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CTCAC Rent Increase Limitation’s Five-Year Look Back Could Cause Transfer Issues

Published by Thomas Stagg on Monday, May 6, 2024 - 9:39AM


The California Tax Credit Allocation Committee (CTCAC) passed April 3 a new limitation on annual rent increases for low-income housing tax credit (LIHTC) tenants. The limitation applies directly to new developments that have received an allocation after April 3, 2024. However, it immediately applies to owners that plan to transfer ownership within the next five years.

Section 10320(b)(1)(D) states the following:

“The Executive Director shall not approve a transfer if, in any of the five calendar years prior to the transfer date or in the year to date of the transfer but not earlier than April 3, 2024, the owner has increased the rent for any low-income household in excess of the amounts described in Section 10328(a)(4).”

This means that even if the rent increase provision is not contained in the partnership’s regulatory agreement, if an owner is planning to sell or transfer a property within the next five years, the owner will need to make sure they comply with the new regulations immediately. If an owner increases rents more than the amount allowed on any low-income household during 2024, they would not be able to obtain CTCAC approval to transfer ownership until after 2029, since they would have to wait five years for the non-compliance to cure.

Timing of Implementation

The regulations not only require compliance in the year of transfer, but contain a lookback to five calendar years prior to the transfer date but not earlier than April 3. If an owner is transferring mid-year, then they would need to comply for both the year of transfer and the five previous complete years. However, in all cases, that date cannot extend prior to April 3, 2024.

Therefore, if an owner is planning to transfer ownership before the end of 2029, they would need to comply with this rule immediately. This means that likely any development that is beyond Year 10 of the compliance period would likely be required to comply with this immediately. 

Applicable Transfers

The CTCAC regulations do not provide a lot of guidance on how an ownership transfer is defined. Regulation Section 10320(1)(b)(1) states: “No allocation of the Federal or State Credits, or ownership of a Tax Credit project, may be transferred without prior written approval of the Executive Director.”

Regulation Section 10320(1)(b)(1)(A) makes it clear that this would apply to, “changes to any general partner, member, or equivalent responsible party.” During the recent regulatory approval process, CTCAC stated that this does not apply to transfers of limited partnership interest. For now, it would appear that it applies in the case where either the property is being sold, or the general partner interest in the property is being sold or transferred. 

Other Considerations

Partnership Agreement Provisions

It isn’t just the general partners that will want to implement controls around this topic.  This rule can impact the ability to transfer property. Therefore, investors will also want to make sure their exit rights in Year 15 are not impacted by non-compliance with this requirement. For example, if the investor has the right to force the sale of the property for a limited time window after the end of the compliance period, then non-compliance with the rule may limit the ability of the partnership to sell the property.

Right of First Refusal

This lack of ability to transfer could also cause issues with partnerships trying to exercise the right of first refusal. If a property is not allowed to be transferred due to CTCAC’s refusal to approve the transfer, it is unclear if a bon-a-fide offer could exist to purchase the property.

Occasionally, parties other than the general partner may have a right of first refusal option in the partnership agreement. The holder of the right of first refusal would also want to make sure their contractual rights are not being limited by non-compliance with these rules.

Resyndication

This could also limit a property’s ability to resyndicate and access tax credits to pay for needed rehabilitation and repairs. If a violation of the rent increase rule occurred, CTCAC would not approve a transfer of ownership typically required during a resyndication.

Conclusion

If an owner is considering transferring ownership withing the next five years, they will need to make sure they have communicated this requirement to their property management company and that controls have been put in place to comply with this rule.

For technical assistance, reach out to a Novogradac professional

 

 

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