Resident Protections in a Low-Income Housing Tax Credit Property — “Good Cause” Termination

Every Section 42 Low-Income Housing Tax Credit (LIHTC) property must have a recorded Extended Use Agreement (EUA). One of the requirements of an EUA is that it prohibit eviction or termination of occupancy by a low-income resident without “good cause.”

The requirement for an EUA went into effect for LIHTC properties with allocations of credit beginning in 1990 and the good cause protections were included in the original law requiring EUAs.

IRS Revenue Ruling 2004-82 (July 29, 2004) made clear that all EUAs for LIHTC projects must include a prohibition against evicting or terminating tenancy of a low-income resident for other than good cause. This requirement must remain in place throughout the entire term of the EUA, which will be a minimum of 30 years.

What is “Good Cause?”

The general definition of “good cause” is “serious or repeated violations of the material terms of the lease.” The owner of a LIHTC project must be able to demonstrate – if challenged in state court – that good cause existed to support the eviction or termination of a low-income resident.

For purposes of §42(h)(6)(E)(ii)(I), good cause is determined by the state or local law applicable to the location in which the project is located. The IRS will never take a position relative to what constitutes good cause in any specific situation. This is purely a state and local law issue.

Examples of Good Cause

Examples of good cause based on most state and local laws governing landlord/tenant relationships include:

• Nonpayment of rent;
• Material violations of a lease or rental agreement;
• Destruction or damage of the property;
• Interference with other tenants or creating a nuisance; and
• Using the property for an unlawful purpose.

In the context of a properly structured lease for a LIHTC property, lease violations could include:

• Refusal to follow the rules of the Section 42 program, including recertification, permitting management to obtain utility records, etc.;
• Being deemed ineligible under the rules of the Section 42 program (e.g., student status); and
• Provision of incorrect information relating to eligibility.

What about states that allow Landlords to non-renew leases without cause?

Many states permit a landlord to non-renew a lease at the end of a lease term without cause – i.e., no reason is needed. In such cases, if a landlord refuses to enter into a new lease, it is not considered, per se, eviction without good cause. However, in these cases, owners must be prepared to demonstrate if challenged in state court that the non-renewal of a lease is not a “termination of tenancy” for other than good cause under the EUA. While state landlord/tenant law may permit non-renewal without cause, the EUA is a state-court enforceable deed restriction agreed to by the owner. These agreements may be enforced in state court by any interested party. The tenant is clearly an “interested party,” but the HFA could also be considered an interested party and seek enforcement of the EUA on behalf of a resident.

Conclusion

Owners of LIHTC properties must remember that once the EUA is executed, the right to lease non-renewal without cause is waived. Unless a tenant has violated the terms of a lease or rental agreement, an owner will be hard pressed to defend the termination of a low-income resident’s occupancy in a LIHTC property.