Land Use Restriction Agreements (LURA)
An agreement between a property owner and the government whereby the property owner agrees to limit the use of its property in exchange for some pre-determined tax credits or bond financings. A Land Use Restriction Agreement (LURA) is most common to low-income housing tax credits (LIHTC) where the property owner agrees to limit the rent it may charge at the property and in so doing becomes eligible for certain tax credits.
The LURA stays with the land, meaning any restrictions defined in the agreement continue on even after a sale. These restrictions generally last for a pre-defined period of time, usually 15 to 30 years depending on the agreement and jurisdiction.
Putting “Land Use Restriction Agreements (LURA)” in Context
Legacy Horizons Family Office, a generational wealth management entity, recently identified an opportunity to invest in Oakwood Meadows Apartments, a 150-unit affordable housing community located in Cincinnati, Ohio. The property, built in 2005, is subject to a Land Use Restriction Agreement (LURA) as part of its original development financing under the Low-Income Housing Tax Credit (LIHTC) program.
The Property and Investment Strategy
Oakwood Meadows Apartments operates under the stipulations of a LURA that requires 100% of the units to be rented to households earning 60% or less of the area median income (AMI). In exchange, the original developer was awarded substantial LIHTCs that reduced their equity requirements during development. The agreement, recorded on the deed, ensures these affordability requirements remain in place for 30 years.
Legacy Horizons Family Office is interested in purchasing the property as part of a tax-advantaged investing strategy. The firm’s leadership recognizes the LURA will restrict future rental growth to affordability guidelines. However, the predictable nature of income from long-term tenancy, combined with the tax benefits derived from continuing LIHTC compliance, aligns well with the family office’s objective to preserve wealth and generate stable, inflation-resistant returns.
Financial Analysis
The property is being marketed at $12 million, with a net operating income (NOI) of $750,000, reflecting a cap rate of 6.25%. After acquiring the property, Legacy Horizons expects to incur annual compliance costs of $25,000 related to tenant certification and reporting to the state housing authority.
- Projected Year 1 Cash Flow:
- NOI: $750,000
- Less Compliance Costs: $25,000
- Net Cash Flow: $725,000
With no intentions to reposition the property due to the LURA, the family office values the steady return and the property’s role in reducing their overall tax liability.
Challenges and Opportunities
While the LURA protects Oakwood Meadows’ mission of providing affordable housing, it also imposes limitations:
- Rent Growth Limits: Rental increases are capped annually based on AMI adjustments.
- Resale Restrictions: Any future sale of the property must comply with the LURA until its expiration in 2035.
However, Legacy Horizons sees an opportunity to capitalize on Cincinnati’s increasing demand for affordable housing, which has kept vacancy rates below 3% at Oakwood Meadows. Moreover, retaining the LURA allows them to benefit from tax credits tied to ongoing compliance, further enhancing their after-tax returns.
Conclusion
By investing in Oakwood Meadows Apartments, Legacy Horizons demonstrates the strategic application of a Land Use Restriction Agreement to align with its tax-advantaged goals. The case illustrates how a LURA serves as a powerful tool for preserving affordable housing while also offering investors a predictable, socially impactful, and tax-efficient asset class.
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