Restrictive Covenant Release/Covenant Modification Policy
Recently, OHFA has witnessed an increased number of requests for the release or modification
of restrictive covenants. OHFA’s Qualified Allocation Plan (QAP) after 1996 required owners
to waive the right to request a qualified contract which is one means available to sell the low
income portion of a project, but often a path to a covenant release. Therefore, many owners
have been requesting a full release of the restrictive covenant. A variety of reasons for the
request are often provided including the requirement to refinance the property, marketing and
vacancy issues, reduction or depletion of replacement reserve account, and the regulatory
burden, among others. In many instances, a modification to the restrictive covenant rather than
a full release of the covenant is more appropriate. This entails increasing the number of
“market units” (units with no rent or income restrictions) or increasing the rent and income
limits.
Requests for project modifications or releases should be sent to Todd Carmichael, Compliance
Manager, Office of Program Compliance at tcarmichael@ohiohome.org or by mail to 57 East
Main Street, Columbus Ohio 43215.
OHFA will review an owner’s request on a case-by-case basis. Rather than approving a full
release of restrictive covenant and based upon the information provided in the request, OHFA
will consider modifying the mix of market and low-income units, and increasing both rent and
income restrictions. OHFA’s decision to approve or disapprove an owner’s request will be
based upon a number of factors including, but not limited to, vacancy rates, market conditions,
financial stability, property condition and age, recent and planned capital improvements, and
current or past compliance issues including if the property is on OHFA’s Project Watch List or
has Uncorrected 8823 Forms. Restrictive covenant modification approvals will have the
following limitations or restrictions. OHFA may impose additional restrictions at its sole
discretion.
An owner’s request for a Multifamily Covenant Modification or Release must include the
following. OHFA may require additional documents not contained in this list.
1. A cover letter fully explaining why the modification or release is necessary. The
explanation should include any attempts to refinance or stabilize the property. If the
request is based upon the current owner’s inability to refinance or sell the project
due to the restrictions contained in the Restrictive Covenant, the letter should
contain information about the current state of the project, what would happen if the
property is not sold to a buyer, and why a buyer cannot acquire the property with
Ohio Housing Finance Agency
the restrictions in place. In order to help determine if the covenant modification or
release request is based upon market and/or rent or income problems, OHFA
recommends the owner also submit a market analysis. The analysis should include
but is not limited to the following information:

The number and age of other Housing Tax Credit projects located within the
Primary Market Area of the subject property.

Current vacancy rates for the property and vacancy rates over the last two
years for other Housing Tax Credit projects located within the Primary
Market Area.
2. Explanation of any steps taken by the owner over the last two years to ease entry
requirements (e.g. minimum income level). For a subject property that is
experiencing over-income applicants due to income restrictions, explain how much
over-income the applicants are and the household size.
3. History of the use of the project’s reserve account (operating/replacement) for the
last three tax years including the required monthly replacement amount.
4.
Description of any capital improvements (i.e. roof, windows, carpet, HVAC
systems, parking lot surfacing) that were completed in the last five years, and what
type of capital improvements are planned for the next two years.
5. OHFA’s Covenant Release Questionnaire (form PC-E41). The Questionnaire
includes questions on vacancy rates, current condition of the property, attempts to
refinance, marketing efforts, and why the owner believes the covenant is preventing
success of the property’s stability and sustainability.
6. A completed Project Proforma. The Proforma will ensure sufficient data to analyze
proposed changes to rents.
7. Prior year’s audited financial statements and current year-to-date audited financial
statements.
8. Copy of the property’s current year rent roll.
An owner’s request for a Single-family Covenant Release must include the following. OHFA
may require additional documents not contained in this list. Further information regarding
single-family covenant releases is provided on pages 4-6 of this policy.
1. A cover letter fully explaining why the modification or release is necessary. The
explanation should include any attempts to refinance or stabilize the property. The
cover letter must contain the following:

Description of the property’s real estate tax liabilities, water/sewer account
payables, and operating, security deposit, and reserve account balances
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
Description of the current occupancy to include number of vacant homes,
number of homes that have been vacant more than 60 days, and the number of
homes occupied

Description of the resident prospects such as the willingness and ability to
purchase the home. The description should include the number of families with
good rent payment history, number of families that do not want to purchase (if
known), and if a financing pool has been secured for families who cannot obtain
conventional financing
2. OHFA’s Covenant Release Questionnaire (form PC-E41).
3. Copy of the property’s current year rent roll.
Possible Project Changes for Approved Covenant Modifications
1. Market units: the number of approved market rate units will be no greater than twice
the average monthly vacancy rate from the past year. OHFA may approve another level
of market units based on owner request or its analysis of project needs.
2. Income and rent restrictions: increases to both rent and income restrictions will be up to
the minimum set aside elections.
3. Gap Financing/HOME/HDAP restrictions will remain in place through the affordability
period as found in the funding agreement and 24 CFR Part 92, specifically 92.252e.
The exception to this restriction will be HOME agreements where the HOME Program
affordability period has been completed {New Construction (20 years) and
Acquisition/Rehab (15 years)}. The affordability period begins on the date the project
was placed in service. OHFA may modify the HOME agreement to reflect a change in
the affordability period. When possible, OHFA will modify rent and income
restrictions.
4. Other programs: Compliance requirements for Section 8 and/or Rural Housing Service
(RHS) {e.g. RD} remain in place.
Reporting Requirements for Covenant Modification Approvals
If a restrictive covenant modification is approved, owners are required to submit the ExtendedUse Owner Certification (for projects in extended use) or the Annual Owner Certification by
March 1st of every year. Additionally, OHFA will require documents that measure the progress
and effectiveness of the modification(s). Owners are required to submit the following reporting
documents by January 31st of each year. The documents should be submitted to the attention
of Todd Carmichael, Compliance Manager, Office of Program Compliance. The documents
include but are not limited to:
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
Correspondence that explains how the modification has or has not improved the
property’s financial viability

The past year’s audited financial statement

Copy of any capital needs assessments conducted or scheduled

Copy of the current year’s rent roll that shows the average monthly vacancy rate,
average number of residents with an outstanding account balance including the low
and high outstanding amount and the number of move-ins

Status of outstanding bank debt

The current year’s property reserve account balances (operating and replacement)
Restrictive covenant modifications do not require OHFA Board approval. Specific OHFA
Board approval is only required when the owner will not accept the approved modifications
and instead requests a full release. OHFA Board approval will also be required should the
owner fail to adhere to conditions as outlined in an approved modified covenant. Staff will
present a recommendation to the Multifamily Committee of the Board. The Multifamily
Committee will then vote on whether to recommend the action to the full Board. The request
and supporting evidence from the owner will be provided to the Committee and Board. The
owner may be present at both meetings to answer any questions from Board members.
Restrictive Covenant Releases for Lease-Purchase Properties
If the Restrictive Covenant indicates that the property is a lease-purchase project, then the units
may be sold to Qualified Existing Tenants at the end of the 15-year compliance period. A
“Qualified Existing Tenant” is defined as the current tenant who was properly qualified under
the requirements of Section 42 of the Internal Revenue Code of 1986 as amended. This
expressly includes a tenant whose income would not currently qualify under Section 42, but
who was qualified at the time of original occupancy of that unit. According to the Internal
Revenue Code Section 42 (h)(6)(E)(ii), for a three-year period following the termination of
extended use, (i.e. release of the restrictive covenant) low-income residents may not be evicted
other than for just cause, nor may the rent for low-income units be raised above the applicable
tax credit rent. These protections apply to low income residents with a lease in effect as of the
date the restrictive covenant is released. New tenants of previously vacant units must have
incomes that would currently qualify under Section 42.
The following procedure will be used for the release of lease-purchase units at the end of the
15-year compliance period. Generally, OHFA will prepare the Release of Restrictive
Covenant. However, preparation of the Covenant Release by the owner or owner’s attorney is
acceptable so long as one of OHFA’s Covenant Release templates is used. The templates can
be found on OHFA’s website via the following links: Covenant Modification Template and
Covenant Release Template.
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Ohio Housing Finance Agency
1. Within 120 days following the end of the compliance period, the owner will send
written notification to Todd Carmichael, Compliance Manager, Office of Program
Compliance at tcarmichael@ohiohome.org or by mail to 57 East Main Street,
Columbus, Ohio 43215. Upon its receipt of such notification, OHFA will prepare either
a blanket release or a separate Partial Release of Restrictive Covenants and Partial
Release of Mortgage applicable to each individual unit in the project. The owner’s
notification shall include the address and tax identification number of each unit to be
sold to an Eligible Tenant.
2. OHFA will execute such Partial Releases and deposit them in escrow with a title
insurance agent selected by the owner and acceptable to OHFA (the “Escrow Agent”).
The Partial Release for any unit may be recorded only upon the sale of that unit to a
Qualified Existing Tenant. Any property that is not sold to a Qualified Tenant such as a
landlord or non-owner tenants will be conveyed using a Deed Rider to Enforce the
Three-Year Restriction Period. The Deed Rider should be recorded simultaneously with
the recording of the Release. The deed restriction requires that for the next three years,
the tenant cannot be evicted except for good cause and the rent cannot exceed the
applicable tax credit rent. Additionally, the owner must supply the following
information for any property not sold to a Qualified Tenant:

Summary of the new owner’s experience in affordable or rental housing

Capacity of the new owner

Performance of the new owner in owning and/or renting housing. Information
must include any housing or code violations and if the owner was penalized by
any local court for not responding to code or housing violations
This information should be sent to Todd Carmichael, Compliance Manager, Office of
Program Compliance at tcarmichael@ohiohome.org. OHFA will not require approval
of the new owner prior to the sale of the property for the purpose of executed Releases.
However owners that have little or no affordable housing experience, limited capacity
and/or a history of housing code violations, may be subject to placement on OHFA’s
Multifamily Watch List.
If at any time during the three-year restriction period the owner fails to adhere to the
requirements according to the Internal Revenue Code Section 42 (h) (6) (E) (ii), the
owner shall be deemed in violation of the Partial Covenant Release and either and/or
both the existing tenant and the Ohio Housing Finance Agency shall be entitled to
injunctive relief against the owner in order to specifically enforce the three-year
restrictions. The restrictions shall run with the land and binding upon any successors in
the interest of the property. The restrictions shall expire with respect to each unit on the
earlier of:
a) the end of the restriction period
b) the date of termination of the tenancy of the existing tenant either for good cause or
voluntarily by the existing tenant
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c) on the recording date, as to any unit that is not occupied on the recording date OR
d) on the date a unit is acquired by the Existing Qualified Tenant of that unit
3. If financial assistance was awarded under the Housing Development Assistance
Program (HDAP) using funding from the Ohio Housing Trust Fund or the HOME
Investment Partnerships Program, the HDAP Recipient may request that OHFA permit
them to pass on a proportionate amount of the outstanding HDAP principal to an
income-eligible homebuyer as a forgivable loan, according to procedures outlined in
the OHFA Housing Credit Gap Financing Guidelines.
Requests for lease-purchase covenant releases do not require approval by the OHFA Board. If
OHFA approves a covenant release, the owner is required to notify current tenants within 30
days that the covenant has been released and explain that a three-year restriction period that
will be enforced per Section 42 of the Internal Revenue Code. The owner must provide a copy
of the tenant notice to Todd Carmichael, Compliance Manager, Office of Program Compliance
at tcarmichael@ohiohome.org or mail to 57 East Main Street, Columbus, Ohio 43215.
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