Treasury Posts Support of HFA Disincentives for Qualified Contracts
In a December 12, 2024 post, the U.S. Department of Treasury expressed strong support for Housing Finance Agency (HFA) attempts to prevent or limit qualified contract requests for LIHTC projects. According to recent Harvard Joint Center for Housing Studies data, the United States is facing an unprecedented housing affordability crisis. Record numbers of renters spend over 30% of their income on housing and utilities. As housing costs continue to climb in the wake of the pandemic, preserving existing affordable housing stock has become increasingly critical. The Low-Income Housing Tax Credit (LIHTC) program is the federal government's primary tool for expanding the affordable housing supply. Between 2000 and 2019, it supported approximately 25% of new apartment construction. However, a provision known as the Qualified Contract option threatens to prematurely remove thousands of units each year from the affordable housing inventory. Understanding the Qualified Contract Challenge The Qualified Contract provision, introduced in 1989, was designed to encourage private investment in affordable housing by offering property owners an early exit option. After 14 years, owners can request their state housing agency find a buyer willing to pay a statutorily defined price. If no qualified buyer emerges within a year, the property can convert to market-rate housing despite the original 30-year affordability commitment. This mechanism has led to significant losses in affordable housing stock. Current estimates indicate that 6,000-10,000 low-income units are lost annually through Qualified Contracts, with cumulative losses reaching approximately 115,000. The problem has intensified recently as the statutory pricing formula often exceeds market value, making it difficult for agencies to secure buyers willing to maintain affordability restrictions. State-Level Solutions State housing agencies have implemented various strategies to address this challenge: Mandatory Waivers Many states now require LIHTC applicants to waive their Qualified Contract rights as a prerequisite for receiving tax credits. North Dakota and Nevada exemplify this approach, making such waivers mandatory for new applications. The Treasury Department strongly endorses these policies and encourages their application across 4% and 9% LIHTC programs. Incentive-Based Approaches Some states have adopted point-based systems to encourage longer affordability commitments. Georgia's program, for instance, awards developers incremental points based on the duration of their Qualified Contract waiver: one point for a 5-year waiver, two points for 10 years, and three points for a complete waiver. Deterrence Measures States have also implemented policies discouraging Qualified Contract requests from existing LIHTC property owners. These measures include: Disqualifying applicants with a history of Qualified Contract requests (Maine, North Carolina) Assigning negative points to applicants who have previously pursued Qualified Contract exits (Indiana, Kansas, New Hampshire) Awarding bonus points to applicants who have never requested a Qualified Contract (South Carolina) Federal Support and Coordination Federal agencies are aligning their policies to reinforce these state-level efforts: HUD has proposed restricting FHA Multifamily and Risk Share insurance access to owners who waive Qualified Contract rights. The Federal Housing Finance Agency now prohibits Fannie Mae and Freddie Mac from investing in properties that retain Qualified Contract options. The USDA's Rural Housing Service is developing complementary measures. Looking Forward The Treasury Department strongly supports state and federal initiatives to limit the use of Qualified Contracts and preserve affordable housing. These coordinated efforts are a crucial component of the administration's comprehensive strategy to address the housing affordability and supply challenges facing American families. As housing costs strain household budgets nationwide, preserving existing affordable units through Qualified Contract restrictions becomes increasingly vital. State agencies' innovative approaches to this challenge demonstrate the potential for policy solutions that balance private sector participation with long-term affordability goals. This article reflects the Treasury's position on best practices in LIHTC administration as of December 2024. Please consult your state housing agency for the most current guidance and requirements.