Affordable Housing Loss Grows as ‘Qualified Contracts’ Sap Thousands of Housing Credit Units
LISC is pressing Congress and state housing officials to address the troubling effects of QCs, which reduce the amount of rental housing that is available to families with low incomes. “As a country, we can’t afford to let that continue,” write LISC’s Matt Josephs and Michael Skrebutenas, in a new commentary on the issue. “We can’t afford to subsidize affordable housing development for public good only to watch it slip away for private windfall.”
A loophole in the nation’s top affordable housing production program is costing communities approximately 10,000 rental homes each year and, without intervention from Congress or state housing agencies, will make it even more difficult for families to find housing within their means—especially in gentrifying and high-opportunity areas.
At issue is a provision in the federal Low Income Housing Tax Credit (Housing Credit) program, which finances 90 percent of U.S. affordable rental housing development. Units in Housing Credit properties are generally intended to be affordable for at least 30 years—15 years during the initial compliance period and an additional 15 years (and sometimes more) under “extended use” provisions in the tax code.
But there is a significant exception, known as a qualified contract (QC). It allows an owner to ask its state housing finance agency (HFA) to seek a buyer for its property, beginning in year 14. The offering price would be set based on an inflation-adjusted return on equity, and the buyer would be required to keep the property affordable for the remainder of the 30-year term.
Unfortunately, it rarely works out that way. Too often, the HFA is unable to find a buyer because the asking price exceeds the value of the property. After a year, if the HFA sale effort stalls, the existing owner is free to sell the property or keep it. In either instance, the property is permitted to transition to market-rate rents after a three-year period in which existing tenants are protected.
In other words, contrary to congressional intent, the QC provision has become an almost-automatic opt out for profit-seeking LIHTC owners. To date, it has drained more than 100,000 units from the national stock of affordable rental housing.
In response, the Federal Housing Finance Agency held a listening session to take in public feedback on how the Government Sponsored Enterprises can limit QCs for development deals they finance, and many state HFAs have moved to intervene as well, requiring developers to waive their QC rights when it comes to new Housing Credit awards.
But there are still powerful incentives for existing owners to pursue this option. Rents across the U.S. rose at an unprecedented pace in the second half of 2021, according to Harvard’s Joint Center of Housing Study America’s Rental Housing 2022 report. As rental markets tightened and demand soared, typical asking rents rose an astounding 11.0 percent year over year in September 2021, up from 1.2 percent a year earlier. Some owners are seeking to realize those gains 15 years ahead of schedule.
As a country, we can’t afford to let that continue. We can’t afford to subsidize affordable housing development for public good only to watch it slip away for private windfall. The country is already in the midst of a massive affordable housing shortfall. It is all but impossible to build fast enough to keep up with need, much less replace apartments that should still be maintained as affordable.
That’s why LISC and other housing organizations have pressed Congress to repeal the qualified contracts option on a forward-looking basis, and to correct the statutory price for the purchase of existing properties so that it is based on the fair market value of the property, inclusive of affordability restrictions. In addition to benefiting families and communities, it would also save the federal government nearly $500 million, as scored by the congressional Joint Committee on Taxation. LISC will continue to pursue this issue in the 118th Congress, alongside other critically needed legislative fixes that would increase the supply of affordable housing and better serve extremely low-income families and residents of rural and Native communities.
In the meantime, HFAs can implement policies that mitigate the loss of affordable units. Every HFA should immediately require tax credit applicants to waive their right to utilize the QC process for new developments utilizing both 9 percent and 4 percent Housing Credits. In addition, when existing owners request a change in loan terms or a transfer of ownership, approval should be made contingent on their waiving QC rights going forward. These kinds of strategies won’t close the loophole, but they would make QC activity less attractive to some owners.
In all of this, there is also a conversation to be had about who is developing affordable housing and how that plays into Housing Credit awards. Nonprofit owners/developers, along with responsible for-profits, understand that preserving affordable housing is critical so that residents can share in, rather than be displaced by, local economic growth. They don’t work to maximize their gains at the expense of low-income families. They don’t step on the interests of communities to generate outsized profits. They don’t try to “game” the system for personal benefit.
They have track records of impact, and their work has underpinned the tremendous success of the LIHTC program and the more than 3.6 million affordable homes it has supported.
That speaks to why this issue is so important. To some, QCs might seem to be a complicated technical issue buried within an even more complicated housing production program. But, in truth, this issue is pretty simple: QCs are hurting families and communities. We urge you to let your legislators and state housing officials know what’s at stake and ask them to help protect vital affordable housing assets.
About the Authors
Matt Josephs, Senior Vice President, LISC Policy
Matt manages the team that is responsible for developing LISC’s federal policy agenda; communicating this agenda to LISC employees, board members, funders and other stakeholders; and pursuing this agenda through engagement with members of Congress and other federal officials.
@LISC_policy
Michael Skrebutenas, Senior Vice President for Housing, LISC
Michael Skrebutenas has more than 25 years of experience in housing and public service. As LISC’s senior vice president of housing, he leads work on key systemic and policy issues, helps assemble vital housing capital, and oversees products and services to help LISC’s community-based partners meet critical affordable housing goals.