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Land Use Restriction Agreement

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What is a Land Use Restriction Agreement?

A Land Use Restrictive Agreement (LURA) is a legal document in which the property owner gives up some of their rights of the land use in exchange for the promise of future tax credits, tenant income restrictions, unit set asides to be rented to lower income tenants and other affordability restrictions. LURA documents the land use restrictions in a public record and runs with the land, which simply mean that the rights in the real estate deed remain with the land despite change in ownership.

Here is more on land use restriction agreements .

How Land Use Restriction Agreements Work

The purpose of a LURA is to provide affordable housing to low-income households by limiting the maximum rent that can be charged for a unit. The LURA documents the restrictions placed upon the property and guarantees that the project receives a specific number of low income housing tax credits over a specific time period. Low Income Housing Tax Credits, or LIHTC, are federal tax credits designed to encourage private businesses to invest in affordable housing.

Low Income Housing Tax Credits depend on a project providing 40% of the apartment units to tenants making no more than 60% of the area median income or allotting 20% of the units to tenants making no more than 50% of the area median income. Since LURA set the restrictions on a property, even if a developer sells the property which has a Land Use Restrictive Agreement in effect, it will transfer to the new buyer.

If the new buyer wants to develop a mixed-use project, the LIHTCs might be overly restrictive. However, there are ways to overcome this problem while maintaining the LIHTCs. One can create a master lease where a developer signs a lease to take over the commercial space. The developer thus becomes a tenant and pays a specific set rent under the income restriction back to the owner of the project. The developer can rent out the commercial space to businesses or individuals to make a profit.

The buyer can also break the mixed-use project into different pieces like a condominium's units–each owned by separate people. The developer is the sole owner of the commercial part of the project but it remains separate from the residential part of the project where the LIHTC applies.

You can read more on working with a property that has a land use restriction agreement in place, here .

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Common Terms in a LURA

The LURA has some common sections such as definitions and property details. There are some common sections and topics that are present in all LURAs.

  • Multifamily Financing Implications : Properties with a LURA restrict rents are underwritten and processed differently than traditional market rate properties. For instance, Loan terms, costs and interest rates may differ from those of a market rate property. Properties with a restrictive agreement in place are processed under an Affordable Housing program often. A dedicated team of professionals trained in affordable housing will underwrite, process and close the loan.
  • The Restriction Period : The restrictions period is also known as the compliance period and is set forth in the LURA. For instance, the compliance period is set at 15 years with an additional 15 years for the extended use period.
  • LIHTC Tax Credits : For submitting to the land use restrictions the owner of the multifamily property receives a series of tax credits that provide dollar-for-dollar reductions in its federal income taxes. LIHTC properties receive the tax credits annually during the first 10 years of the agreement.
  • Termination of the LURA under LIHTC : While the restriction period of the LIHTC program is in place the land use restrictions also stay in place. This can limit the operations of the multifamily housing property. The specific length of time that the restrictions stay in place is specified in the LURA as the compliance period. The LURA's restrictions can terminate through the qualified termination process, through lender foreclosure proceedings or through the natural expiration of time which can be 30 years or more.

You can read more on components of a LURA here .

Land Use Restriction Agreement Compliance Period

The compliance period is the period between the effective date of the agreement and the expiration of the agreement. Generally, the compliance period is set at 15 years with an additional 15 years for the extended use period. The IRS regulations, HUD or other housing authority set the initial 15-year compliance period. Additional extended use period is enforced by the actions of the individual states housing authority where the property is located.

Here is a sample LURA .

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