Alaska Supreme Court Rules on Owner’s Extended Use Commitment
In a recent case from Alaska, an LIHTC site owner tried to exercise an option to be able to exit the affordability restrictions put in place by the extended use agreement. There are two ways an owner can escape extended use commitments, but the court ruled that neither applied here. In applying for LIHTCs and signing the restrictive agreement the owner clearly showed an intent to commit to maintaining affordability requirements for 30 years.
An owner in Alaska sued the Alaska Housing Finance Corporation to be able to terminate affordability restrictions at an LIHTC site.
The Internal Revenue Code (IRC) establishes rules about the length of time an LIHTC site must maintain affordability requirements to receive tax credits. The IRC says that developers must make “an extended low-income housing commitment” to receive credits, requiring the project to maintain affordability for an “extended use period.” The extended use period lasts 15 years beyond the initial 15-year compliance period, for a total of 30 years, unless otherwise specified by the state agency’s agreement.
The IRC provides two possibilities for ending the affordability restrictions before the extended use period’s end. First, the extended use period may end prematurely if the project is acquired from the developer by foreclosure (or instrument in lieu of foreclosure).
Second, the extended use period may end prematurely under what’s known as the “qualified contract” option. Under this option an owner may remove the project from the program if, after the initial 15-year compliance period, the state housing agency can’t find a buyer for it that will continue operating it as low-income housing. But a state may exclude the qualified contract option. The IRC states that the qualified contract option “shall not apply to the extent more stringent requirements are provided in the agreement or in State law.”
In this case, the owner sought to end the site’s affordability restrictions at the 15-year mark using the qualified contract option. The state housing agency denied the owner’s request to exercise a qualified contract option.
Court’s Ruling and Reasoning
The Alaska Supreme Court ruled that a developer that received LIHTCs from the Alaska Housing Finance Corporation in 2001 is ineligible to exercise a qualified contract option to exit the agreement after 15 years.
When the owner applied for LIHTCs in 1999 under the state housing agency’s Qualified Allocation Plan (QAP)—the document a state housing agency publishes that contains the selection criteria it uses to award credits—the plan stated that six points would be “awarded to applications that commit the project to an extended low-income use equaling 30 years. An extended use requirement . . . is required.” In its application, the owner awarded itself six additional qualifying points in its application for “Extended Low Income project use,” stating the project would “maintain affordability for a 30-year period.”
The court stated that the qualified contract option isn’t available to the owner and the owner had agreed to an affordability requirement that’s more stringent than the federal baseline. The written documents showed the owner took the six extra qualifying points in exchange for maintaining affordability for 30 years.
In addition, the court said the IRC doesn’t create a right to a qualified contract option that a developer “waives.” The IRC allows states to eliminate the qualified contract option. Ultimately, the owner applied for and received LIHTCs in exchange for affordability restrictions at the site with an extended 30-year commitment and no qualified contract option.
- Creekside LP v. Alaska Housing Finance Corp., March 2021
What’s Included in an Extended Use Agreement?
The extended use agreement commits owners to maintaining low-income units at their site even after the compliance period has ended and they’ve claimed all their tax credits. It spells out the requirements for compliance during the extended use period.
Although owners can’t lose credits during the extended use period, state housing agencies can sue owners for breach of contract if management fails to follow the provisions of this agreement.
According to the IRS, extended use agreements must:
- Specify that the applicable fraction for the building for each year in the extended use period won’t be less than the applicable fraction specified in the extended use agreement;
- Prohibit the eviction or the termination of tenancy (other than for good cause) of an existing tenant of any low-income unit, or any increase in the gross rent with respect to such unit not otherwise permitted under tax credit regulations;
- Allow individuals (whether prospective, present, or former occupants) who meet the LIHTC income limitations the right to enforce in state court the maintenance of the applicable fraction and the prohibition against the eviction or the termination of tenancy (other than for good cause) of an existing tenant of any low-income unit, or any increase in the gross rent with respect to such unit not otherwise permitted under tax credit regulations;
- Prohibit the disposition to any person of any portion of the building unless all of the building is disposed of to that person;
- Prohibit the refusal to lease to Section 8 voucher holders because of the status of the prospective tenant as such a holder; and
- Provide that the agreement is binding on all successors of the owner.