Many multifamily investors and developers must follow specific rules when it comes to utilizing the land they or projects they build when they are using Low Income Housing Tax Credits (LIHTCs) to pay for the cost of these projects. One of the specific rules that apply to LIHTCs is the requirement to meet rent limits for a period of time. Other restrictions also apply.
All of the restrictions related to the use of LIHTCs are placed in a contract that the property developer or investor agrees to. This contract is the Land Use Restrictive Agreement (LURA). LURA real estate is common and should be understood by investors.
It is important to understand how LURAs work. When LIHTC funds are distributed, they are allocated to each state from the U.S. federal government. Then, at the state level, the funds are disbursed by each state’s housing finance agency. The funds are sent to each of the individual projects by the state. This lends itself to creating numerous aspects of LURAs that are shared among these properties, though the actual details of each will vary significantly.
What Is a Land Use Restriction Agreement (LURA)?
The LURA is a contract that requires any real estate that is a multifamily property using LIHTCs to land use restrictions. In this agreement, the investor or owner of the project agrees to give up some of their rights.
All LURAs have the LIHTC standard rental restriction agreement. These LURA requirements state that the property owner will set aside at least 40 percent of the units within the project for people who earn less than 60 percent of the median income for the area. Or, they may set aside at least 20 percent of the units at the property for people who earn under 50 percent of the median income in the area.
This standard rental restriction is called the 40/60 test or the 20/50 test. This requirement often remains in place for at least 15 years and sometimes longer than this.
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Purpose of Land Use Restriction Agreement (LURA)?
From the government’s standpoint, the benefit of the LURA is to provide access to housing for people who are considered low-income households. Placing the restrictions on the maximum rent that the investor or owner can charge on the property’s units, or at least some of the units makes it easier to ensure low-income housing remains available within the region.
In all situations, at least some of the units must be kept affordable enough for people who are living under the Average Median Income within that area.
The LURA are public records. That means they are easy to verify. More so, they are maintained, or run, with the land itself as a result of a deed restriction.
This means that should the investor or owner sell the multifamily property during the compliance period, also known as the restriction period, the requirements of the LURA will be transferred to the new owner. They are legally binding to any owner of the property.
Obtaining a LIHTC is highly desirable. However, it is also very challenging to do since there is a lot of competition for them. As a result of this high competition and desirability, states can remain confident they will maintain enough low-income family housing access. Often, because there is so much demand for them, the state will require a higher allocation of affordable units in these properties.
How Do LIHTC Tax Credits Work?
Property owners agree to the LURA terms for many reasons. One of the biggest is because it gives them the promise of future tax credits. When the property owner or investor agrees to the land use restrictions, as defined above, the LIHTC multifamily property owner will then be given tax credits. These credits are typically very valuable. They provide dollar-for-dollar reductions in the federal income tax the property owner must pay.
These tax credits are provided on qualified properties for the first ten years within the LURA, which provides a significant reduction in the amount of federal income tax the property owner ends up paying each year. More so, the tax credits are available to the property owner directly.
These tax credits are available to the owner simply because of that ownership. As a result, the tax credit does not separate from the real estate itself. That means the property owner cannot sell the tax credit to others. The property maintains the tax credits even if ownership in that real estate is sold. That means the buyer of the property can receive the tax credit.
What’s the Restriction Period of LURA Under LIHTC?
One of the core components of the LURA is the restriction period. This is the length of time in which the property is held to the land use restrictions set in the LURA. This can vary based on the state’s rules and other requirements.
In most situations, the LURA is 15 years, which means the property owner agrees to the land use restrictions for at least 15 years. This is the compliance period. Some LURAs will have an additional 15 years as an extended use period.
Violations of this compliance period can be significant. Typically, compliance to this land use restriction period is enforced by the U.S. Internal Revenue Service, the U.S. Department of Housing and Urban Development, or other housing authorities as appropriate. This can carry significant financial implications.
If there is an extended use period, the restrictions on this period and all compliance fall on the shoulders of the state’s housing authority. This is based on the location of the property itself. Investors should learn about this opportunity or limitation as defined within the LURA prior to agreeing to the terms and conditions of the agreement.
During the restriction period for the property, land use restrictions remain in place. This creates some limitations on the property owner for how they can increase rent or who they can lend to – and in some states, additional compliance requirements are applicable as well. The LURA will specify how long the LURA remains in place.
It may be possible to terminate the LURA. This can happen through a qualified termination process as outlined within the LURA itself. It may also be done through foreclosure by the lender on the property due to nonpayment. Or, the LURA will expire in all situations within a set amount of time listed within the LURA. This is often 30 years or longer, depending on state laws and requirements.
Wrapping Things Up
For those who wish to receive the LIHTC tax credit, one of the most lucrative ways to reduce federal income tax for multifamily investment owners, it is critical to understand what the LURA is and how it works. States have various requirements within these, and that means investors must learn about the local rules clearly before undertaking this opportunity.
Because LURAs are so valuable to communities, they are likely to be a factor for most investors looking to build affordably or offer tax-advantaged projects within the region. These land use restrictions are very common throughout the U.S. and play a valuable role in keeping costs of housing affordable within communities.