Multifamily investors and developers utilizing Low-Income Housing Tax Credits (LIHTCs) must adhere to specific regulations regarding how they use the land or develop their projects. One key requirement of LIHTCs is compliance with rent limits for a designated period, among other conditions.
These restrictions are outlined in a binding contract known as a Land Use Restriction Agreement (LURA). This agreement ensures that developers and property owners comply with the terms of the LIHTC program, making it an essential aspect of real estate investment in affordable housing.
Understanding the Land Use Restriction Agreement (LURA)
A LURA is a legally enforceable document that mandates certain land use restrictions on multifamily properties benefiting from LIHTCs. By signing this agreement, property owners and investors agree to specific limitations, including rental pricing constraints.
A fundamental requirement within all LURAs is that property owners must reserve a portion of the units for low-income households. Typically, they must allocate:
- At least 40% of the units to tenants earning 60% or less of the area’s median income (AMI), or
- At least 20% of the units to tenants earning 50% or less of the AMI.
This requirement, known as the 40/60 or 20/50 test, generally remains in effect for at least 15 years, with the possibility of an extended compliance period.
Purpose and Public Record Status of LURA
The primary goal of LURA is to preserve access to affordable housing. By imposing rent limitations, it ensures that low-income families have sustainable housing options within the community.
Because these agreements are public records, they are easily verifiable and remain attached to the property. If the property is sold during the restriction period, the new owner must adhere to the existing LURA terms, as they are legally binding.
Due to the high demand for LIHTCs, states often impose additional requirements, such as setting aside a greater percentage of affordable units within developments.
How LIHTC Tax Credits Work
Property owners agree to LURA terms in exchange for valuable tax credits. These LIHTC benefits provide dollar-for-dollar reductions in federal income tax liability.
Tax credits are issued annually for the first 10 years of the compliance period. Since these credits are tied to property ownership, they cannot be sold separately. However, if a property changes hands, the new owner can continue to benefit from the remaining tax credits.
Compliance and Restriction Period
The restriction period outlined in a LURA varies by state but typically includes:
- A minimum 15-year compliance period where land use restrictions remain in place.
- A possible extended use period of an additional 15 years, subject to state regulations.
Failure to comply with LURA terms can result in significant penalties, with enforcement typically handled by the IRS, HUD, or local housing authorities.
Terminating a LURA
While LURAs are designed to be long-term agreements, termination may be possible through:
- A qualified termination process, as specified in the agreement.
- Foreclosure by a lender due to nonpayment.
- Expiration of the agreement, which can range from 30 years or longer, depending on state laws.
Conclusion
For investors seeking the LIHTC tax credit, understanding the LURA’s implications is essential. Because these agreements play a crucial role in maintaining affordable housing, they are a key consideration for any developer pursuing tax-advantaged real estate opportunities.
Given the widespread use of LURAs across the U.S., investors must carefully review state-specific requirements before committing to a project.