What is an affordability covenant or use agreement

A covenant is a restriction on real property use. Some covenants are personal obligations that only bind the parties who created them. But affordable housing covenants are designed to run with the land, binding every future owner, not just the current one. In affordable housing, these covenants ensure long-term affordability. The covenant is the legal mechanism that prevents a subsidized apartment building from converting to luxury condos five years down the road.

Covenants in affordable housing projects have different names, depending on the program or funding source: Land Use Restriction Agreement (LURA), Extended Use Agreement (EUA), Use Agreement, Regulatory Agreement, or Affordable Housing Covenant. The terminology varies by jurisdiction and program, but the legal function is generally the same: they restrict how the property can be used and who can live there.

Do affordability restrictions stay in place after a sale

For the most part, affordable housing covenants stay on the property if the ownership is transferred. The key exception (see below) is that foreclosures are sometimes carved out to improve financing options.

When a covenant persists after the property is sold or refinanced, attorneys say the covenant “runs with the land.” Foreclosure is different and depends on lien priority. It doesn't matter who owns the building next year or in 2045. The covenant stays in place and the future owners of the land need to follow the requirements. The requirements for a covenant to run with the land are mostly a state law question.

Can an affordability covenant be removed or amended

A property owner usually cannot remove an affordability covenant on its own. In practice, amendment or early release usually requires written consent from the enforcing party, documented in a recorded amendment, release, or partial release.

Some programs have limited statutory or contractual pathways for early termination. For LIHTC, the extended use period can end through foreclosure or through the qualified contract process, but tenant protections can still apply for a period after early termination.

Common sources of long-term affordability rules in rental deals

  • LIHTC use agreement, often called a LURA or extended use agreement.
  • Tax-exempt multifamily housing bonds: bond regulatory agreement, plus related set-asides.
  • HOME written agreement, often paired with recorded restrictions depending on structure.
  • Section 8 PBRA HAP contract.
  • Section 202 PRAC, and sometimes Section 811 PRAC or PRA for disability housing.
  • FHA insured multifamily loans like 221(d)(4) and 223(f) include a recorded HUD regulatory agreement, which is not always an affordability restriction, but it is a recorded control document that affects ownership, operations, and transfers.

How affordability covenants affect property value and financing

Affordable housing covenants reduce property value because they cap revenue. If your rents are limited by program rules, the property cannot earn what a market rate building earns in the same neighborhood. Lower net operating income usually means lower appraised value.

Affordable housing covenants can also reduce how much a developer can borrow. Appraisers and lenders underwrite to the restricted income stream, which often means a smaller loan and less conventional debt capacity.

In acquisition rehab deals, the purchase price is allocated between land and building. Because land is not included in LIHTC eligible basis, developers often want the allocation to reflect the reality that a recorded affordability restriction can reduce the land’s market value. This should be supported by appraisal methodology and a reasonable allocation, since land values and allocations are a known audit focus.

What do affordability restrictions affect

Affordability restrictions usually cover one or more of these:

  • Who can live there (income): units must be occupied by households at or below a set AMI level (for example 60% AMI).
  • What can be charged (rent): rent is capped by program rules, often tied to AMI and calculated using a formula. In many programs, the cap is based on gross rent, which means utilities matter.
  • Both: the most common structure is income qualification plus a rent cap.

Each approach has tradeoffs. Income only rules require income verification and ongoing compliance systems, but can leave rent more flexible. Rent only rules are simpler on paper but can miss the targeting goal. Income plus rent caps is the most common model, and it is also the most compliance heavy.

Use agreements also usually specify how many units must be affordable. Some use agreements allow floating units, meaning the owner can choose which specific units count as restricted as long as the required number and unit mix are met. For example, if one restricted unit is offline for repairs, the owner may be able to temporarily count a similar unit as the restricted unit instead. Other use agreements require fixed units (for example, “Units 101–140 must be the affordable units”). Floating is operationally easier, but some funders prefer fixed units for tracking and monitoring.

Other rules you will see in a use agreement

Beyond basic income and rent limits, use agreements often include:

  • Unit count and unit mix requirements (how many restricted units, and sometimes which bedroom sizes)
  • Targeting rules (specific AMI bands, special needs set-asides, seniors)
  • Tenant selection and marketing rules (including referral systems)
  • Limits on transfers, refinancing, or major changes without consent
  • Rent rules by bedroom size and utility allowance treatment
  • Annual reporting, audits, and file reviews
  • Inspection rights and compliance monitoring by the agency
  • Default, cure periods, and remedies for noncompliance

What Happens to Affordability Covenants in a Foreclosure

Foreclosure raises a simple question with a complicated answer: do the affordability restrictions stay, or do they get wiped out?

The first thing to understand is priority. A foreclosure generally wipes out interests that are junior to the foreclosed mortgage. If the affordability covenant is subordinate to the senior loan, the restrictions may terminate in a foreclosure. If the covenant is senior, or if the lender agrees to keep it in place, the restrictions can survive.

Program rules matter too. In LIHTC, federal law provides that the extended use period generally terminates when the building is acquired through foreclosure or deed in lieu, but the statute also protects existing low-income tenants for a three-year period after early termination. For HOME, HUD guidance allows affordability restrictions to terminate in the event of foreclosure for rental units.

This is also why lenders care about the foreclosure language. A property with long-term rent and income caps can be worth less as foreclosure collateral. Many lenders, including agency lenders, require that recorded affordability restrictions not impair their ability to cure defaults, foreclose, take title, and protect the lender’s interests. In multifamily agency deals, this is often addressed through a subordination agreement or lender protections built into the regulatory agreement.

To balance financing with preservation, deals often add notice and cure rights or purchase rights for a public agency or nonprofit partner. Notice and cure rights give an affordability stakeholder a chance to step in before the foreclosure is final.

When reviewing foreclosure provisions in affordability covenants, focus on practical questions:

  • Are the affordability restrictions intended to survive foreclosure, or terminate?
  • What is the lien priority, and is there a recorded subordination agreement?
  • Who gets notice of a default, and who has cure rights?
  • How long are the cure periods, and are there multiple layers of cure rights?
  • If restrictions terminate, what tenant protections or transition rules apply?

Fair Housing Considerations

Affordable housing covenants sometimes target a specific population. That can be legal, but you need to do it carefully.

The federal Fair Housing Act prohibits housing discrimination because of race, color, religion, sex, national origin, familial status, or disability. Many states and cities add additional protected categories, often including sexual orientation, gender identity, marital status, source of income, and age. Do not assume the federal list is the whole list.

Older-person housing is the classic exception. The Fair Housing Act has an exemption from the familial status rules for “housing for older persons.” That includes communities solely occupied by people 62 and older, and communities intended and operated for 55 and older if at least 80% of occupied units have at least one 55+ occupant, the property has published policies showing that intent, and the property follows HUD’s verification rules.

Affordability covenants that set aside units for specific sets of people need to be drafted carefully. It is usually safer to frame housing for certain groups of people as a preference or priority tied to a lawful program requirement, not as an exclusion that blocks everyone else. If an affordability covenant says “veterans only” or “LGBTQ only,” the project is flirting with a fair housing violation, even if the goal is well-intentioned. The more a project's tenant selection rules rely on protected characteristics, the more carefully they need to be structured under federal, state, and local law.

Immigration status is a common trap. Immigration status is not listed as a federal Fair Housing Act protected class, but policies that screen or treat people differently based on perceived immigration status can create national origin risk. If a subsidy program has eligibility rules that touch immigration status, follow those program rules and avoid adding extra layers of “unwritten screening” in the covenant or tenant selection plan.

Sexual orientation and gender identity are a moving target at the federal level. HUD publicly announced in 2021 that it would treat discrimination based on sexual orientation and gender identity as a form of sex discrimination under the Fair Housing Act, but HUD guidance and enforcement posture on this topic has been changing in 2025. In practice, you should check current federal guidance and treat state and local law as a key part of the analysis because it is often clearer and more explicit.

If a covenant requires the project to accept referrals from a government agency, read that clause closely. Consider what happens if the agency is defunded, becomes unresponsive, or if the referral process creates unreasonable delays that jeopardize leasing and compliance. Ideally, the project builds in fallback provisions or termination triggers. Projects struggle when a referral agency stops functioning but the covenant still requires exclusive referrals.

What to Actually Review

Do not spend time negotiating standard boilerplate in a use agreement. In most programs, the form is driven by statute or agency policy, and substantive changes are rarely accepted. Your time is better spent confirming that the deal-specific facts are correct and that the recorded document matches the project being financed.

Prioritize the items that most often create closing problems or long-term compliance issues:

  • Unit count: Confirm the total number of units and the number of restricted units match the plans, approvals, and financing sources.
  • Affordability levels: Confirm the AMI levels and set-aside structure align with the term sheet, underwriting, and funding commitments.
  • Term: Confirm the restriction period matches program requirements and does not conflict with other recorded obligations.
  • Parties and authority: Confirm the owner entity’s exact legal name and that the signatory has clear authority.
  • Legal description: Confirm the legal description matches the title commitment and survey, including all parcels and any common areas.

Factual errors in these items can be costly and time-consuming to correct after closing. Treat this as a verification exercise. Review and confirm each item carefully before recording.

Common Questions

What happens if we accidentally rent a unit to someone over the income limit?

Treat it as a compliance issue, and get in front of it early. Notify your state housing finance agency, document what happened, and follow their correction guidance. Housing credit agencies report LIHTC noncompliance to the IRS, so you want a clean record of what you found and what you did.

The fix depends on what actually happened:

  • Over income at move in: If the household was not income qualified at initial occupancy, the unit is not qualified, and you are in straight noncompliance.
  • Qualified at move in, then later over income: That is a different situation. Under LIHTC, a unit can often remain treated as low-income if it stays rent restricted and you comply with the Available Unit Rule once it is triggered.

Sometimes the practical solution is moving the household to a nonrestricted unit if the building has one, or rebalancing unit designations if the documents allow it. Do not guess, use the agency’s compliance guidance, and keep your file tight.

Do covenant restrictions apply during construction?

The recorded use agreement exists when it is recorded, but the income and rent rules usually matter once you are leasing units.

For LIHTC, timing is tied to placed in service and the credit period election. An owner may elect to begin the credit period in the year after the building is placed in service, and first year lease up and certifications are where many compliance issues show up.

For PBRA, restrictions typically turn on execution of the HAP contract and units being available for occupancy. For HOME and bond deals, the trigger can vary by document and program, so check the recorded agreement and the funding documents.

Can covenants restrict who can own the property, or just who can live there?

Both, depending on the documents.

Most affordability covenants focus on occupancy and rents, meaning who can live in the units and what can be charged. Many regulatory agreements also include transfer controls, such as requiring agency consent for a sale, a change of control, or certain refinancings. Read the sections titled “transfer,” “assignment,” “sale,” or “change of control,” and treat them as closing critical.

What is the difference between a regulatory agreement and a deed restriction?

Both are ways to record enforceable rules against the property.

A deed restriction usually means a recorded restriction that appears in the deed or is recorded as a separate instrument tied to the deed. A regulatory agreement is typically a standalone recorded agreement between the owner and a government agency. In practice, both can create restrictions that bind future owners. The key is not the label, it is what is recorded, who can enforce it, and what it says about defaults, amendments, and foreclosure.

If a property has multiple covenants from different funding sources, which one controls?

All of them apply, and you have to comply with each one.

In practice, you often end up following the most restrictive requirements across the stack. Sometimes requirements can overlap. For example, a set-aside at 50% AMI can usually also satisfy a requirement for 60% AMI units, if the documents allow overlap and the unit mix works. Other times they are separate and cumulative.

Best practice is to build a simple compliance matrix before closing that lists each covenant’s unit counts, AMI levels, rent rules, reporting, and enforcement terms. If two documents truly conflict in a way that cannot be satisfied at the same time, get written clarification or amendments before closing.

If you want, we can do one more pass after you decide whether your Common Questions should include a LIHTC specific question about “over income tenants and the Available Unit Rule,” because that is a high value SEO query and it helps prevent common misunderstandings.