Qualified Contract Toolkit

The Qualified Contract is defined in Section 42(h)(6)(F) of the Code as a bona fide contract to acquire (within a reasonable period of time after the contract is entered into) the non-low-income portion of the building for fair market value and the low-income portion of the building for an amount not less than the applicable fraction of:

(i) The sum of

(I) The outstanding indebtedness(1) secured by, or with respect to, the building, plus
(II) The adjusted investor equity in the building, plus
(III) Other capital contributions not reflected in the amounts described in subclause (I) or (II), reduced by

(ii) Cash distributions from (or available for distribution from) the project.

“Adjusted investor equity” is defined in Section 42(h)(6)(G) as the aggregate amount of cash taxpayers invested with respect to the low-income buildings, increased by the applicable cost-of-living adjustment, if any.

Cost of living increases in excess of five percent should not be taken into account.

Section 42(h)(6)(E)(i)(II) of the Code provides that the extended use period shall terminate if a housing credit agency is unable to present a Qualified Contract to an Owner who has requested such a contract. The initial compliance period for a development receiving a LIHTC allocation is 15 years. For LIHTC allocations made in 1990 and after, an extended use agreement required by Section 42(h)(6) of the Code extends the compliance period up to a minimum of 15 additional years. Many developments that received LIHTC from NIFA were awarded additional points to extend the compliance period and defer the Qualified Contract to a later date. This information can be found in the original LIHTC application of record or on the summary page of the LURA.

Section 42(h)(6)(E)(i)(II) of the Internal Revenue Code created a provision that housing credit agencies may respond to the request with a presentation of a Qualified Contract for LIHTC developments with expiring compliance periods. The Qualified Contract request may not be initiated until year 15 (or later for those developments that received points in their NIFA application for deferring) of the compliance period. The request for a Qualified Contract is a request that the housing credit agency find a buyer (who will continue to operate the property as a qualified low-income property) to purchase the property for a Qualified Contract price pursuant to IRS regulations. If the housing credit agency is unable to find a buyer within one year, the extended use period is terminated and a 3-year decontrol period begins to provide protection to existing low-income tenants.

(1) Treas. Reg 1.42-18, Outstanding Indebtedness. Outstanding indebtedness means the remaining stated principal balance (which is initially determined at the time of the Agency's offer of sale of the building to the general public) of any indebtedness secured by, or with respect to, the building that does not exceed the amount of qualifying building costs described in paragraph (b)(4) of this section (costs included in eligible basis).  Thus, any refinancing indebtedness or additional mortgages in excess of such qualifying building costs are not outstanding indebtedness for purposes of section 42(h)(6)(F) and this section. Examples of outstanding indebtedness include certain mortgages and developer fee notes (excluding developer service costs not included in eligible basis). Outstanding indebtedness does not include debt used to finance non-depreciable land costs, syndication costs, legal and accounting costs, and operating deficit payments. Outstanding indebtedness includes only obligations that are indebtedness under general principles of Federal income tax law and that are actually paid to the lender upon the sale of the building or are assumed by the buyer as part of the sale of the building.

Interested Development Owners who believe the development they own is eligible for the option year should contact NIFA to:

1.    Confirm they are eligible to apply for a qualified contract.

2.    Confirm there are no outstanding non-compliance issues in any previous years. NIFA will not process a qualified contract request until all previous non-compliance issues are corrected.

Once it is confirmed that a development is both eligible to apply for the qualified contract and in compliance with all NIFA requirements, the Development Owners must complete the Qualified Contract Notification Letter and the Calculation of Qualified Contract Price Form and Worksheets and provide all required due diligence documentation listed therein, collectively these are the Required Documents.

In order for NIFA to assist in making information available to potential purchasers of affordable housing properties, the Development Owner must cooperate in such effort and is responsible for providing certain information. At a minimum, the Development Owner must provide the following to NIFA:

1.    Qualified Contract Notification Letter.

2.    Non-refundable, $5,000.00 Qualified Contract processing fee.

3.    A fully completed "Calculation of Qualified Contract Price Package", including:

i.    Worksheet A - Must attach a copy of the amortization schedule and statement showing the current balance for each loan.

ii.    Worksheet B – The Consumer Price Index (CPI) should be calculated using the CPI Worksheet.

iii.    Worksheet C

iv.    Worksheet D

v.    Worksheet E – The Appraisal, study, methodology proof or other support for the fair market value of the non-low-income portion of the buildings must be attached.

vi.    CPI Worksheet

This package must be completed or approved (in writing) and signed by a third-party accountant or similar professional.

4.    A thorough narrative description of the Development, including all amenities suitable for familiarizing prospective purchasers with the Development. This narrative must include, at a minimum, the following:

i.    number of buildings

ii.    number of units

iii.    unit mix

iv.    rent amounts per unit

v.    utility allowance

vi.    description of all improvements

vii.    description of all services (i.e., supportive services, utilities, trash collection, etc.)

viii.    description of current staff/management

5.    A description of all income, rents, and other program restrictions, if any, applicable to the operation of the Development.

6.    A detailed set of digital photographs of the Development, including the interior and exterior of representative apartment units and buildings, and the Development's grounds.

7.    A copy of the most recent 36 months of operating statements for the Development which fairly sets forth the Development's operating expenses, debt service, gross receipts, net cash flow and debt service coverage ratio.

8.    A current and complete rent roll for the entire Development.

9.    If any portion of the land or improvements are leased, copies of the leases.

10.    A copy of a capital needs assessment, prepared by a licensed engineer or architect within the last six (6) months, that meets the requirements set forth in the Exhibits of NIFA's Exhibit Examples, which can be found in the most recent, finalized Qualified Allocation Plan in the Individual QAP Chapter "Application Exhibit Examples" on the Forms and Documents page. Such assessment must identify the costs associated with the recommended improvements.

11.    Draft of a Listing Agreement with a qualified broker. The Listing Agreement must be for a minimum period of one year and must remain listed for the duration of the Qualified Contract Period. Development Owner shall provide all requested authorizations to NIFA so that NIFA may receive information regarding prospects and showings of the property, etc. from the real estate agent and broker. The property shall be marketed electronically in the Multiple Listing Service (MLS) or similar electronic medium (CIE, LoopNet, etc.). Links to any online listings must be provided when the listing goes live.

12.    Copies of the following for all years of operation:

i.    Tax Returns

ii.    Capital contribution schedule

iii.    Audited Financials

13.    A certified appraisal.

14.    Copies of the first year of 8609’s with Part II completed.

The Development Owner must certify to the following:

1.    Development Owner has conducted its own investigation and due diligence in determining calculations of the Qualified Contract Price.

2.    Development Owner is solely responsible for documents and information provided to NIFA and to prospective purchasers.

3.    All information submitted is accurate and complete.

4.    Development Owner understands that NIFA has made no independent investigation of the Development Owner’s submissions and cannot attest to their accuracy or completeness.

5.    Development Owner agrees to indemnify, defend, and hold NIFA harmless with respect to the use of information submitted with respect to the Development.

Once the initial documentation has been reviewed by NIFA staff and the Development Owner has been notified of NIFA’s acceptance, they shall within four weeks, provide all remaining Required Documentation, including but not limited to the following:

1.    An executed listing agreement of the Development for sale, for a minimum twelve (12) month period and up through the entirety of the qualified contract period, with a licensed real estate broker/agent with required expertise in affordable multifamily housing developments.

2.    A digital property flyer for NIFA’s use in marketing the property, as well as a link to the online broker listing of the property.

3.    A signed authorization form allowing NIFA to create and post a summary of the offered property for use on the NIFA website and allowing NIFA to request and receive updated financial information regarding the property from the Listing Broker as requested, including additional rent rolls, development tax returns, income certifications, repair and maintenance records, operating expenses, and debt service information, as well as other due diligence documents.

i.    An initial round of diligence documents shall be provided to NIFA at the time of provision of the authorization form and shall be updated at a minimum when new tax records are available, as well as upon request of NIFA.

4.    A project-specific form letter (see example) to be provided to existing and future tenants regarding the submission of the qualified contract request, with a timeline for sending such letters to existing tenants. Development Owner shall provide NIFA a copy of all such letters that show the date on which the letters were sent, which may be provided digitally, including copies of future tenant notifications which shall be provided at or before the time of move-in by new tenants.

5.    Development Owner agrees to provide full financials (or to have their real estate agent provide such documentation, as relevant) to NIFA upon request, and to update financials quarterly during the sale period.

During the term of the Qualified Contract Period, the Development Owner, alone or by and through its Listing Broker, shall:

1.    Allow access to the property by NIFA and any prospects during regular business hours and at such other times as Listing Broker may be available to show the property, taking into account required tenant-notice provisions.

2.    Cooperate with NIFA to enable presentment of a qualified contract for purchase of the Development. This may include providing copies of additional rent rolls, development tax returns, income certifications, repair and maintenance records, operating expenses and debt service information, and other due diligence documents.

3.    Provide access to the Development during regular business hours for inspection by NIFA.

Upon receipt of a Development Owner's request to exercise the Qualified Contract option and all initial documentation, NIFA staff will proceed as follows:

1.    Review all previous compliance years to ensure the project does not have any outstanding non-compliance. If there is outstanding non-compliance NIFA will notify the development and corrections must be made prior to NIFA proceeding with the review of the Qualified Contract Request.

2.    Review the Development Owner’s packet of due diligence materials and confirm the appropriate Qualified Contract Price (QCP).

3.    Ensure all Required Documents have been provided.

Once all “Initial Documentation Requirements,” have been met, NIFA will notify Development Owner of NIFA’s acceptance of the initial documentation, and the items needed for the “Final Documentation Requirements.”  Once all Final Documentation has been received, NIFA will:

1.    Send notice of the date on which the Qualified Contract period begins and ends.

2.    Begin the process of making the property’s status known to potential buyers.

3.    Post the Development information on NIFA’s website.

4.    Forward information with respect to the Development to current owners of tax credit developments and to local, state, and nation-wide non-profit and for-profit owners who have notified NIFA that they have an interest in preserving housing; and to tax credit investors and others who have asked for such information.

5.    Act as a facilitator for requests of prospective purchasers by referring them to the appropriate contact persons for the Development Owner.

6.    NIFA may, at its sole discretion, on its own behalf or on behalf of another party, elect to submit a Qualified Contract to purchase the property.

7.    NIFA may, at any time, change these procedures, or act or refuse to act on a procedure, without notice or obligation to any Development Owner.

8.    NIFA’s actions or failure to act on these procedures does not constitute a waiver of the requirements of Section 42.

The maximum listing price for the property shall be the “Qualified Contract Price” (QCP), although Development Owner may accept an offer for the property at a lower price if desired. Any offer accepted by the Owner during the Qualified Contract Period must require the purchaser to maintain the affordable housing units and fulfill all requirements of the LURA for the remainder of the extended use period. The qualified purchaser may be a non-profit or for-profit entity.

If NIFA finds a prospective purchaser willing to present an offer to purchase the Development for an amount equal to the Qualified Contract Price, the Development Owner must agree to enter into a commercially reasonable form of purchase agreement or other contract of sale for the Development and provide a reasonable time for necessary due diligence and closing of the purchase. If the Development Owner rejects an offer at or above the agreed-upon listed price, the development will remain affordable throughout the remaining term of the LURA.

NOTE: In connection with the process described herein, NIFA is not acting as an agent for any Development Owner and NIFA is not responsible for finding a buyer for any Development and is not representing any Development Owner in the sale of such Development Owner’s Development. Rather, NIFA is simply sharing information about the Development for the convenience of the respective Development Owners who are attempting to sell their developments at a Qualified Contract Price.

If NIFA does not present a Qualified Contract before the one year period expires, the restrictions of the LURA will cease; provided that the Development will remain subject to the requirements set forth in Section 42(h)(6)E(ii); that is, for a three year period commencing on the termination of the extended use period, the Development Owner may not (i) evict or terminate a tenancy (other than for good cause) of an existing tenant of any low income unit, or (ii) increase the gross rent with respect to any low income unit except as permitted under Section 42 of the Code, as well as the requirements of the LURA.

In order to release the LURA and begin the three-year decontrol period, Development Owner must provide NIFA the following:

1.    A notarized letter confirming that no offers were made during the year or disclosing all offers made that were unaccepted, and also providing a list of all inquiries the development received over the course of the qualified contract period.

2.    Compliance Documentation (up to the end of the qualified contract period) as follows:

i.    Compliance Fee Payments

ii.    Certification Portal (CP) entries for all tenant data

iii.    Tenant files as requested by NIFA (once the CP submissions are complete)

iv.    Owner Documentation (i.e., Owner's Certificate of Continuing Program Compliance, Utility Allowance documentation, etc.) and any other documentation requested by NIFA.

3.    All noted non-compliance issues must be corrected.

4.    Proof of correspondence (see linked examples) sent to all tenants notifying them either that a qualified contract was not presented (see example letter) or, as relevant, that the project will remain in the LIHTC program (see example letter).

The Owner further agrees to provide NIFA with a completed 3-year Decontrol Period Owner’s Certificate of Continuing Program Compliance form along with a copy of the current rent roll. Failure to provide such documentation by January 31st of each subsequent year will result in a late fee of $1,500, which will accrue interest at the default rate of 16% and the developer, general partner/managing member or any affiliate thereof will be considered ineligible for purposes of future applications. If property is sold during the decontrol period, the new owner must continue to comply with the 3-Year Decontrol Period and sign an acknowledgement of such requirement on a form acceptable to NIFA on or before closing on the project. Once the sale is completed, the new owner must submit the 3-Year Decontrol Period Owner’s Certificate of Continuing Program Compliance form along with a copy of the rent roll through the entire decontrol period.