LIHTC COMPLIANCE AFTER THE COMPLIANCE PERIOD: ONCE THE CREDITS ARE GONE INTRODUCTION

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1 LIHTC COMPLIANCE AFTER THE COMPLIANCE PERIOD: ONCE THE CREDITS ARE GONE INTRODUCTION Section 42 was enacted in 1986, and in 1989, Sec. 42(h)(6) (reprinted below) was added which the extended use requirement, obligating all LIHTC project to be subject to an affordability covenant lasting at least 30 years (i.e., for the 15- year Compliance Period, plus an additional 15 years). This panel will discuss various policy, legal and practical aspects of the extended use requirement. * * * * * * * * A. Laura Abernathy. Not surprisingly, extended use restrictions can have a substantial effect on future affordability of housing developed under the Housing Credit program. Extended restrictions prevent an escalating loss of affordability and allow the assisted stock to grow, ensuring that units remain affordable to low-income families in the long term. Starting with the general policy considerations of long-term affordability, Laura will explore the various ways in which Housing Finance Agencies use their Qualified Allocation Plans to incentivize and in some cases require affordability beyond the federally mandated 30 years. The topic of qualified contracts and how this relates to long-term affordability will also introduced; the presentation will explore the trend among HFAs of requiring Housing Credit applicants to waive their rights to a qualified contract. B. Mark Shelburne. Mark will discuss the legal context of two ways to terminate the extended use period. Owners across the country continue to request qualified contacts, which is the start of a complex process. Mark will explain some of the specific statutory provisions, including both calculation of the statutory price and process for handling requests. He also will discuss whether QCs lead to significant numbers of sales. Fortunately foreclosures are a far less frequent way out of extended use. The rate for LIHTC properties is lower than for any other form of real estate. However, even with these small numbers, there is a concern with how they could occur. In a few isolated instances, foreclosures appear to have been planned as a way to end affordability. Mark will describe these and a proposal in the recently filed Affordable Housing Credit Improvement Act legislation (aka Cantwell-Hatch) to address this potential problem. C. Katie Day. It is not uncommon for developers of affordable housing projects to seek to modify the terms of the extended use agreement prior to its expiration, e.g., an amendment that relaxes or reduces affordability requirements. Some credit agencies have been willing to entertain these requests. However, it s not clear that credit agencies have the authority to make these modifications, particularly in light of the statutory language of Section 42(h)(6)(B)(ii) of the Code, which allows former, current and prospective tenants who meet the income eligibility requirements to enforce the provisions of the extended use agreement and the decision of the Oregon Court of Appeals in Nordbye v. BRCP/GM Ellington (holding that a former tenant of a low-income

2 housing project has the right to enforce an extended use commitment despite a release agreement between the owner of the project and the state housing credit agency to terminate the agreement early). D. Randall Shorr. Randall will discuss the approach of the Ohio Housing Finance Agency ( OHFA ) to these issues, including its post-year 15 monitoring requirements, its handling of qualified contract requests and its policies relating to requests for amending the LURA. Ohio has a significant portfolio of single-family lease purchase units, and of course the covenant must be released in order to deliver clear title to lease-purchase buyers, which still providing protections to renters who remain in these projects. Many multifamily projects reaching the end of the compliance period are facing severe financial challenges, and OHFA has developed a set of policies for considering requests for modifications to affordability covenants to allow these projects to remain financially viable. * * * * * * * * 42(h)(6) Buildings eligible for credit only if minimum long-term commitment to low-income housing (A) In general No credit shall be allowed by reason of this section with respect to any building for the taxable year unless an extended low-income housing commitment is in effect as of the end of such taxable year. (B) Extended low-income housing commitment For purposes of this paragraph, the term "extended low-income housing commitment" means any agreement between the taxpayer and the housing credit agency - (i) which requires that the applicable fraction (as defined in subsection (c)(1)) for the building for each taxable year in the extended use period will not be less than the applicable fraction specified in such agreement and which prohibits the actions described in subclauses (I) and (II) of subparagraph (E)(ii), (ii) which allows individuals who meet the income limitation applicable to the building under subsection (g) (whether prospective, present, or former occupants of the building) the right to enforce in any State court the requirement and prohibitions of clause (i), (iii) which prohibits the disposition to any person of any portion of the building to which such agreement applies unless all of the building to which such agreement applies is disposed of to such person,

3 (iv) which prohibits the refusal to lease to a holder of a voucher or certificate of eligibility under section 8 of the United States Housing Act of 1937 because of the status of the prospective tenant as such a holder, (v) which is binding on all successors of the taxpayer, and (vi) which, with respect to the property, is recorded pursuant to State law as a restrictive covenant. (C) Allocation of credit may not exceed amount necessary to support commitment (i) In general The housing credit dollar amount allocated to any building may not exceed the amount necessary to support the applicable fraction specified in the extended low-income housing commitment for such building, including any increase in such fraction pursuant to the application of subsection (f)(3) if such increase is reflected in an amended low-income housing commitment. (ii) Buildings financed by tax-exempt bonds If paragraph (4) applies to any building the amount of credit allowed in any taxable year may not exceed the amount necessary to support the applicable fraction specified in the extended low-income housing commitment for such building. Such commitment may be amended to increase such fraction. (D) Extended use period For purposes of this paragraph, the term "extended use period" means the period - (i) beginning on the 1st day in the compliance period on which such building is part of a qualified low-income housing project, and (ii) ending on the later of - (I) the date specified by such agency in such agreement, or (II) the date which is 15 years after the close of the compliance period. (E) Exceptions if foreclosure or if no buyer willing to maintain low-income status (i) In general The extended use period for any building shall terminate - (I) on the date the building is acquired by foreclosure (or instrument in lieu of foreclosure) unless the Secretary determines that such

4 acquisition is part of an arrangement with the taxpayer a purpose of which is to terminate such period, or (II) on the last day of the period specified in subparagraph (I) if the housing credit agency is unable to present during such period a qualified contract for the acquisition of the low-income portion of the building by any person who will continue to operate such portion as a qualified low-income building. Subclause (II) shall not apply to the extent more stringent requirements are provided in the agreement or in State law. (ii) Eviction, etc. of existing low-income tenants not permitted The termination of an extended use period under clause (i) shall not be construed to permit before the close of the 3-year period following such termination - (I) the eviction or the termination of tenancy (other than for good cause) of an existing tenant of any low-income unit, or (II) any increase in the gross rent with respect to such unit not otherwise permitted under this section. (F) Qualified contract For purposes of subparagraph (E), the term "qualified contract" means a bona fide contract to acquire (within a reasonable period after the contract is entered into) the nonlow-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 (specified in the extended low-income housing commitment) of - (i) the sum of - (I) the outstanding indebtedness secured by, or with respect to, the building, (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. The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out this paragraph, including regulations to prevent the manipulation of the amount determined under the preceding sentence. (G) Adjusted investor equity

5 (i) In general For purposes of subparagraph (E), the term "adjusted investor equity" means, with respect to any calendar year, the aggregate amount of cash taxpayers invested with respect to the project increased by the amount equal to - (I) such amount, multiplied by (II) the cost-of-living adjustment for such calendar year, determined under section 1(f)(3) by substituting the base calendar year for "calendar year 1987". An amount shall be taken into account as an investment in the project only to the extent there was an obligation to invest such amount as of the beginning of the credit period and to the extent such amount is reflected in the adjusted basis of the project. (ii) Cost-of-living increases in excess of 5 percent not taken into account Under regulations prescribed by the Secretary, if the CPI for any calendar year (as defined in section 1(f)(4)) exceeds the CPI for the preceding calendar year by more than 5 percent, the CPI for the base calendar year shall be increased such that such excess shall never be taken into account under clause (i). (iii) Base calendar year For purposes of this subparagraph, the term "base calendar year" means the calendar year with or within which the 1st taxable year of the credit period ends. (H) Low-income portion For purposes of this paragraph, the low-income portion of a building is the portion of such building equal to the applicable fraction specified in the extended low-income housing commitment for the building. (I) Period for finding buyer The period referred to in this subparagraph is the 1-year period beginning on the date (after the 14th year of the compliance period) the taxpayer submits a written request to the housing credit agency to find a person to acquire the taxpayer's interest in the low-income portion of the building. (J) Effect of noncompliance If, during a taxable year, there is a determination that an extended low-income housing agreement was not in effect as of the beginning of such year, such determination shall not apply to any period before such year and subparagraph (A) shall be applied without regard to such determination if the failure is corrected within 1 year from the date of the determination.

6 (K) Projects which consist of more than 1 building The application of this paragraph to projects which consist of more than 1 building shall be made under regulations prescribed by the Secretary.

7 Materials for LIHTC Compliance after the Compliance Period 2017 ABA Forum Annual Conference; submitted by Mark Shelburne The statute governing the Housing Credit, known as Section 42, requires owners to abide by income, rent, suitability and other restrictions for at least 30 years (known as the extended use period ). Congress also gave owners a way out after the first 15 years. The opt-out process begins with the owner informing the allocating agency of its intention to terminate the program restrictions. If the owner meets certain requirements, the agency has one year to find a buyer willing to purchase the project for a price determined under Section 42. The owner is released from the restrictions if the agency does not find such a buyer. Starting the process Owners may request a QC after the 14 th year of the initial 15-year compliance period. For projects with multiple buildings and different compliance periods, the time period will start with the last one placed in service. For example, if five buildings in the project began their credit periods in 1999 and one started in 2000, the 15 th year for the entire project would be A few owners received more than one allocation of Housing Credits for the same project. In those cases the later allocation re-starts the applicable time period. For example, if a project received its first allocation in 2001 and a subsequent award in 2003, the 15 th year for the purposes of a Request would be If the project is past the 14 th year, the first step is sending a preliminary inquiry to the allocating agency. This does not start the one-year period. The purpose is to allow an initial evaluation of whether the project is eligible. Owners of many projects waived the right to request a QC either entirely or for a certain number of years. Documentation requirements If the project is eligible, the owner must compile and submit documentation required by the agency. The list below is a representative sample. The first five can be burdensome, but are necessary for determining the QC price. The second five are basic due diligence matters that will be reviewed by potential buyers. 1) first year 8609s, 2) annual partnership tax returns for all years of operation since the start of the compliance period, 3) annual project financial statements for all years, 4) loan documents for all secured debt during the compliance period, 5) partnership agreement (original, current and all interim amendments), 6) physical needs assessment for the entire project, 7) appraisal for the entire project, 8) market study for the entire project, 9) title report, and 10) Phase I environmental site assessment (Phase II if necessary).

8 In most cases the one-year period starts when the agency determines the owner has met all submission requirements. Owners who expect to take advantage of the QC option have a corresponding duty to maintain the records necessary to allow the computation of the QC price. There are three options for owners who have not fulfilled this responsibility: a) the agency deems the project ineligible for consideration, b) an accountant deduces missing information (interpolation), or c) the owner agrees to accept a three-year period and fair market value. The agency will determine which will apply. An example of item (b) is to re-create what would have been the project s financial statement using accountant work papers. Closing the deal, or not Under Section 42(h)(6)(E)(i)(II), the allocating agency s obligation is to present a bona fide contract to acquire the project for the QC price. More specifically, the 30-year extended use period terminates if the agency is unable to present... a qualified contract. Therefore, once the agency presents such a contract, the possibility of terminating the extended use period is permanently removed. The project will remain bound to the provisions in the LURA for at least 30 years. There is no requirement in Section 42 that the prospective buyer actually purchase the project. Whether the seller executes a contract and closes the transaction is a separate, legally unrelated matter. Conclusion While the QC process does have a limited role to play in the overall Year 15 context, agencies and owners need to understand its limitations. Each side can reduce the need for this confrontation through cooperation, flexibility, and creativity.

9 Qualified contracts. (a) Extended low-income housing commitment (1) In general. No credit under section 42(a) is allowed by reason of section 42 with respect to any building for the taxable year unless an extended low-income housing commitment (commitment) (as defined in section 42(h)(6)(B)) is in effect as of the end of such taxable year. A commitment must be in effect for the extended use period (as defined in paragraph (a)(1)(i) of this section). (i) Extended use period. The term extended use period means the period beginning on the first day in the compliance period (as defined in section 42(i)(1)) on which the building is part of a qualified low-income housing project (as defined in section 42(g)(1)) and ending on the later of (A) The date specified by the low-income housing credit agency (Agency) in the commitment; or (B) The date that is 15 years after the close of the compliance period. (ii) Termination of extended use period. The extended use period for any building will terminate (A) On the date the building is acquired by foreclosure (or instrument in lieu of foreclosure) unless the Commissioner determines that such acquisition is part of an arrangement with the taxpayer ( the owner ) a purpose of which is to terminate such period; or (B) On the last day of the one-year period beginning on the date (after the 14th year of the compliance period) on which the owner submits a written request to the Agency to find a person to acquire the owner's interest in the low-income portion of the building if the Agency is unable to present during such period a qualified contract for the acquisition of the low-income portion of the building by any person who will continue to operate such portion as a qualified low-income building (as defined in section 42(c)(2)). (iii) Owner non-acceptance. If the Agency provides a qualified contract within the one-year period and the owner rejects or fails to act upon the contract, the building remains subject to the existing commitment. (iv) Eviction, gross rent increase concerning existing low-income tenants not permitted. Prior to the close of the three year period following the termination of a commitment, no owner shall be permitted to evict or terminate the tenancy (other than for good cause) of an existing tenant of any low-income unit, or increase the gross rent for such unit in a manner or amount not otherwise permitted by section 42. (2) Exception. Paragraph (a)(1)(ii)(b) of this section shall not apply to the extent more stringent requirements are provided in the commitment or under State law. (b) Definitions. For purposes of this section, the following terms are defined:

10 (1) As provided by section 42(h)(6)(G)(iii), base calendar year means the calendar year with or within which the first taxable year of the credit period ends. (2) The low-income portion of a building is the portion of the building equal to the applicable fraction (as defined in section 42(c)(1)(B)) specified in the commitment for the building. (3) The fair market value of the non-low-income portion of the building is determined at the time of the Agency's offer of sale of the building to the general public. The fair market value of the non-low-income portion also includes the fair market value of the land underlying the entire building (both the non-low-income portion and the low-income portion). This valuation must take into account the existing and continuing requirements contained in the commitment for the building. The fair market value of the non-low-income portion also includes the fair market value of items of personal property not included in eligible basis under section 42(d) that convey under the contract with the building. (4) Qualifying building costs include (i) Costs that are included in eligible basis of a low-income housing building under section 42(d) and that are included in the adjusted basis of depreciable property that is subject to section 168 and that is residential rental property for purposes of section 142(d) and (b); (ii) Costs that are included in eligible basis of a low-income housing building under section 42(d) and that are included in the adjusted basis of depreciable property that is subject to section 168 and that is used in a common area or is provided as a comparable amenity to all residential rental units in the building; and (iii) Costs of the type described in paragraph (b)(4)(i) and (ii) of this section incurred after the first year of the low-income housing building's credit period under section 42(f). (5) The qualified contract amount is the sum of the fair market value of the non-low-income portion of the building (within the meaning of section 42(h)(6)(F) and paragraph (b)(3) of this section) and the price for the low-income portion of the building (within the meaning of section 42(h)(6)(F) and paragraph (b)(2) of this section) as calculated in paragraph (c)(2) of this section. If this sum is not a multiple of $1,000, then when the Agency offers the building for sale to the general public, the Agency may round up the offering price to the next highest multiple of $1,000. (c) Qualified contract purchase price formula (1) In general. For purposes of this section, qualified contract means a bona fide contract to acquire the building (within a reasonable period after the contract is entered into) for the qualified contract amount. (i) Initial determination. The qualified contract amount is determined at the time of the Agency's offer of sale of the building to the general public.

11 (ii) Mandatory adjustment by the buyer and owner. The buyer and owner under a qualified contract must adjust the amount of the low-income portion of the qualified contract formula to reflect changes in the components of the qualified contract formula such as mortgage payments that reduce outstanding indebtedness between the time of the Agency's offer of sale to the general public and the building's actual sale closing date. (iii) Optional adjustment by the Agency and owner. The Agency and owner may agree to adjust the fair market value of the non low-income portion of the building after the Agency's offer of sale of the building to the general public and before the close of the one-year period described in paragraph (a)(1)(ii)(b) of this section. If no agreement between the Agency and owner is reached, the fair market value of the non-low-income portion of the building determined at the time of the Agency's offer of sale of the building to the general public remains unchanged. (2) Low-income portion amount. The low-income portion amount is an amount not less than the applicable fraction specified in the commitment, as defined in section 42(h)(6)(B)(i), multiplied by the total of (i) The outstanding indebtedness for the building (as defined in paragraph (c)(3) of this section); plus (ii) The adjusted investor equity in the building for the calendar year (as defined in paragraph (c)(4) of this section); plus (iii) Other capital contributions (as defined in paragraph (c)(5) of this section), not including any amounts described in paragraphs (c)(2)(i) and (ii) of this section; minus (iv) Cash distributions from (or available for distribution from) the building (as defined in paragraph (c)(6) of this section). (3) Outstanding indebtedness. For purposes of paragraph (c)(2)(i) of this section, 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. 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 nondepreciable 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.

12 (4) Adjusted investor equity (i) Application of cost-of-living factor. For purposes of paragraph (c)(2)(ii) of this section, the adjusted investor equity for any calendar year equals the unadjusted investor equity, as described in paragraph (c)(4)(ii) of this section, multiplied by the qualified-contract cost-of-living adjustment for that year, as defined in paragraph (c)(4)(iii) of this section. (ii) Unadjusted investor equity. For purposes of this paragraph (c)(4), unadjusted investor equity means the aggregate amount of cash invested by owners for qualifying building costs described in paragraph (b)(4)(i) and (ii) of this section. Thus, equity paid for land, credit adjuster payments, Agency low-income housing credit application and allocation fees, operating deficit contributions, and legal, syndication, and accounting costs all are examples of cost payments that do not qualify as unadjusted investor equity. Unadjusted investor equity takes an amount into account only to the extent that, as of the beginning of the low-income building's credit period (as defined in section 42(f)(1)), there existed an obligation to invest the amount. Unadjusted investor equity does not include amounts included in the calculation of outstanding indebtedness as defined in paragraph (c)(3) of this section. (iii) Qualified-contract cost-of-living adjustment. For purposes of this paragraph (c)(4), the qualified-contract cost-of-living adjustment for a calendar year is the number that is computed under the general rule in paragraph (c)(4)(iv) of this section or a number that may be provided by the Commissioner as described in paragraph (c)(4)(v) of this section. (iv) General rule. Except as provided in paragraph (c)(4)(v) of this section, the qualifiedcontract cost-of-living adjustment is the quotient of (A) The sum of the 12 monthly Consumer Price Index (CPI) values whose average is the CPI for the calendar year that precedes the calendar year in which the Agency offers the building for sale to the general public (The term CPI for a calendar year has the meaning given to it by section 1(f)(4) for purposes of computing annual inflation adjustments to the rate brackets.); divided by (B) The sum of the 12 monthly CPI values whose average is the CPI for the base calendar year (within the meaning of section 1(f)(4)), unless that sum has been increased under paragraph (c)(4)(iii)(d) of this section. (v) Provision by the Commissioner of the qualified-contract cost-of-living adjustment. The Commissioner may publish in the Internal Revenue Bulletin (see (d)(2) of this chapter) a process pursuant to which the Internal Revenue Service will compute the qualified-contract cost-of-living adjustment for a calendar year and make available the results of that computation. (vi) Methodology. The calculations in paragraph (c)(4)(iv) of this section are to be made in the following manner: (A) The CPI data to be used for purposes of this paragraph (c)(4) are the not seasonally adjusted values of the CPI for all urban consumers. (The U.S. Department of Labor's Bureau of Labor Statistics (BLS) sometimes refers to these values as CPI-U. ) The BLS publishes the CPI

13 data on-line (including a History Table that contains monthly CPI-U values for all years back to 1913). See (B) The quotient is to be carried out to 10 decimal places. (C) The Agency may round adjusted investor equity to the nearest dollar. (D) If the CPI for any calendar year (within the meaning of section 1(f)(4)) during the extended use period after the base calendar year exceeds by more than 5 percent the CPI for the preceding calendar year (within the meaning of section 1(f)(4)), then the sum described in paragraph (c)(4)(i)(b) is to be increased so that the excess is never taken into account under this paragraph (c)(4). (vii) Example. The following example illustrates the calculations described in this paragraph (c)(4): Example. (i) Facts. Owner contributed $20,000,000 in equity to a building in 1997, which was the first year of the credit period for the building. In 2011, Owner requested Agency to find a buyer to purchase the building, and Agency offered the building for sale to the general public during The CPI for 1997 (within the meaning of section 1(f)(4)) is the average of the Consumer Price Index as of the close of the 12-month period ending on August 31, The sum of the CPI values for the twelve months from September 1996 through August 1997 is The CPI for 2010 (within the meaning of section 1(f)(4)) is the average of the Consumer Price Index as of the close of the 12-month period ending August 31, The sum of the CPI values for the twelve months from September 2009 through August 2010 is At no time during this period (after the base calendar year) did the CPI for any calendar year exceed the CPI for the preceding calendar year by more than 5 percent. (ii) Determination of adjusted investor equity. The qualified-contract cost-of-living adjustment is (the quotient of , divided by ). Owner's adjusted investor equity, therefore, is $27,231,924, which is $20,000,000, multiplied by , rounded to the nearest dollar. (5) Other capital contributions. For purposes of paragraph (c)(2)(iii) of this section, other capital contributions to a low-income building are qualifying building costs described in paragraph (b)(4)(ii) of this section paid or incurred by the owner of the low-income building other than amounts included in the calculation of outstanding indebtedness or adjusted investor equity as defined in this section. For example, other capital contributions may include amounts incurred to replace a furnace after the first year of a low-income housing credit building's credit period under section 42(f), provided any loan used to finance the replacement of the furnace is not secured by the furnace or the building. Other capital contributions do not include expenditures for land costs, operating deficit payments, credit adjuster payments, and payments for legal, syndication, and accounting costs. (6) Cash distributions (i) In general. For purposes of paragraph (c)(2)(iv) of this section, the term cash distributions from (or available for distribution from) the building include

14 (A) All distributions from the building to the owners or to persons whose relationship to the owner is described in section 267(b) or section 707(b)(1)), including distributions under section 301 (relating to distributions by a corporation), section 731 (relating to distributions by a partnership), or section 1368 (relating to distributions by an S corporation); and (B) All cash and cash equivalents available for distribution at, or before, the time of sale, including, for example, reserve funds whether operating or replacement reserves, unless the reserve funds are legally required by mortgage restrictions, regulatory agreements, or third party contractual agreements to remain with the building following the sale. (ii) Excess proceeds. For purposes of paragraph (c)(6)(i) of this section, proceeds from the refinancing of indebtedness or additional mortgages that are in excess of qualifying building costs are not considered cash available for distribution. (iii) Anti-abuse rule. The Commissioner will interpret and apply the rules in this paragraph (c)(6) as necessary and appropriate to prevent manipulation of the qualified contract amount. For example, cash distributions include payments to owners or persons whose relation to owners is described in section 267(b) or section 707(b) for any operating expenses in excess of amounts reasonable under the circumstances. (d) Administrative discretion and responsibilities of the Agency (1) In general. An Agency may exercise administrative discretion in evaluating and acting upon an owner's request to find a buyer to acquire the building. An Agency may establish reasonable requirements for written requests and may determine whether failure to follow one or more applicable requirements automatically prevents a purported written request from beginning the one-year period described in section 42(h)(6)(I). If the one-year-period has already begun, the Agency may determine whether failure to follow one or more requirements suspends the running of that period. Examples of Agency administrative discretion include, but are not limited to, the following: (i) Concluding that the owner's request lacks essential information and denying the request until such information is provided. (ii) Refusing to consider an owner's representations without substantiating documentation verified with the Agency's records. (iii) Determining how many, if any, subsequent requests to find a buyer may be submitted if the owner has previously submitted a request for a qualified contract and then rejected or failed to act upon a qualified contract presented by the Agency. (iv) Assessing and charging the owner certain administrative fees for the performance of services in obtaining a qualified contract (for example, real estate appraiser costs). (v) Requiring all appraisers involved in the qualified contract process to be State certified general appraisers that are acceptable to the Agency.

15 (vi) Specifying other conditions applicable to the qualified contract consistent with section 42 and this section. (2) Actual offer. Upon receipt of a written request from the owner to find a person to acquire the building, the Agency must offer the building for sale to the general public, based on reasonable efforts, at the determined qualified contract amount in order for the qualified contract to satisfy the requirements of this section unless the Agency has already identified a willing buyer who submitted a qualified contract to purchase the project. (3) Debarment of certain appraisers. Agencies shall not utilize any individual or organization as an appraiser if that individual or organization is currently on any list for active suspension or revocation for performing appraisals in any State or is listed on the Excluded Parties Lists System (EPLS) maintained by the General Services Administration for the United States Government found at (e) Effective date/applicability date. These regulations are applicable to owner requests to housing credit agencies on or after May 3, 2012 to obtain a qualified contract for the acquisition of a low-income housing credit building. [T.D. 9587, 77 FR 26178, May 3, 2012]

16 LIHTC Compliance After the Compliance Period: Once the Credits are Gone Materials submitted by Laura Abernathy, Director of State and Local Policy at the National Housing Trust Extended use restrictions can have a substantial effect on future affordability of housing developed under the Low Income Housing Tax Credit (Housing Credit) program by preventing an escalating loss of affordability and allowing the assisted stock to grow. Section 42 of the Internal Revenue Code requires Housing Credit properties to be affordable for 30 years an initial 15-year compliance period, followed by a 15-year extended use period. Many state Housing Finance Agencies use their Qualified Allocation Plans to incentivize and in some cases require affordability beyond the federally mandated 30 years. Owners can opt-out of use restrictions during the 15-year extended use period through a Qualified Contract. After the 14 th year of the 15-year compliance period, an owner can request that the Housing Finance Agency find a buyer for the property who is willing to operate it as a Housing Credit property for the duration of the extended use period. If, after one year s time, the Agency is unable to find a qualified buyer, the land use restrictions terminate. The existing owner can operate the building at market rate. Many states require or incentivize applicants to waive their right to a Qualified Contract, either indefinitely or for a specified number of years, ensuring that properties remain affordable. The table below illustrates the ways in which states require or incent long-term affordability in the Housing Credit Program. Table 1: Affordability by State Housing Finance Agency QAP Year Years of Affordability Requirement Incentive (points) Alabama * x Alaska x Arizona x Arkansas x California ** x Colorado x Connecticut x DC x Delaware x Florida x Georgia x Hawaii x

17 Idaho x Illinois x Indiana x Iowa x Kansas x Kentucky * x Louisiana x Maine x Maryland x Massachusetts x Michigan x Minnesota x Mississippi x Missouri x Montana x Nebraska x Nevada x New Hampshire x New Jersey x New Mexico x New York x North Carolina x North Dakota x Ohio x Oklahoma x Oregon x Pennsylvania x Rhode Island x South Carolina x South Dakota x Tennessee x Texas x Utah x Vermont 2016 Perpetuity x Virginia x Washington x West Virginia x Wisconsin x Wyoming x *applicants are required to waive their right to a Qualified Contract for 5 years, meaning that properties remain affordable for a minimum of 20 years. **properties located on tribal land are required to maintain affordability for 50 years.

18 FILED: October 26, 2011 IN THE COURT OF APPEALS OF THE STATE OF OREGON SARAH NORDBYE, individually and on behalf of all others similarly situated, Plaintiff-Appellant, v. BRCP/GM ELLINGTON, an Oregon limited liability corporation; and the OREGON HOUSING AND COMMUNITY SERVICES DEPARTMENT, Defendants-Respondents. Multnomah County Circuit Court A Dale R. Koch, Judge. Argued and submitted on December 07, Alice Warner argued the cause for appellant. With her on the briefs was Edward Johnson. Thomas H. Tongue argued the cause for respondent BRCP/GM Ellington. With him on the brief were Brian R. Talcott and Dunn Carney Allen Higgins & Tongue LLP. Judy C. Lucas, Senior Assistant Attorney General, argued the cause for respondent Oregon Housing and Community Services Department. With her on the brief were John R. Kroger, Attorney General, and David B. Thompson, Interim Solicitor General. Jeffrey B. Litwak filed the brief amicus curiae for Columbia River Gorge Commission. Dennis Steinman and Kell Alterman & Runstein, LLP, filed the brief amicus curiae for National Housing Law Project. Mark Manulik, Sara Kobak, and Schwabe, Williamson & Wyatt, P.C., filed the brief amicus curiae for Oregon Land Title Association. Before Haselton, Presiding Judge, and Armstrong, Judge, and Duncan, Judge. HASELTON, P. J. Reversed and remanded. 1

19 1 2 3 HASELTON, P. J. Plaintiff, a former tenant of a residential rental property that was financed, at least in part, through the federal Low-Income Housing Tax Credit (LIHTC) program, 4 appeals. 1 Plaintiff challenges (1) the trial court's allowance of summary judgment, on grounds of "Chevron deference," 2 against her claims for injunctive and declaratory relief pertaining to the enforceability of certain "use restrictions" related to the LIHTC program; and (2) the court's denial of her cross-motion for summary judgment. As described below, we conclude that Chevron deference is inapposite. We further conclude that, as a matter of law, plaintiff is entitled to enforce the disputed use restrictions pertaining to the operation of the property as low-income housing. Accordingly, we reverse and remand. Before turning to the particular circumstances of this dispute, it is not only useful, but essential, to describe the LIHTC program. The purpose of the LIHTC program is to encourage the development of low-income rental housing through the allocation of tax credits pursuant to section 42 of the Internal Revenue Code (IRC). Oti Kaga v. South Dakota Housing Dev. Authority, 188 F Supp 2d 1148, 1152 (D SD 2002), 1 Defendant BRCP/GM Ellington (BRCP) is the current owner of the property. Defendant Oregon Housing and Community Services Department (the Department) is responsible for monitoring property owners' compliance with LIHTC program requirements, as was its predecessor entity, the Oregon Housing Authority. For ease of reference, we refer to both entities as "the Department." 2 Chevron USA, Inc. v. Natural Res. Def. Council, 467 US 837, 104 S Ct 2778, 81 L Ed 2d 694 (1984). 2

20 affd, 342 F3d 871 (8th Cir 2003). In general, the federal government allocates tax credits, and state housing agencies are responsible for distributing the credits and monitoring recipient projects for compliance with program requirements. Treas Reg T; Treas Reg The LIHTC program is regulated by, and state housing agencies report to, the Internal Revenue Service. IRC 42(l), (n). Further, as a general rule, the tax credits are claimed annually by the recipient taxpayer over the first 10 years of a project. IRC 42(f)(1); Treas Reg T(a)(1). In return for receiving the tax credits, the taxpayer must commit to maintain the project as low-income housing for 30 years. The 30-year term is comprised of an initial 15-year compliance period and an additional 15-year "extended use period." IRC 42(h)(6). For our purposes, it is not necessary to describe the LIHTC program rental and occupancy restrictions in detail. Suffice it to say there are three salient features. First, the taxpayer agrees that a specified number of units in the project will be rented for a restricted amount of rent to tenants whose income is a certain percentage less than the median income of the geographical area in which the project is located. See IRC 42(g). Second, federal law requires that the taxpayer and state housing agency enter into an "extended low-income housing commitment," which is to be "binding on all successors of the taxpayer," and recorded as a restrictive covenant pursuant to state law. IRC 42(h)(6)(A), (B). Third, "individuals who meet the income limitation applicable to the building * * * (whether prospective, present, or former occupants of the building)" have 3

21 the right to enforce the extended low-income housing commitment "in any State court." 3 IRC 42(h)(6)(B)(ii). Consistently with those requirements, in December 1990, Rose City Village Limited Partnership, the original owner of the project, entered into a Low-Income Housing Tax Credit Reservation and Extended Use Agreement (the extended use agreement) with the Department. The original owner agreed, among other things, that it would maintain 100 percent of the project as low-income housing for 30 years and that, as a condition precedent to the issuance of tax credits, it would record a "declaration of land use restrictive covenants." In the Declaration of Land Use Restrictive Covenants for Low-Income Housing Tax Credits (the declaration), which was recorded in Multnomah County, the original owner acknowledged the obligations and restrictions imposed under the extended use agreement. Section 2(b) of the declaration provides: "The Owner intends, declares and covenants, on behalf of itself and all future Owners and operators of the Project during the term of this Declaration, that this Declaration and the covenants and restrictions set forth in this Declaration regulating and restricting the use, occupancy and transfer of the Project ([1]) shall be and are covenants running with the Project land, encumbering the Project for the term of this Declaration, binding upon the Owner's successors in title and all subsequent Owners and Operators of the Project[,] ([2]) are not merely personal covenants of the Owner, and ([3]) shall bind the Owner (and the benefits shall inure to the Department and any past, present or prospective tenant of the Project) and 3 BRCP argued before the trial court that plaintiff did not meet the income limitation applicable to the building and, thus, that she lacked standing to bring this action. The trial court found that plaintiff satisfied the IRC section 42 income limitations, and BRCP does not challenge that finding on appeal. 4

22 its respective successors and assigns during the term of this Declaration. The Owner hereby agrees that any and all requirements of the laws of the State of Oregon to be satisfied in order for the provisions of this Declaration to constitute deed restrictions and covenants running with the land shall be deemed to be satisfied in full, and that any requirements of privileges [sic] of estate are intended to be satisfied, or in the alternate, that an equitable servitude has been created to insure that these restrictions run with the Project. For the longer of the period this Credit is claimed or the term of this Declaration, each and every contract, deed or other instrument hereafter executed conveying the Project or portion thereof shall expressly provide that such conveyance is subject to this Declaration, provided, however, the covenants contained herein shall survive and be effective regardless of whether such contract, deed or other instrument hereafter executed conveying the Project or portion thereof provides that such conveyance is subject to this Declaration." Further, and of critical significance, section 8 of the declaration, which is captioned "Enforcement of Section 42 Occupancy Restrictions," provides, in part: "(b) The Owner acknowledges that the primary purpose for requiring compliance by the Owner with restrictions provided in this Declaration is to assure compliance of the Project and the Owner with IRC Section 42 and the applicable regulations, AND BY REASON THEREOF, THE OWNER IN CONSIDERATION FOR RECEIVING LOW-INCOME HOUSING TAX CREDITS FOR THIS PROJECT HEREBY AGREES AND CONSENTS THAT THE DEPARTMENT AND ANY INDIVIDUAL WHO MEETS THE INCOME LIMITATION APPLICABLE UNDER SECTION 42 (WHETHER PROSPECTIVE, PRESENT OR FORMER OCCUPANT) SHALL BE ENTITLED, FOR ANY BREACH OF THE PROVISIONS HEREOF, AND IN ADDITION TO ALL OTHER REMEDIES PROVIDED BY LAW OR IN EQUITY, TO ENFORCE SPECIFIC PERFORMANCE BY THE OWNER OF ITS OBLIGATIONS UNDER THIS DECLARATION IN A STATE COURT OF COMPETENT JURISDICTION. The owner hereby further specifically acknowledges that the beneficiaries of the Owner's obligations hereunder cannot be adequately compensated by monetary damages in the event of any default hereunder." (Uppercase in original.) The Department allocated more than $2 million of LIHTC tax credits to the project and monitored the project for conformity with LIHTC program requirements. 5

23 The project experienced compliance problems over the years. In the course of trying to remediate those problems, the Department learned that, in 2002 or 2003, the original owner had transferred ownership of the project to Rose City Village Affordable Housing Limited Partnership (the middle owner). The manner in which the original owner transferred the project violated the terms of the declaration. The declaration requires, among other things, that the owner notify the Department prior to any transfer of ownership and that the owner obtain the agreement of any buyer "that such acquisition is subject to the requirements of" the declaration and IRC section 42. Those requirements were not satisfied. The Department ultimately concluded that, although the middle owner had made substantial progress in some respects, the project could not be brought into full 12 compliance with all of the requirements of the LIHTC program. 4 In 2004, a Department compliance officer notified the Internal Revenue Service (IRS) of that conclusion in a letter, which stated, in part: "Due to the severity of the noncompliance issues relating to this project, it has been determined that this project is not currently, is unlikely to be in the future, and may not have ever been in compliance. It is apparent that the Owner failed to make reasonable attempts to comply with the requirements of the Program. Therefore, because of the egregious nature of the noncompliance, it is the decision of [the Department] to remove this project from the Low-Income Housing Tax Credit Program." 4 A Department employee subsequently identified the "largest problem" as the original owner's failure to properly document the income eligibility of the initial project tenants. Although the parties disagree about whether the Department was justified in determining that full compliance was an impossibility, we need not resolve that dispute in that it is immaterial to our analysis and disposition. 6

24 With that letter, the Department also submitted multiple IRS 8823 forms, entitled "Low- Income Housing Credit Agencies Report of Noncompliance or Building Disposition." 5 The Department checked the same preprinted box on each form, indicating that the "[p]roject is no longer in compliance nor participating in the low-income housing tax credit program[.]" The federal government ultimately recaptured a portion of the tax credits that had been allocated to the project. 6 In 2005, the middle owner and the Department entered into a Settlement, Satisfaction and Partial Release Agreement (the release agreement). The release agreement recites that "the parties desire to resolve all outstanding issues between them by means of this Agreement" and provides, in part: "1. MUTUAL RELEASE. "The parties hereby release one another from all claims, causes of action, suits, and other liabilities, actual or potential, arising out of or related to the allocation and subsequent rescission of the low-income housing tax credits and the execution and recording of the related Declaration referenced above, except as specifically indicated herein. "2. SATISFACTION AND PARTIAL RELEASE OF DECLARATION. "The Department hereby provides its satisfaction and partial release of that Declaration except with respect to Section 6 (c) [7] thereof which shall The Department submitted a separate form for each building in the project. From the record before us, the extent of that recoupment is unclear. Section 6(c) of the declaration provides: "Notwithstanding subsection (b) above, IRC Section 42 rent requirements shall continue for a period of three years following the termination of the extended use requirement pursuant to the procedures specified in subsection (b) above for those tenants existing as of the date of termination. 7

25 remain in effect for three years from the date of this Agreement. For the three years that Section 6 (c) remains in effect, the [middle owner], and any successor in interest thereto, or other owner of the Property, shall not evict or terminate the tenancy of an existing tenant of any low-income unit on the Property other than for good cause and shall not increase the gross rent above the maximum allowed under the IRC with respect to such lowincome units." Shortly after it was executed, the release agreement was recorded in Multnomah County. In 2006, the middle owner sold the project to the present owner, BRCP, for a very substantial profit. Later in that same year, and despite the three-year "safe harbor" provision of the release agreement, BRCP issued a 30-day, no-cause eviction notice to plaintiff, among other tenants. Plaintiff stated in her declaration that, by the time she vacated her apartment in response to the eviction notice, almost all of her neighbors had moved, and the project "was like a ghost town." BRCP does not operate the project in a manner that complies with the restrictions of the LIHTC program and declaration. For example, at the time of the summary judgment proceedings below, BRCP did not screen tenants for income eligibility or rent exclusively to tenants who qualified as "lowincome" under section 42 of the Internal Revenue Code. Plaintiff subsequently filed this action, seeking declaratory and injunctive During such three year period, the Owner shall not evict or terminate the tenancy of an existing tenant of any low-income unit other than for good cause and shall not increase the gross rent above the maximum allowed under the IRC with respect to such low-income unit." "Subsection (b)" of the declaration referenced in the excerpt set forth immediately above, along with section 6(c) of the declaration, mirrors, in substance, IRC 42(h)(6)(E), set out below. See Or App at n 11 (slip op at 10 n 11). 8

26 relief to enforce the original owner's commitment to maintain the property as low-income housing for the remainder of the declaration's 30-year term. BRCP and the Department jointly moved for summary judgment, arguing that the release agreement is "valid and enforceable against plaintiff and other current and future tenants[.]" In so contending, defendants asserted, in part, that Chevron deference should be accorded to the Department's decision to execute the 2005 release agreement. Plaintiff opposed defendants' motion for summary judgment and filed a cross-motion, asserting that the release agreement did not, and could not, abrogate her right to obtain specific performance of the declaration. The trial court granted defendants' motion for summary judgment and denied plaintiff's cross-motion. The court determined that the Department's decisions to "terminate" the project from participation in the LIHTC program and enter into the release agreement effectively abrogated the ability of low-income tenants to obtain 14 specific performance of the declaration. 8 That holding was predicated on the trial court's 15 conclusion that the Department's decisions to remove the project from the LIHTC 8 The release agreement does not explicitly address the rights conferred on lowincome tenants in the declaration. Instead, the middle owner and the Department state in the release agreement that they "desire to resolve all outstanding issues between them" and that they are releasing "one another." (Emphasis added.) Although an argument could be made that the parties never intended that the release agreement would have any effect on the right of a qualified tenant to enforce the use restrictions set forth in the declaration, no such argument was made before the trial court or has been made on appeal. It appears that the parties and the trial court assumed that the middle owner and the Department intended that the release agreement would extinguish the enforcement rights conferred on low-income tenants. 9

27 program and enter into the release agreement with the middle owner were entitled to deference under the principles set forth in Chevron USA, Inc. v. Natural Res. Def. Council, 467 US 837, 104 S Ct 2778, 81 L Ed 2d 694 (1984). The court thereafter entered a general judgment of dismissal. Plaintiff appeals, assigning error to the allowance of defendants' motion for summary judgment and to the denial of her cross-motion for summary judgment. 9 appeal from a judgment that results from cross-motions for summary judgment, "if both the granting of one motion and the denial of the other are assigned as error, then both are subject to review. Each party that moves for summary judgment has the burden of demonstrating that there are no material issues of fact and that the movant is entitled to judgment as a matter of law. We review the record for each motion in the light most favorable to the party opposing it." In an Eden Gate, Inc. v. D&L Excavating & Trucking, Inc., 178 Or App 610, 622, 37 P3d 233 (2002) (citations omitted). As amplified below, we conclude that deference under Chevron is not warranted and that the 2005 release agreement did not abrogate plaintiff's right to enforce the original use restrictions prescribed in the 1990 declaration. Accordingly, the trial court erred in granting defendants' motion for summary judgment and in denying plaintiff's cross-motion. We begin with the trial court's basis for disposition--viz., deference in 9 Earlier in this appeal, BRCP filed a motion to dismiss for lack of jurisdiction, arguing that this court lacks jurisdiction because plaintiff's exclusive remedy is under the Administrative Procedures Act (ORS chapter 183). The Appellate Commissioner denied the motion, and BRCP renews its jurisdictional argument in its answering brief. We deny BRCP's renewed motion to dismiss for the reasons stated by the commissioner in the court's order entered on April 29,

28 accordance with the principles set forth in Chevron. 10 In Friends of Columbia Gorge v. Columbia River (S055722), 346 Or 366, 378, 213 P3d 1164 (2009), the court generally described the application of deference under Chevron: "A long line of federal cases, beginning with Chevron, * * * holds that, when a federal agency has been charged by Congress with implementing a federal statute, courts should defer to that agency's interpretation of the statute, treating that interpretation as controlling as long as it is reasonable." However, deference is appropriate only where "Congress has not directly addressed the precise question at issue[.]" Chevron, 467 US at 843. "If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress." Id. at Here, invoking Chevron deference, the trial court noted that the Internal Revenue Code explicitly identifies two situations in which the extended-use period will terminate early (neither of which was applicable in the circumstances of this case) Although the Department argued before the trial court that Chevron-style deference was appropriate, it has abandoned that argument on appeal and, in fact, now argues that Chevron deference is inapposite. BRCP, however, defends the trial court's rationale. 11 IRC section 42(h)(6)(E) provides: "(i) In general.--the extended use period for any building shall terminate-- "(I) on the date the building is acquired by foreclosure (or instrument in lieu of foreclosure) unless the Secretary determines that such acquisition is part of an arrangement with the taxpayer a purpose of which is to terminate such period, or "(II) on the last day of the period specified in subparagraph (I) if the housing credit agency is unable to present during such period a qualified contract for the acquisition of the low-income portion of 11

29 Nevertheless, the court reasoned that that identification was not necessarily exclusive and, thus, "Congress was silent" as to whether, in other circumstances, local housing agencies can voluntarily terminate a project's participation in the LIHTC program before the end of the extended-use period. Proceeding from that premise, the trial court concluded that, "[i]n light of the fact that some areas of noncompliance could never be remedied[,] it was reasonable for the agency to determine that the property owner would be unable to bring the property into compliance. Because [the Department] acted reasonably, the court will defer to its interpretation of the statute. This leaves the remaining question as to whether [the Department and the middle owner] needed to give the tenants notice and obtain their consent prior to modification of the Declaration." As to that "remaining question," the court concluded that Congress had not directly addressed the subject and that the "actions" of the parties to the release agreement "were reasonable and will be entitled to deference." The court's invocation of Chevron deference was erroneous because the the building by any person who will continue to operate such portion as a qualified low-income building. "Subclause (II) shall not apply to the extent more stringent requirements are provided in the agreement or in State law. "(ii) Eviction, etc. of existing low-income tenants not permitted.--the termination of an extended use period under clause (i) shall not be construed to permit before the close of the 3-year period following such termination-- "(I) the eviction or the termination of tenancy (other than for good cause) of an existing tenant of any low-income unit, or "(II) any increase in the gross rent with respect to such unit not otherwise permitted under this section." 12

30 Department is not an entity to which deference is warranted under Chevron. The Department is an agency established under state statute. See ORS (1). "A state agency's interpretation of federal statutes is not entitled to the deference afforded a federal agency's interpretation of its own statutes under Chevron * * *." Orthopaedic Hosp. v. Belshe, 103 F3d 1491, 1495 (9th Cir 1997). BRCP suggests, nevertheless, that deference to the Department is warranted under Chevron because the circumstances here are analogous to those in Friends of Columbia Gorge. We disagree. In Friends of Columbia Gorge, the Oregon Supreme Court held that interpretations by the Columbia River Gorge Commission (Gorge Commission) of certain provisions of the Columbia River Gorge National Scenic Area Act, 16 USC p, were entitled to Chevron deference. In so holding, the court pointed to specific features of the federal authorizing legislation--including those requiring the Gorge Commission to develop, implement, and administer a management plan "in cooperation and consultation with the United States Secretary of Agriculture"--and emphasized that, as a matter of Congressional intent, "[t]he Act clearly contains gaps that the [Gorge] commission is charged with filling." 346 Or at , Here, in contrast, nothing in the authorizing legislation for the LIHTC program delegates to the Department or other state housing agencies the expansive type of "rulemaking" authority conferred on the Gorge Commission. To the contrary, section 42(n) of the Internal Revenue Code provides that "[t]he Secretary shall prescribe such 13

31 regulations as may be necessary or appropriate to carry out the purposes of this section[.]" BRCP contends, alternatively, that Chevron deference applies because an IRS employee's advice informed the Department's decision to remove the project from the LIHTC program. In particular, BRCP points to evidence that an IRS employee advised the Department in a phone conversation that the project could be "kicked out of" 7 the LIHTC program for noncompliance with program requirements. 12 That argument is unavailing. Only those administrative interpretations that Congress and the agency intend to have the force of law are entitled to Chevron deference. United States v. Mead Corp., 533 US 218, , 121 S Ct 2164, 150 L Ed 2d 292 (2001). The oral advice of a federal employee, given on an ad hoc basis to a state agency, simply does not qualify. In sum, the trial court erred in granting defendants' summary judgment motion based on its application of Chevron deference. That, however, is merely the beginning, not the end, of our inquiry. That is so because, as noted, plaintiff has also challenged the denial of her cross-motion for summary judgment, and defendants, individually and collectively, proffer alternative legal bases for affirming the trial court's dismissal of plaintiff's claims. None of the parties suggests that those cross-cutting contentions implicate disputed issues of material fact. For the reasons that follow, we conclude that the 2005 release agreement did not abrogate plaintiff's entitlement to 12 The official position held by the IRS employee is not clear from the record. One Department employee described the IRS employee as being a LIHTC compliance "guru," and another said the IRS employee was in charge of LIHTC compliance at the IRS. 14

32 enforce the use restrictions prescribed in the 1990 declaration and that defendants' asserted defenses to the enforcement of those restrictions fail as a matter of law. Accordingly, the trial court erred in denying plaintiff's cross-motion for summary judgment. We begin with the pertinent provisions of the declaration. In section 2(b) of the declaration, the original owner of the project and the Department agreed that the use restrictions set forth in the declaration would be "covenants running with the Project land," encumbering the project for the term of the declaration and binding all successors in title for the stated duration. See Or App at (slip op at 3-4). Section 2(b) further provides that the "benefits" of the covenants and restrictions "shall inure to the Department and any past, present or prospective tenant of the Project." (Emphasis added.) Finally, under section 8(b) of the declaration, both the Department and "any individual who meets the income limitation applicable under section 42 (whether prospective, present or former occupant) shall be entitled * * * to enforce specific performance" of obligations owed under that document. (Emphasis omitted.) Thus, under the declaration, plaintiff is an intended third-party beneficiary of the use restrictions and, pursuant to section 8(b), she is independently entitled to enforce those use restrictions, even if the Department has waived its ability to do so. BRCP contends, however, that the release agreement abrogated the use restriction, precluding plaintiff or any other intended beneficiary from enforcing those restrictions. That argument fails because, under Oregon law--which is expressly made 15

33 applicable by both section 8(e) of the declaration and section 4 of the release agreement-- a grantor and grantee cannot terminate a restrictive covenant without the consent of the intended beneficiary. Snashall et ux v. Jewell et ux, 228 Or 130, , 363 P2d 566 (1961). In Snashall, the parties lived in the same subdivision and received their deeds from common grantors. 228 Or at 132. The defendants' deed contained a restrictive covenant prohibiting buildings over one story in height and also contained a covenant that building plans be approved by the common grantors. The defendants, in an attempt to defeat the restrictive covenant, transferred the property back to the original grantors, who then reconveyed the land to the defendants, with the deed of reconveyance effectively omitting the building restriction. Id. at 133. The plaintiffs subsequently, successfully brought an action for breach of contract, asserting that the defendants' home violated the restrictive covenants. The defendants appealed, and the Supreme Court affirmed. In so holding, the court determined that "[t]his [reconveyance] maneuver did not, however, operate to change the binding effect of the restrictions contained in the original deed because the covenants which became operative upon the execution of the first deed to defendants inured to the benefit of the other lot owners in the tract and would continue to bind defendants as to those other owners unless the latter were to release defendants from the obligations of the covenants. Defendants treat the deed provision calling for the grantors' approval of building plans as vesting in the grantors a dispensing power permitting the lifting of the restriction on any lot at the will of the grantors. We do not so construe the provision; it was intended to provide machinery in the aid of the enforcement of the covenants rather than to provide a means by which the common plan could be weakened by modification. It is manifest from 16

34 the content of the restrictive covenants that they were imposed for the benefit of the owners of the several lots within the tract rather than for the personal benefit of the grantors." Id. at (emphasis added). The Supreme Court concluded that, "by reason of either the theory of third party beneficiary or the theory of implied reciprocal servitude, [the] plaintiffs are entitled to enforce the restrictive covenant contained in [the] defendants' deed." Id. at 138. See also Menstell et al. v. Johnson et al., 125 Or 150, 167, 262 P 853 (1927), reh'g den, 125 Or 169, 266 P 891 (1928) (restrictive covenant may not be modified "without the consent or acquiescence of the [beneficiaries]"). Plaintiff contends (we believe correctly) that Snashall is dispositive. Notwithstanding plaintiff's invocation of Snashall, defendants do not directly address Snashall, Menstell, and the other related cases cited by plaintiff 13 --and offer no principled basis for distinguishing those cases. Defendants appear to suggest, however, that plaintiff's claim is foreclosed by the release agreement because the declaration does not expressly require that qualified tenants consent to release of their interests. The problem with that argument is that the declaration and the release agreement do expressly incorporate Oregon law--including Snashall--and nothing in Snashall (or any related case) conditions the right of an intended beneficiary to enforce a restrictive covenant on the existence of an express contractual provision requiring the third-party beneficiary's 13 See, e.g., Stan Wiley v. Berg, 282 Or 9, 15-16, 578 P2d 384 (1978) (a promisor and promisee generally cannot materially alter or abrogate the rights of an intended thirdparty beneficiary once the beneficiary has "accepted, adopted, or acted upon" the promise made for his or her benefit). 17

35 1 2 3 consent to the material modification or termination of the covenant. BRCP further argues that, in all events, it is not bound by the use restrictions set forth in the declaration because the declaration did not succeed in creating 4 covenants that run with the land at law. 14 To create a covenant running with the land and binding on successors, four requirements must be met: "(1) there must be privity of the estate between the promisor and his successors; (2) the promisor and promisee must intend that the covenant run; (3) the covenant must touch and concern the land of the promisor; and (4) the promisee must benefit in the use of some land possessed by him as a result of the performance of the promise." Johnson v. Highway Division, 27 Or App 581, 584, 556 P2d 724 (1976), rev den, 277 Or 99 (1977) (emphasis omitted). Specifically, BRCP argues that the first and fourth requirements are not satisfied. BRCP's argument fails because the declaration itself expressly provides that all of the requirements under Oregon law for creation of a restrictive covenant running with the land are deemed satisfied. In section 2(b), the parties to the declaration agreed "that any and all requirements of the laws of the State of Oregon to be satisfied in order for the provisions of this Declaration to constitute deed restrictions and covenants running with the land shall be deemed to be satisfied in full[.]" BRCP does not cite, and we are not aware of, any authority supporting the proposition that such an agreement is legally ineffective. 14 The trial court determined that the declaration was recorded as a restrictive covenant in the property's chain of title, and the Department does not dispute that the declaration successfully created covenants running with the land. 18

36 In all events, even if the requisites of the covenant running with the land were somehow not satisfied, BRCP would nevertheless be subject to enforcement of the use restrictions as an equitable servitude. That is so because the original owner and the Department agreed in section 2(b) of the declaration that, in the event that the declaration somehow failed to create covenants running with the land at law, an equitable servitude would be created "to insure that [the] restrictions run with the Project." In Ebbe v. Senior Estates Golf, 61 Or App 398, , 657 P2d 696 (1983), we summarized the elements of an equitable servitude: "The general rule is that, even if all technical requirements for a covenant to run with the land are not met, a promise is binding as an equitable servitude if (1) the parties intend the promise to be binding; (2) the promise 'concern[s] the land or its use in a direct and not a collateral way'; and (3) 'the subsequent grantee [has] notice of the covenant * * *.' 20 Am Jur 2d Covenants, 26 (1965)." An equitable servitude creates a burden that will fall on subsequent holders of the property "'with the single qualification that a subsequent owner who acquires the legal estate for value and without notice takes it free from this burden.'" Hall v. Risley and Heikkila, 188 Or 69, 99, 213 P2d 818 (1950) (quoting John Norton Pomeroy, 4 Pomeroy's Equity Jurisprudence 1295, 850 (5th ed)). Either actual or constructive notice of the covenant is sufficient to bind a subsequent owner. Ebbe, 61 Or App at 405. BRCP remonstrates that an equitable servitude is inapposite because it did not have actual or constructive notice of the use restrictions set forth in the declaration. The uncontroverted evidence is to the contrary--and, indeed, BRCP had both actual and constructive notice of the covenants. In particular, the individual in charge of due 19

37 diligence for BRCP's acquisitions acknowledged that she had learned of the existence of the declaration and the covenants included therein before BRCP purchased the project. Thus, BRCP acquired the project with actual notice of the use restrictions. In addition, the recording of the declaration operated to give BRCP constructive notice of the use restrictions imposed by that document. ORS (addressing constructive notice from recordation of interest in real property); see also Huff v. Duncan, 263 Or 408, 411, 502 P2d 584 (1972). BRCP argues, however, that it should not be bound by the use restrictions imposed in the declaration because, in deciding to purchase the project, it reasonably relied on the intervening release agreement. BRCP maintains that the release agreement appeared to be a valid release of the declaration "on its face," rendering the explicit use restrictions of the recorded declaration of "no import." We disagree. As a threshold matter, BRCP's "facial" characterization of the release agreement is insupportable. As noted, see Or App at n 8 (slip op at 8 n 8), nothing in the release agreement expressly addresses the enforcement rights of qualified low-income tenants as third-party beneficiaries of the declaration's use restrictions. Regardless, a purchaser of real property has a duty to examine all documents in the property's chain of title and is "bound by the recitals in the conveyances necessary to his chain of title." Phair v. Walker, Coe, 277 Or 141, 144, 559 P2d 882 (1977); see also Jennings v. Lentz, 50 Or 483, 490, 93 P 327 (1908) (purchaser must use reasonable diligence in conducting search of documents in chain of title or "assume the risk" of 20

38 1 2 3 taking property subject to competing interest). BRCP cites no authority in support of its argument that it was entitled to rely on only the release agreement simply because the release agreement was the most recently recorded document in the project's chain of 4 title. 15 Indeed, BRCP's purported reliance on the release agreement in isolation is especially unreasonable given that section 3(o) of the declaration expressly provides that the rights and obligations created by that document will survive and control in the face of inconsistent provisions in later documents. 16 Finally, BRCP posits that the release agreement extinguished plaintiff's enforcement rights because the declaration provides that it can be amended "as may be necessary to comply with the [Internal Revenue Code], any and all applicable rules, regulations, policies, procedures, rulings or other official statements pertaining to the [LIHTC program]." Again, that contention is unavailing. Even assuming that the release 15 The Oregon Land Title Association (OLTA), as amicus curiae, filed a brief in support of BRCP. OLTA argues that we should apply the reasoning of Willamette Col. & Credit Serv. v. Gray, 157 Or 77, 70 P2d 39 (1937), to this case. The court in Willamette Col. & Credit held that, "where a release or satisfaction of a mortgage has been entered by the record owner, a subsequent purchaser, for value and without notice, will be protected against the lien of a prior unrecorded assignment of the mortgages." Id. at 85. Willamette Col. & Credit has no application here for the reason that the competing interest at issue in that case was unrecorded. Here, plaintiff's interest was timely recorded in the project's chain of title. 16 That provision states: "The Owner warrants that it has not and will not execute any other Declaration with provisions contradictory to, or in opposition to, the provisions hereof, and that in any event, the requirements of this Declaration are paramount and controlling as to the rights and obligations herein set forth and supersede any other requirements in conflict herewith." 21

39 agreement could somehow be deemed a mere "amendment" to the declaration, its content does not "comply" with the Internal Revenue Code or other applicable law. Rather, abrogation of the enforcement rights conferred on plaintiff is inconsistent with the proper application of IRC section 42 and applicable regulations and authoritative pronouncements pertaining to the LIHTC program. 17 Defendants concede that there is no express authority under federal law to extinguish the enforcement rights conferred on qualified tenants for noncompliance with 8 LIHTC program requirements during the extended-use period. 18 They each argue, 17 Defendants rely on an IRS publication entitled Guide for Completing Form 8823 Low-Income Housing Credit Agencies Report of Noncompliance or Building Disposition (the guide), which provides, in part, that, "when a building or project is removed from the program, state agencies have discretionary authority to release the extended use agreement and remove the deed restriction." There are at least two problems with BRCP's reliance on the guide. First, the guide states on its cover that "[u]nder no circumstances should the contents [of this guide] be used or cited as authority for setting or sustaining a technical position." Second, the guide is dated January 2007, and the release agreement here was executed in Because it post-dates the agency action at issue in this case, it could not have served as authority for the Department's decision. 18 Nor do defendants argue that abrogation of plaintiff's enforcement rights is authorized under state law. In fact, it appears that such action is contrary to the Department's own regulations. OAR provides, in part: "(2) An executed Reservation and Extended Use Agreement shall be enforceable in any State court by any individual who qualified for occupancy by virtue of the income limitation set for such buildings; shall be binding on all successors of the Applicant; and the Declaration of Land Use Restrictive Covenants incorporated within the Reservation and Extended Use Agreement shall be recorded pursuant to State law as a restrictive covenant." OAR provides, in part: "(5) The Declaration of Land Use Restrictive Covenants shall be deemed a 22

40 however, that doing so is consistent with the letter and spirit of the LIHTC program. We disagree. The private enforcement rights conferred on qualified low-income tenants are an integral part of Congress's comprehensive design. As already noted, the LIHTC program is front-loaded. See Or App at (slip op at 2). A project owner typically receives tax credits during the first 10 years of a project's life. Moreover, although a portion of the tax credits allocated to a project may be recaptured by the IRS in the event of noncompliance with program requirements, the recapture period corresponds to the 15- year compliance period, not the additional 15-year extended-use period. See IRC 42(j). Congress anticipated that the enforcement role played by the pertinent government agencies gradually would diminish and effectively end before expiration of the 30-year extended-use period. To effectuate continued enforcement, Congress conferred on qualified tenants enforcement rights for the duration of the 30-year extended-use period. IRC 42(h)(6)(B)(ii). The private enforcement mechanism included in the tax code and contract enforceable by one or more tenants as third-party beneficiaries of the Declaration of Land Use Restrictive Covenants and Reservation and Extended Use Agreement. "(6) In the event the Project owner fails to satisfy the requirements of the Declaration of Land Use Restrictive Covenants and Reservation and Extended Use Agreement and legal costs are incurred by the Department or one or more tenants or beneficiaries, such legal costs, including legal charges and court costs (including costs of an appeal), are the responsibility of and may be recovered from the project owner." 23

41 restated in the declaration ensures full performance of the promises made by a recipient taxpayer after the tax credits are fully allocated and the recapture period has passed. As noted, see Or App at n 11 (slip op at 10 n 11), Congress explicitly described two situations in which the extended-use period terminates before the end of the 30-year extended-use period. One of those triggering events is an acquisition of the project by foreclosure or instrument in lieu of foreclosure, "unless the Secretary determines that such acquisition is part of an arrangement with the taxpayer a purpose of which is to terminate" the extended-use period. IRC 42(h)(6)(E)(i)(I). We agree with amicus National Housing Law Project (NHLP) that, "in specifically prohibiting purposeful foreclosure from terminating an extended use period, Congress clearly articulated its intent to ensure compliance with long-term use requirements. Congress certainly did not intend to prohibit purposeful foreclosure while simultaneously allowing noncompliance with program requirements--which is also wholly within an owner's control--to produce the identical result." We also agree with plaintiff and NHLP that, if failure to comply with program requirements were grounds for early release from the applicable use restrictions, it would create a perverse incentive to encourage noncompliance. An owner of a property subsidized with public funds would be encouraged to violate program requirements in order to secure early release from the LIHTC program. Once released from the obligation to maintain the property as low-income housing for the stated period, an owner would be free to charge market-rate rent or to sell the project for a profit, thereby profiting from a public subsidy without fulfilling the conditions of that subsidy. In sum, permitting abrogation of LIHTC program-prescribed use 24

42 restrictions--and, specifically, tenants' rights to enforce those restrictions--by way of "releases" between project owners and local housing agencies would subvert, and even invert, Congressional intent. Plaintiff is, thus, entitled to enforce the declaration's use restrictions, and the trial court erred in concluding otherwise. Reversed and remanded. 25

43 LIHTC COMPLIANCE AFTER THE COMPLIANCE PERIOD: ONCE THE CREDITS ARE GONE Characteristics of the Ohio market: OHIO S TAKE Little upside conversion potential as may be seen in certain hot markets on the east or west coasts (though this may be changing in certain urban markets) Market rents are often not significantly higher than restricted rents Significant number of single-family lease-purchase units Compliance and Monitoring Tenant Certifications o Projects without HOME funds require certification only at initial occupancy o Projects with HOME or other forms of assistance carry greater recertification requirements o OHFA has an online database called DevCo in which tenant certification may be submitted, but 3 rd party products may also be used. Monitoring o Frequency and intensity of site monitoring based on past performance and other factors o Annual reporting required through DevCo o Certain monitoring rules and procedures are relaxed during extended use o Deficiencies may be addressed through legal action, watch list, not in good partnership status (preventing future participation), etc.

44 Covenant Release and Covenant Modification Policy Lease-Purchase o OHFA processes covenant release for Lease-Purchase projects through qualified contract process, even though these projects typically waived the right to submit a QC request o Once the required information is submitted, OHFA issues a Conditional Release of Covenant, the purpose of which is to provide the 3-year protection required under Sec. 42(h)(6)(E)(ii) against: no-cause evictions; or rent increases not otherwise allowable under Sec. 42 o Since the 3-year protection is only intended to apply to existing tenants, the Conditional Release terminates with respect to any unit that is or later become vacant. o OHFA may choose to issue Partial Covenant Releases in escrow (to be recorded upon the sale of each home) instead of a blanket Conditional Release Multifamily o The right to request a qualified contract has generally be waived by all projects after 1996, and although OHFA is still free to consider such requests. o Generally, OHFA prefers to modify rather than release covenants o Decisions are made on a case-by-case basis Underwriting type analysis Significant Data Submission o Circumstances warranting covenant modification: Vacancy rates Insufficient rental income in relation to costs Expiration of tax abatement Depletion of reserves Capital Needs o Approaches that OHFA may take: Increasing income or rent limits Increasing number of market-rate units Post-Modification Reporting/Analysis is Required

45 ( ABOUT ( PROGRAMS ( OUR PARTNERS ( NEWS & EVENTS ( PROJECT REQUESTS & CHANGES HOMEBUYERS ( RENTERS ( CONTACT ( ( Additional forms can be found under our Compliance Forms ( and Compliance Policies ( webpages. OWNER, GENERAL PARTNER & MANAGEMENT COMPANY CHANGES Owner Management Company Change Policy ( (264 KB Adobe PDF File) revised 10/3/16 PC-E40 Owner Capacity Review ( (2.15 MB Excel File) e ective 10/3/16 PC-E39 Management Change Form ( (159 KB Excel File) revised 8/31/16 PC-E38 Management Capacity Review ( (1.79 MB Adobe PDF File) revised 8/31/16 PC-E37 OHFA Disposition of Property Form ( (201 KB Adobe PDF File) revised 8/31/16 QUALIFIED CONTRACT REQUESTS Certain Housing Tax Credit properties can seek a buyer through the quali ed contract process. Review the restrictive covenant for your project to determine if it quali es. If you have any questions about quali ed contract requests, contact your regional representative ( LIHTC Property Sales ( Quali ed Contract Request Instructions and Worksheets ( edcontract.xls) (113 KB Excel File) RESTRICTIVE COVENANT RELEASE/MODIFICATION Recently, OHFA has witnessed an increased number of requests for the release or modi cation of restrictive covenants. OHFA's Quali ed Allocation Plan (QAP) after 1996 required owners to waive the right to request a quali ed contract which is one means available to sell the low income portion of a project, but often a path to a covenant release. Therefore, many owners have been requesting a full release of the restrictive covenant. In many instances, a modi cation to the restrictive covenant rather than a full release of the covenant is more appropriate. This entails increasing the number of "market units" (units with no rent or income restrictions) or increasing the rent and income limits. Requests for project modi cations or releases should be sent to Todd Carmichael, Compliance Manager, O ce of Program Compliance at tcarmichael@ohiohome.org (mailto:tcarmichael@ohiohome.org) or by mail to 57 East Main Street, Columbus Ohio Restrictive Covenant Release/Modi cations Policy Updated 1/3/14 ( (146 KB Word File)