A.CRE

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.

Frequently Asked Questions about Land Use Restriction Agreements (LURA)

A LURA is an agreement between a property owner and the government in which the owner agrees to restrict the use of their property—typically for affordable housing—in exchange for benefits like Low-Income Housing Tax Credits (LIHTC). These restrictions often include limits on rent and tenant income.

LURA restrictions usually last between 15 to 30 years, depending on the specific agreement and jurisdiction. In the Oakwood Meadows Apartments example, the LURA was in place for 30 years until 2035.

The LURA stays with the land, meaning any new owner is still bound by its terms until the expiration date. This includes maintaining affordability requirements and rent limits as specified in the agreement.

The LURA required that all units at Oakwood Meadows be rented to households earning 60% or less of AMI. While it restricted future rent growth, it offered stable income, low vacancy, and tax benefits aligned with the investor’s goals.

Owners must account for compliance costs and rent restrictions. For example, Oakwood Meadows generated $750,000 in NOI, but after $25,000 in compliance costs, the net cash flow was $725,000. These restrictions are offset by tax advantages and reduced operating risk.

Yes, but only within limits. Rent increases must follow annual adjustments based on Area Median Income (AMI), not market rates. This ensures continued affordability for qualifying tenants.

Investors may value the predictable, socially responsible income stream, stable occupancy, and tax benefits associated with compliance. Legacy Horizons Family Office used Oakwood Meadows to align with wealth preservation and tax-advantaged investing strategies.

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