LIHTC compliance and extended use: the covenant is the asset

The credits are earned over ten years, but the obligations run far longer. Federal law sets a 15-year compliance period (with recapture of accelerated credits for noncompliance) and, since 1990, a § 42(h)(6) extended use agreement of at least 30 years recorded against the land. California goes further: the CTCAC regulations require 55-year regulatory agreements on essentially all deals.

Compliance is policed through the state agency: CTCAC monitors, and reports noncompliance to the IRS on Form 8823 — the categories and cure standards are laid out in IRS Publication 5913 (2024), which replaced the old 8823 guide.

• Unit tests, continuously: income-qualified households at initial occupancy, rent ceilings never exceeded, and the available-unit and vacant-unit rules (26 C.F.R. § 1.42-15) governing over-income households and re-renting.
• Annual certifications to CTCAC, utility-allowance updates (§ 1.42-10), and casualty-loss timelines.
• Recapture exposure: discovered noncompliance in years 1–15 claws back accelerated credits plus interest from the investor — which is why investor consents and cure rights dominate partnership agreements.
• 8823 mechanics: the agency must report; cure within the correction period usually resolves the tax exposure, but chronic categories (extended-use violations, habitability) escalate. Pub. 5913's category-by-category guidance is the operative reference.

The recorded regulatory agreement binds successors: rent and income limits, unit-mix designations (fixed elections under the average-income regulations), affirmative-marketing and, in California, service and preference commitments priced into the original award. Three-year tenant protections apply even after early termination events.

• Underwriting a purchase of an existing LIHTC asset:
• Pull the recorded agreement and the last three 8823/inspection files — you inherit uncured issues.
• Model rents off the agreement's limits (and any deeper CTCAC elections), not the federal maxima.
• Check the first-refusal/purchase-option stack: nonprofit ROFRs at debt-plus-taxes are common and define your exit universe.

• Investor exit: after year 15 the credit investor exits per the partnership agreement (capital-account puts, options); the operating covenant continues.
• Qualified contract: the statute's escape hatch — after year 14 the owner can request the agency find a buyer at the formula price, and failure terminates extended use (with the 3-year tenant tail). In California this path is largely closed: CTCAC has long required applicants to waive qualified-contract rights, and § 1.42-18 governs the mechanics where they survive on legacy deals.
• Resyndication: the common real exit — a new 4% acquisition/rehab execution on the same asset, resetting compliance with fresh capital (see the 25% bond test guide for why this got easier).
• Sale subject to covenant: mission buyers and preservation funds price these assets off restricted NOI; the covenant, not the market rent roll, is the asset being sold.