Against a deepening crisis in affordable housing across the country, the U.S. Department of the Treasury urges state action against a long-standing provision in the LIHTC program, commonly referred to as the “qualified contract loophole.” This call for action was published in a recent post on the Treasury’s website in light of growing concerns about the preservation of affordable housing.

The backdrop: The LIHTC program offers developers tax credits in exchange for committing to keep rents affordable for at least 30 years. However, the statute allows property owners to opt out of this commitment after only 15 years via the qualified contract provision. This loophole enables owners to apply to state agencies to buy their building at a price determined by a statutory formula that’s generally above market value for buildings subject to rent restrictions. 

Unless the state or local agency can find a buyer within that year, the site can exit the program’s affordability restrictions and convert units to market rates. Originally intended to attract investors by offering an exit strategy, this provision has increasingly weakened the program’s goals. Experts estimate that over time, the loophole has cost 115,000 units of affordability and, each year, the loss is estimated at between 6,000 and 10,000 units.

One takeaway: States are being encouraged to adopt policies that either bar or discourage the use of qualified contracts. Many states now require developers, as a condition of receiving credits, to waive their right to a qualified contract for future LIHTC projects. For existing projects, some states have sought to discourage owners from exercising this option by penalizing owners who utilize it or making developers who do so ineligible for future allocations of credits. Treasury’s push for more active state-level action reflects increased federal attention and efforts to safeguard relatively affordable housing.