRC section 42 and applicable regulations and authoritative 4
pronouncements pertaining to the LIHTC program.17
5
Defendants concede that there is no express authority under federal law to 6
extinguish the enforcement rights conferred on qualified tenants for noncompliance with 7
LIHTC program requirements during the extended-use period.18
They each argue, 8
17
Defendants rely on an IRS publication entitled Guide for Completing Form 8823
Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition
(the guide), which provides, in part, that, "when a building or project is removed from the
program, state agencies have discretionary authority to release the extended use
agreement and remove the deed restriction." There are at least two problems with
BRCP's reliance on the guide. First, the guide states on its cover that "[u]nder no
circumstances should the contents [of this guide] be used or cited as authority for setting
or sustaining a technical position." Second, the guide is dated January 2007, and the
release agreement here was executed in 2005. Because it post-dates the agency action at
issue in this case, it could not have served as authority for the Department's decision.
18 Nor do defendants argue that abrogation of plaintiff's enforcement rights is
authorized under state law. In fact, it appears that such action is contrary to the
Department's own regulations. OAR 813-090-0029 provides, in part:
"(2) An executed Reservation and Extended Use Agreement shall be
enforceable in any State court by any individual who qualified for
occupancy by virtue of the income limitation set for such buildings; shall be
binding on all successors of the Applicant; and the Declaration of Land Use
Restrictive Covenants incorporated within the Reservation and Extended
Use Agreement shall be recorded pursuant to State law as a restrictive
covenant."
OAR 813-090-0070 provides, in part:
"(5) The Declaration of Land Use Restrictive Covenants shall be deemed a
23
however, that doing so is consistent with the letter and spirit of the LIHTC program. We 1
disagree. 2
The private enforcement rights conferred on qualified low-income tenants 3
are an integral part of Congress's comprehensive design. As already noted, the LIHTC 4
program is front-loaded. See ___ Or App at ___ (slip op at 2). A project owner typically 5
receives tax credits during the first 10 years of a project's life. Moreover, although a 6
portion of the tax credits allocated to a project may be recaptured by the IRS in the event 7
of noncompliance with program requirements, the recapture period corresponds to the 15-8
year compliance period, not the additional 15-year extended-use period. See IRC § 42(j). 9
Congress anticipated that the enforcement role played by the pertinent government 10
agencies gradually would diminish and effectively end before expiration of the 30-year 11
extended-use period. 12
To effectuate continued enforcement, Congress conferred on qualified 13
tenants enforcement rights for the duration of the 30-year extended-use period. IRC § 14
42(h)(6)(B)(ii). The private enforcement mechanism included in the tax code and 15
contract enforceable by one or more tenants as third-party beneficiaries of
the Declaration of Land Use Restrictive Covenants and Reservation and
Extended Use Agreement.
"(6) In the event the Project owner fails to satisfy the requirements of the
Declaration of Land Use Restrictive Covenants and Reservation and
Extended Use Agreement and legal costs are incurred by the Department or
one or more tenants or beneficiaries, such legal costs, including legal
charges and court costs (including costs of an appeal), are the responsibility
of and may be recovered from the project owner."
24
restated in the declaration ensures full performance of the promises made by a recipient 1
taxpayer after the tax credits are fully allocated and the recapture period has passed. 2
As noted, see ___ Or App at ___ n 11 (slip op at 10 n 11), Congress 3
explicitly described two situations in which the extended-use period terminates before the 4
end of the 30-year extended-use period. One of those triggering events is an acquisition 5
of the project by foreclosure or instrument in lieu of foreclosure, "unless the Secretary 6
determines that such acquisition is part of an arrangement with the taxpayer a purpose of 7
which is to terminate" the extended-use period. IRC § 42(h)(6)(E)(i)(I). We agree with 8
amicus National Housing Law Project (NHLP) that, 9
"in specifically prohibiting purposeful foreclosure from terminating an 10
extended use period, Congress clearly articulated its intent to ensure 11
compliance with long-term use requirements. Congress certainly did not 12
intend to prohibit purposeful foreclosure while simultaneously allowing 13
noncompliance with program requirements--which is also wholly within an 14
owner's control--to produce the identical result." 15
We also agree with plaintiff and NHLP that, if failure to comply with 16
program requirements were grounds for early release from the applicable use restrictions, 17
it would create a perverse incentive to encourage noncompliance. An owner of a 18
property subsidized with public funds would be encouraged to violate program 19
requirements in order to secure early release from the LIHTC program. Once released 20
from the obligation to maintain the property as low-income housing for the stated period, 21
an owner would be free to charge market-rate rent or to sell the project for a profit, 22
thereby profiting from a public subsidy without fulfilling the conditions of that subsidy. 23
In sum, permitting abrogation of LIHTC program-prescribed use 24
25
restrictions--and, specifically, tenants' rights to enforce those restrictions--by way of 1
"releases" between project owners and local housing agencies would subvert, and even 2
invert, Congressional intent. Plaintiff is, thus, entitled to enforce the declaration's use 3
restrictions, and the trial court erred in concluding otherwise. 4
Reversed and remanded. 5
LIHTC COMPLIANCE AFTER THE COMPLIANCE PERIOD: ONCE THE CREDITS ARE GONE
OHIO’S TAKE
Characteristics of the Ohio market:
Little upside conversion potential as may be seen in certain “hot markets” on the east or west coasts (though this may be changing in certain urban markets)
Market rents are often not significantly higher than restricted rents
Significant number of single-family lease-purchase units
Compliance and Monitoring
Tenant Certifications o Projects without HOME funds require certification only at initial
occupancy o Projects with HOME or other forms of assistance carry greater re-
certification requirements o OHFA has an online database called DevCo in which tenant
certification may be submitted, but 3rd party products may also be used.
Monitoring o Frequency and intensity of site monitoring based on past
performance and other factors o Annual reporting required through DevCo o Certain monitoring rules and procedures are relaxed during
extended use o Deficiencies may be addressed through legal action, watch list, “not
in good partnership” status (preventing future participation), etc.
Covenant Release and Covenant Modification Policy
Lease-Purchase o OHFA processes covenant release for Lease-Purchase projects
through qualified contract process, even though these projects typically waived the right to submit a QC request
o Once the required information is submitted, OHFA issues a Conditional Release of Covenant, the purpose of which is to provide the 3-year protection required under Sec. 42(h)(6)(E)(ii) against:
no-cause evictions; or rent increases not otherwise allowable under Sec. 42
o Since the 3-year protection is only intended to apply to existing tenants, the Conditional Release terminates with respect to any unit that is or later become vacant.
o OHFA may choose to issue Partial Covenant Releases in escrow (to be recorded upon the sale of each home) instead of a blanket Conditional Release
Multifamily o The right to request a qualified contract has generally be waived by
all projects after 1996, and although OHFA is still free to consider such requests.
o Generally, OHFA prefers to modify rather than release covenants o Decisions are made on a case-by-case basis
Underwriting type analysis Significant Data Submission
o Circumstances warranting covenant modification: Vacancy rates Insufficient rental income in relation to costs Expiration of tax abatement Depletion of reserves Capital Needs
o Approaches that OHFA may take: Increasing income or rent limits Increasing number of market-rate units
Post-Modification Reporting/Analysis is Required
PROJECT REQUESTS & CHANGES
Additional forms can be found under our Compliance Forms (http://ohiohome.org/compliance/forms.aspx) and Compliance Policies(http://ohiohome.org/compliance/policies.aspx) webpages.
OWNER, GENERAL PARTNER & MANAGEMENT COMPANY CHANGES
Owner Management Company Change Policy (http://ohiohome.org/compliance/documents/ECP-23-OwnerManagementChange%20Policy.pdf) (264 KB Adobe PDF
File) – revised 10/3/16
PC-E40 Owner Capacity Review (http://ohiohome.org/compliance/documents/PC-E40-OwnerCapacityReview.pdf) (2.15 MB Excel File) – e៛�ective 10/3/16
PC-E39 Management Change Form (http://ohiohome.org/compliance/documents/PC-E39-ManagementChange.pdf) (159 KB Excel File) – revised 8/31/16
PC-E38 Management Capacity Review (http://ohiohome.org/compliance/documents/PC-E38-ManagementCapacity.pdf) (1.79 MB Adobe PDF File) – revised 8/31/16
PC-E37 OHFA Disposition of Property Form (http://ohiohome.org/compliance/documents/PC-E37-DispositionPropertyForm.pdf) (201 KB Adobe PDF File) – revised
8/31/16
QUALIFIED CONTRACT REQUESTSCertain Housing Tax Credit properties can seek a buyer through the quali�ed contract process. Review the restrictive covenant for your project to determine if itquali�es.
If you have any questions about quali�ed contract requests, contact your regional representative (http://ohiohome.org/compliance/contact.aspx).
LIHTC Property Sales (http://ohiohome.org/compliance/propertysales.aspx)
Quali�ed Contract Request Instructions and Worksheets (http://ohiohome.org/compliance/documents/quali�edcontract.xls) (113 KB Excel File)
RESTRICTIVE COVENANT RELEASE/MODIFICATIONRecently, OHFA has witnessed an increased number of requests for the release or modi�cation of restrictive covenants. OHFA's Quali�ed Allocation Plan (QAP) after1996 required owners to waive the right to request a quali�ed contract which is one means available to sell the low income portion of a project, but often a path to acovenant release. Therefore, many owners have been requesting a full release of the restrictive covenant. In many instances, a modi�cation to the restrictivecovenant rather than a full release of the covenant is more appropriate. This entails increasing the number of "market units" (units with no rent or incomerestrictions) or increasing the rent and income limits.
Requests for project modi�cations or releases should be sent to Todd Carmichael, Compliance Manager, O៝�ce of Program Compliance [email protected] (mailto:[email protected]) or by mail to 57 East Main Street, Columbus Ohio 43215.
Restrictive Covenant Release/Modi�cations Policy – Updated 1/3/14 (http://ohiohome.org/compliance/documents/RestrictiveCovenantPolicy.docx) (146 KB Word
File)
(HTTP://OHIOHOME.ORG/INDEX.ASPX)
(http://ohiohome.org/compliance/changes.aspx#)
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OUR PARTNERS (HTTP://OHIOHOME.ORG/PARTNERS/DEFAULT.ASPX) NEWS & EVENTS (HTTP://OHIOHOME.ORG/NEWS/DEFAULT.ASPX)
HOMEBUYERS (HTTP://OHIOHOME.ORG/HOMEBUYERS.ASPX) RENTERS (HTTP://OHIOHOME.ORG/RENTERS.ASPX)
CONTACT (HTTP://OHIOHOME.ORG/CONTACT.ASPX)
Covenant Release Template (http://ohiohome.org/compliance/documents/Template-CovenantRelease.doc) (44 KB Word File)
Covenant Modi�cation Template (http://ohiohome.org/compliance/documents/Template-CovenantModi�cation.doc) (43 KB Word File)
Restrictive Covenant – Sample Proforma (http://ohiohome.org/compliance/documents/RestrictiveCovenantModi�cations-Sample.xlsx) (21 KB Excel File) – updated
2/24/14
PC-E41 Restrictive Covenant Release Questionnaire (http://ohiohome.org/compliance/documents/RestrictiveQuestionnaire_PC-E41.pdf) (515 KB Adobe PDF File) –
posted 5/16/11
CHANGES TO UNITS
PC-E28 Noti�cation of Employee Unit (http://ohiohome.org/compliance/documents/PC-E28-EmployeeUnits.pdf) (151 KB Adobe PDF File) posted 5/13/16
PC-E50 Noti�cation of Unit O៝�ine (http://ohiohome.org/compliance/documents/PC-E50-O៝�ineUnits.pdf) (67 KB Adobe PDF File) posted 5/13/16
QUICK LINKS
Compliance FAQs(http://ohiohome.org/compliance/faqs.aspx)
Compliance Forms(http://ohiohome.org/compliance/forms.aspx)
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Compliance Trainings & Regional Forums(http://ohiohome.org/compliance/events.aspx)
Compliance Message Updates & Archive(http://ohiohome.org/compliance/messagearchive.aspx)
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Housing Investment Fund(http://ohiohome.org/compliance/hif.aspx)
IRS & HUD Guidance(http://ohiohome.org/compliance/irs.aspx)
LIHTC Property Sales(http://ohiohome.org/compliance/propertysales.aspx)
Ohio Housing Locator(http://www.ohiohousinglocator.org/)
Ohio Section 811 Program(http://ohiohome.org/ppd/ohio811.aspx)
Project Requests & Changes(http://ohiohome.org/compliance/changes.aspx)
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Renters & Tenant Rights
Page 1 of 3 ECP-26 Revised 10/28/2016
Extended Use Requirements & Monitoring Policy
Extended Use Requirements & Monitoring Policy Effective May 16, 2012
Purpose & Background: In IRC§ 42, the Owner agrees to provide low-income housing for at least 30 years. The Owner receives credits for ten years (credit period), must provide low-income housing under IRS jurisdiction for fifteen years (compliance period), and under the Ohio Housing Finance Agency’s (OHFA) sole jurisdiction for an additional fifteen years (Extended Use period). During this Extended Use period of fifteen years, the project must continue to operate as a Housing Tax Credit project, which means leasing units to low income households in accordance with IRC§42 of the Internal Revenue Code. OHFA has some flexibility in how the compliance requirements for Housing Tax Credit projects are applied.
Effective January 1, 2016, properties between the 16th to 30th years of compliance, the Extended Use period, will have both a physical and file review conducted on either a 3 year or 5 year rotation cycle.
Tenant Certifications: The Owner must continue to implement any and all rent and income restrictions, as well as abide by any other terms of restrictive covenant, other OHFA issued funding agreements, and any other relevant local, State, or federal laws. The use of the Tenant Income Certification (TIC) and other OHFA required forms must be used to show that the tenants are properly qualified and that the restrictions are being met. This includes income verification consistent with methods outline by both the HUD 4350.3 Chapter 5 and guidance from the IRS in light of the Housing Tax Credit Program, which must be completed at move in for all new residents occupying low income units. The TIC can be completed in DevCo, OHFA’s online database and reporting software, or in compliance software used at the property that includes the TIC.
Once initially income qualified for the Housing Tax Credit (HTC) program, Owners are not required to complete a tenant recertification annually. However if the project has gap financing from an OHFA program that requires recertifications, these will need to be completed as per those program requirements throughout the affordability period defined in the Funding Agreement. Projects with HOME or the Ohio Housing Trust Fund (OHTF) that were allocated by OHFA must complete an annual income certification for assisted units. Gap financing in the form of HOME or OHTF outlines that assisted households must be recertified annually. Certifications include a full third-party certification at years One, Six, Twelve, Eighteen, Twenty-four and Thirty. In the intervening years, income should be self-certified by the household. All income certifications must contain the OHFA Tenant Sworn Income and Asset Statement (PC-E01), the OHFA Student Status Certification (PC-E42) and if needed, the income verifications as outlined above. Note: Programs such as Section 8 and RD require an annual income certifications. – Requirements for these programs are not waived by this policy.
For Extended Use properties that do not HOME funds, OHFA does not require the use of the Student Status Certification PC-E42. However, it is recommended for properties intending to apply for OHFA funding in the future, to continue to do annual student certifications for their tenants. If the property has HOME funds the Student Status must verified annual throughout the affordability period for the HOME funds. For a full list of the required forms, review http://ohiohome.org/compliance/forms.aspx.
Page 2 of 3 ECP-26 Revised 10/28/2016
Extended Use Requirements & Monitoring Policy
Site Monitoring: OHFA will use an Extended Use Needs Assessment Tool to determine the frequency of site visits. The Assessment Tool will be based upon multiple factors related to the project (e.g. past performance, systemic compliance issues, owner or management company change) and program/property specifics to identify relevant risks and the potential impact of those risks.
The following will be reviewed during site visits:
1. 10% of the occupied units files 2. 10% of all affordable units will have a physical inspection 3. 100% of all building exteriors 4. All projects will be treated as a multiple building project as per the owner election on 8b of the 8609 5. The owner needs to follow the same Housing Tax Credit rules EXCEPT: Unit Vacancy Rule, Available
Unit Rule, and Student Rule. 6. If the property has active HOME compliance all requirements and regulations must continue to be
followed for the HOME program. Note: If owners are contemplating resyndication (e.g. new allocation of housing tax credits) to preserve compliance with previously qualified households, all items listed above in #4 and #5 are applicable and owner should self-monitor for compliance.
A written report will be prepared by OHFA and generally sent to the owner no later than 15 business days after the on-site review. OHFA reserves the right to review additional files and/or inspect additional units and buildings if noncompliance is found.
If the Owner fails to respond and/or correct any deficiencies noted in the review report, OHFA may recommend the owner, and, if warranted, the property management company, be placed on OHFA’s Watch List and/or Not in Good Partnership standing which would prohibit the owner from accessing OHFA program funding.
Owners are cautioned that if the project has federal HOME Program funds allocated by OHFA, the project must continue to abide by the terms of the funding agreement. Projects with HOME funds may be subject to compliance inspections consistent with the 2013 Final HOME rule.
It is important to note OHFA may take legal action against owners who fail to abide by the requirements in the Restrictive Covenant and/or OHFA funding agreements.
Utility Allowances: If an owner is currently using a consumption-based utility allowance, the owner must use another utility allowance methodology as outlined in OHFA’s Utility Allowance Policies and Procedures policy (Utility Allowance Policies and Procedures) when the allowance is due for an annual update. All other OHFA approved utility allowances may continue to be used. During Extended Use, the owner is not required to submit to OHFA for approval any allowance, but it must be updated on an annual basis. However, OHFA reserves the right to request documents regarding the utility allowance. Changes in utility allowances must be completed in DevCo on an annual basis, at minimum as per Internal Revenue Code Section 1.42-10.
Page 3 of 3 ECP-26 Revised 10/28/2016
Extended Use Requirements & Monitoring Policy
Annual Reporting: OHFA requires that all properties in Extended Use report annually, this is done with a submission of the Annual Owner Certification and Tenant Data through DevCo, OHFA’s online database and reporting software. The deadline for annual reporting is typically on or around March 1st of each year and must cover activity at the property from January 1st to December 31st of the reporting year. (DevCo Homepage)
Extended Use properties are required to submit tenant data on all households residing at the property for that reporting year. This will be completed in DevCo, OHFA’s online reporting system, and should include all event types: move-ins, transfers, composition updates, rent updates, and recertifications, if applicable. The student (status) update is not required for Extended Use properties. Because a student update is not required, there is still the potential that not every unit will have tenant information reported for the year based on the types of events that occurred in the units.
Restrictive Covenant: OHFA recognizes that projects entering Extended Use may face significant financial challenges. Therefore, OHFA will consider modification requests to the Restrictive Covenant that could help the project become more financially viable. Modifications could include relief from rent and income restrictions. OHFA’s guidance regarding covenant modifications or releases can be found at http://ohiohome.org/compliance/changes.aspx.
Restrictive Covenant Release/Covenant Modification Policy
Recently, OHFA has witnessed an increased number of requests for the release or modification
of restrictive covenants. OHFA’s Qualified Allocation Plan (QAP) after 1996 required owners
to waive the right to request a qualified contract which is one means available to sell the low
income portion of a project, but often a path to a covenant release. Therefore, many owners
have been requesting a full release of the restrictive covenant. A variety of reasons for the
request are often provided including the requirement to refinance the property, marketing and
vacancy issues, reduction or depletion of replacement reserve account, and the regulatory
burden, among others. In many instances, a modification to the restrictive covenant rather than
a full release of the covenant is more appropriate. This entails increasing the number of
“market units” (units with no rent or income restrictions) or increasing the rent and income
limits.
Requests for project modifications or releases should be sent to Todd Carmichael, Compliance
Manager, Office of Program Compliance at [email protected] or by mail to 57 East
Main Street, Columbus Ohio 43215.
OHFA will review an owner’s request on a case-by-case basis. Rather than approving a full
release of restrictive covenant and based upon the information provided in the request, OHFA
will consider modifying the mix of market and low-income units, and increasing both rent and
income restrictions. OHFA’s decision to approve or disapprove an owner’s request will be
based upon a number of factors including, but not limited to, vacancy rates, market conditions,
financial stability, property condition and age, recent and planned capital improvements, and
current or past compliance issues including if the property is on OHFA’s Project Watch List or
has Uncorrected 8823 Forms. Restrictive covenant modification approvals will have the
following limitations or restrictions. OHFA may impose additional restrictions at its sole
discretion.
An owner’s request for a Multifamily Covenant Modification or Release must include the
following. OHFA may require additional documents not contained in this list.
1. A cover letter fully explaining why the modification or release is necessary. The
explanation should include any attempts to refinance or stabilize the property. If the
request is based upon the current owner’s inability to refinance or sell the project
due to the restrictions contained in the Restrictive Covenant, the letter should
contain information about the current state of the project, what would happen if the
property is not sold to a buyer, and why a buyer cannot acquire the property with
Ohio Housing Finance Agency
2
the restrictions in place. In order to help determine if the covenant modification or
release request is based upon market and/or rent or income problems, OHFA
recommends the owner also submit a market analysis. The analysis should include
but is not limited to the following information:
The number and age of other Housing Tax Credit projects located within the
Primary Market Area of the subject property.
Current vacancy rates for the property and vacancy rates over the last two
years for other Housing Tax Credit projects located within the Primary
Market Area.
2. Explanation of any steps taken by the owner over the last two years to ease entry
requirements (e.g. minimum income level). For a subject property that is
experiencing over-income applicants due to income restrictions, explain how much
over-income the applicants are and the household size.
3. History of the use of the project’s reserve account (operating/replacement) for the
last three tax years including the required monthly replacement amount.
4. Description of any capital improvements (i.e. roof, windows, carpet, HVAC
systems, parking lot surfacing) that were completed in the last five years, and what
type of capital improvements are planned for the next two years.
5. OHFA’s Covenant Release Questionnaire (form PC-E41). The Questionnaire
includes questions on vacancy rates, current condition of the property, attempts to
refinance, marketing efforts, and why the owner believes the covenant is preventing
success of the property’s stability and sustainability.
6. A completed Project Proforma. The Proforma will ensure sufficient data to analyze
proposed changes to rents.
7. Prior year’s audited financial statements and current year-to-date audited financial
statements.
8. Copy of the property’s current year rent roll.
An owner’s request for a Single-family Covenant Release must include the following. OHFA
may require additional documents not contained in this list. Further information regarding
single-family covenant releases is provided on pages 4-6 of this policy.
1. A cover letter fully explaining why the modification or release is necessary. The
explanation should include any attempts to refinance or stabilize the property. The
cover letter must contain the following:
Description of the property’s real estate tax liabilities, water/sewer account
payables, and operating, security deposit, and reserve account balances
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Description of the current occupancy to include number of vacant homes,
number of homes that have been vacant more than 60 days, and the number of
homes occupied
Description of the resident prospects such as the willingness and ability to
purchase the home. The description should include the number of families with
good rent payment history, number of families that do not want to purchase (if
known), and if a financing pool has been secured for families who cannot obtain
conventional financing
2. OHFA’s Covenant Release Questionnaire (form PC-E41).
3. Copy of the property’s current year rent roll.
Possible Project Changes for Approved Covenant Modifications
1. Market units: the number of approved market rate units will be no greater than twice
the average monthly vacancy rate from the past year. OHFA may approve another level
of market units based on owner request or its analysis of project needs.
2. Income and rent restrictions: increases to both rent and income restrictions will be up to
the minimum set aside elections.
3. Gap Financing/HOME/HDAP restrictions will remain in place through the affordability
period as found in the funding agreement and 24 CFR Part 92, specifically 92.252e.
The exception to this restriction will be HOME agreements where the HOME Program
affordability period has been completed {New Construction (20 years) and
Acquisition/Rehab (15 years)}. The affordability period begins on the date the project
was placed in service. OHFA may modify the HOME agreement to reflect a change in
the affordability period. When possible, OHFA will modify rent and income
restrictions.
4. Other programs: Compliance requirements for Section 8 and/or Rural Housing Service
(RHS) {e.g. RD} remain in place.
Reporting Requirements for Covenant Modification Approvals
If a restrictive covenant modification is approved, owners are required to submit the Extended-
Use Owner Certification (for projects in extended use) or the Annual Owner Certification by
March 1st of every year. Additionally, OHFA will require documents that measure the progress
and effectiveness of the modification(s). Owners are required to submit the following reporting
documents by January 31st of each year. The documents should be submitted to the attention
of Todd Carmichael, Compliance Manager, Office of Program Compliance. The documents
include but are not limited to:
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Correspondence that explains how the modification has or has not improved the
property’s financial viability
The past year’s audited financial statement
Copy of any capital needs assessments conducted or scheduled
Copy of the current year’s rent roll that shows the average monthly vacancy rate,
average number of residents with an outstanding account balance including the low
and high outstanding amount and the number of move-ins
Status of outstanding bank debt
The current year’s property reserve account balances (operating and replacement)
Restrictive covenant modifications do not require OHFA Board approval. Specific OHFA
Board approval is only required when the owner will not accept the approved modifications
and instead requests a full release. OHFA Board approval will also be required should the
owner fail to adhere to conditions as outlined in an approved modified covenant. Staff will
present a recommendation to the Multifamily Committee of the Board. The Multifamily
Committee will then vote on whether to recommend the action to the full Board. The request
and supporting evidence from the owner will be provided to the Committee and Board. The
owner may be present at both meetings to answer any questions from Board members.
Restrictive Covenant Releases for Lease-Purchase Properties
If the Restrictive Covenant indicates that the property is a lease-purchase project, then the units
may be sold to Qualified Existing Tenants at the end of the 15-year compliance period. A
“Qualified Existing Tenant” is defined as the current tenant who was properly qualified under
the requirements of Section 42 of the Internal Revenue Code of 1986 as amended. This
expressly includes a tenant whose income would not currently qualify under Section 42, but
who was qualified at the time of original occupancy of that unit. According to the Internal
Revenue Code Section 42 (h)(6)(E)(ii), for a three-year period following the termination of
extended use, (i.e. release of the restrictive covenant) low-income residents may not be evicted
other than for just cause, nor may the rent for low-income units be raised above the applicable
tax credit rent. These protections apply to low income residents with a lease in effect as of the
date the restrictive covenant is released. New tenants of previously vacant units must have
incomes that would currently qualify under Section 42.
The following procedure will be used for the release of lease-purchase units at the end of the
15-year compliance period. Generally, OHFA will prepare the Release of Restrictive
Covenant. However, preparation of the Covenant Release by the owner or owner’s attorney is
acceptable so long as one of OHFA’s Covenant Release templates is used. The templates can
be found on OHFA’s website via the following links: Covenant Modification Template and
Covenant Release Template.
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1. Within 120 days following the end of the compliance period, the owner will send
written notification to Todd Carmichael, Compliance Manager, Office of Program
Compliance at [email protected] or by mail to 57 East Main Street,
Columbus, Ohio 43215. Upon its receipt of such notification, OHFA will prepare either
a blanket release or a separate Partial Release of Restrictive Covenants and Partial
Release of Mortgage applicable to each individual unit in the project. The owner’s
notification shall include the address and tax identification number of each unit to be
sold to an Eligible Tenant.
2. OHFA will execute such Partial Releases and deposit them in escrow with a title
insurance agent selected by the owner and acceptable to OHFA (the “Escrow Agent”).
The Partial Release for any unit may be recorded only upon the sale of that unit to a
Qualified Existing Tenant. Any property that is not sold to a Qualified Tenant such as a
landlord or non-owner tenants will be conveyed using a Deed Rider to Enforce the
Three-Year Restriction Period. The Deed Rider should be recorded simultaneously with
the recording of the Release. The deed restriction requires that for the next three years,
the tenant cannot be evicted except for good cause and the rent cannot exceed the
applicable tax credit rent. Additionally, the owner must supply the following
information for any property not sold to a Qualified Tenant:
Summary of the new owner’s experience in affordable or rental housing
Capacity of the new owner
Performance of the new owner in owning and/or renting housing. Information
must include any housing or code violations and if the owner was penalized by
any local court for not responding to code or housing violations
This information should be sent to Todd Carmichael, Compliance Manager, Office of
Program Compliance at [email protected]. OHFA will not require approval
of the new owner prior to the sale of the property for the purpose of executed Releases.
However owners that have little or no affordable housing experience, limited capacity
and/or a history of housing code violations, may be subject to placement on OHFA’s
Multifamily Watch List.
If at any time during the three-year restriction period the owner fails to adhere to the
requirements according to the Internal Revenue Code Section 42 (h) (6) (E) (ii), the
owner shall be deemed in violation of the Partial Covenant Release and either and/or
both the existing tenant and the Ohio Housing Finance Agency shall be entitled to
injunctive relief against the owner in order to specifically enforce the three-year
restrictions. The restrictions shall run with the land and binding upon any successors in
the interest of the property. The restrictions shall expire with respect to each unit on the
earlier of:
a) the end of the restriction period
b) the date of termination of the tenancy of the existing tenant either for good cause or
voluntarily by the existing tenant
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c) on the recording date, as to any unit that is not occupied on the recording date OR
d) on the date a unit is acquired by the Existing Qualified Tenant of that unit
3. If financial assistance was awarded under the Housing Development Assistance
Program (HDAP) using funding from the Ohio Housing Trust Fund or the HOME
Investment Partnerships Program, the HDAP Recipient may request that OHFA permit
them to pass on a proportionate amount of the outstanding HDAP principal to an
income-eligible homebuyer as a forgivable loan, according to procedures outlined in
the OHFA Housing Credit Gap Financing Guidelines.
Requests for lease-purchase covenant releases do not require approval by the OHFA Board. If
OHFA approves a covenant release, the owner is required to notify current tenants within 30
days that the covenant has been released and explain that a three-year restriction period that
will be enforced per Section 42 of the Internal Revenue Code. The owner must provide a copy
of the tenant notice to Todd Carmichael, Compliance Manager, Office of Program Compliance
at [email protected] or mail to 57 East Main Street, Columbus, Ohio 43215.
Ohio Housing Finance AgencyLow Income Housing Tax Credit Program
Instructions for Calculation of Qualified Contract Price
If you have any questions with respect to the preparation of the Calculation Form and Worksheets, you are encouraged to contact the OHFA Compliance Analyst assigned to the project.
In order for OHFA to assist in identifying a purchaser for your project, you must complete the Calculation of Qualified Contract Price form attached to these instructions (the “Calculation Form”). This calculation will establish the minimum price at which your project will be offered for purchase. The completed worksheets must be accompanied by a specific written request, by the owner, that OHFA identify a purchaser of the qualified contract. The "Calculation of QCP" worksheet, Worksheets A-E, and a copy of the recorded restrictive covenant must accompany the written request, or be submitted via e-mail.
To complete the Calculation Form, you must complete Worksheets A through D and, if the project has market rate units, Worksheet E. The results of Worksheets A through E are transferred to the Calculation Form to determine the Qualified Contract Price for the project.
The Calculation Form is derived from a statutory formula set forth in Section 42(h)(6)(F) of the Internal Revenue Code. The statutory formula divides the purchase price between the low income portion of the project and the market rate portion of the project, if applicable. The Qualified Contract Price for the low income portion of the project is equal to the sum of project indebtedness (Worksheet A), investor equity (Worksheet B), and other capital contributions (Worksheet C) reduced by the total cash that has been distributed, or is available for distribution, from the project (Worksheet D). If the project has any market rate units, the Qualified Contract Price is increased by the fair market value of those units (Worksheet E).
The twelve month period in which OHFA has, if it so chooses, to identify a buyer for your project will not commence until the Calculation Form, and Worksheets A through E, are completed and returned to OHFA with the notification letter and all other required materials.
Note: If the project received gap financing from OHFA (e.g. HDAP), the obligations for that funding will remain in force, regardless of the results of the qualified contract review.
Notice of LIHTC Property for Sale
The owner of West Bay Apartments in Columbus has pursuant to IRS Code Section 42(h)(6)(E)(i)(II) provided proper notice of intent and requests that the Ohio Housing Finance Agency ("OHFA") find a qualified buyer who will purchase the property at the assigned price. For a one year period, beginning August 25th, 2016 West Bay Apartments are being made available for purchase to qualified entities who will maintain the low-income provisions of the property.
• West Bay Apartments is located at 4711 Bay Run Drive Columbus OH 43228.o The property consists of 15 buildings with a total of 244 units.o The qualified contract price is $9,799,149.17.
If your organization is in a position to purchase West Bay Apartments at the posted price and would like to explore it further, please contact:
John Grantham Elmington Capital Group at 615.490.6714 or [email protected]
Interested buyers should coordinate with the owner’s representative to schedule a site visit and/or possible inspection of the property.
Please be advised that the buyer must agree to operate the property in accordance with the low-income restrictions already in place. The owner will have the choice of any offer at or above the posted qualified contract price.
The qualified contract one year period will expire at 5 p.m. Columbus local time on August 25, 2017.