Get Extended Use Restriction Agreement Signed and Recorded
If you don’t, the IRS may cite you for noncompliance, and the owner may lose its tax credits.
IRS Form 8823, “Low Income Housing Credit Agencies Report of Noncompliance or Building Disposition,” is the form your state housing agency uses to report all compliance violations, even minor ones, to the IRS. The form divides into 16 categories the reasons your state housing agency may issue a violation. Among the categories listed on line 11, category 11k is used to report buildings for which an extended low-income housing commitment (Extended Use Agreement) is not in effect.
For all buildings allocated tax credits after 1989, IRC §42(h)(6) requires owners of tax credit properties to enter into an Extended Use Agreement with the state agency that allocated the credits to the project. So, if you manage a tax credit site with at least one building placed in service after 1989, make sure the Extended Use Restriction Agreement has been signed and recorded in your local register’s office. Otherwise, the IRS may cite you for noncompliance, and the owner may lose its tax credits.
Noncompliance is sometimes unavoidable. But it’s easy to avoid being cited for noncompliance because of an unsigned or unrecorded Extended Use Agreement. We’ll tell you what the tax credit law requires and what you must do to protect the owner’s tax credits.
Why Is Agreement Important?
The Extended Use Restriction Agreement, a contract between the owner and the state housing agency, spells out the requirements for compliance during the extended use period, which applies to buildings placed in service after 1989. Owners must agree to a long-term commitment beginning on the first day of the 15-year compliance period and ending on the later of the date specified by the state agency in the agreement or the date which is 15 years after the close of the 15-year compliance period. In other words, the owner covenants to maintain the property as a low-income housing project for at least 30 years.
The purpose of the Extended Use Restriction Agreement is to commit owners to maintaining low-income units at their site even after the compliance period has ended and they’ve claimed all their tax credits. Although owners can’t lose credits during the extended use period, state housing agencies can sue owners for breach of contract if management fails to follow the provisions of this agreement.
To enforce their rights under the Extended Use Restriction Agreement, state housing agencies must know that the agreement is signed and recorded. By signing the agreement, an owner binds itself even before the compliance period begins to comply with restrictions during the extended use period. The agreement needs to be recorded because it contains restrictions that affect the deed, which is also recorded. That way anyone who acquires an interest in the property will be bound by the restrictions.
If the IRS discovers that the Extended Use Restriction Agreement hasn’t been properly signed or recorded, the owner risks losing tax credits for the entire building during the taxable years it was in noncompliance. So, if in Year 5 your state housing agency reports that the agreement isn’t recorded, the IRS will take back all credits claimed for your building since Year 1, unless you correct the noncompliance.
How to Tell Whether You’re in Compliance
Checking whether the Extended Use Restriction Agreement has been signed and recorded will give you a chance to fix any problems before your state housing agency finds them. So you’ll keep the owner’s tax credits safe. Here’s what to do:
Get the Extended Use Restriction Agreement from the owner. Call the owner’s office to ask for the recorded copy or photocopy of the Extended Use Restriction Agreement. It’s common for owners to hold on to recorded copies of documents and keep them in a secure place. That’s because only one recorded copy exists for any document and replacing it can be a hassle. So, if the recorded copy isn’t in the regular files, it may be stored with the deed in a bank vault or safe.
In addition to checking whether the Extended Use Restriction Agreement has been recorded, you should review its provisions to understand your management duties during the extended use period. So, if the owner offers you only an unrecorded copy of the agreement, you should take it anyway to review.
Check for original signatures and recording stamps. When you get the Extended Use Restriction Agreement, make sure that it has the original signatures and acknowledgements of the owner and your state housing agency. Also, look for a cover page from the register’s office as well as a stamp on each page of the agreement that tells the office and date of recording.
If necessary, run a title search and order a certified copy. If the owner can’t find the recorded copy of the Extended Use Restriction Agreement, don’t assume it hasn’t been recorded. Instead, find out by having your title company run a title search against your site. If the search shows that the agreement was recorded, ask the title company to order a certified copy. A certified copy bears the official stamp of the register’s office to indicate that the original document was recorded. This way, you’ll be able to prove your compliance if questions arise.
How to Correct Noncompliance
If you discover that the Extended Use Restriction Agreement hasn’t been properly signed or recorded, don’t wait for your state housing agency to make the same discovery. Otherwise, you run the risk that the owner will lose its tax credits for each taxable year the building was in noncompliance unless you fix the problem.
Fortunately, correcting this type of noncompliance is both easy and inexpensive. If the agreement is missing a signature, simply send it to the right party to sign. Make sure the signature is notarized; otherwise, the register’s office may refuse to record the agreement. Finally, send the signed agreement to your title company with instructions to record it in the same jurisdiction as the deed.
If you do get a notice of noncompliance, the IRS will give you one year to correct it. This should be enough time even in jurisdictions where the register’s office is backlogged a few months. But it’s better to take care of any noncompliance problems ahead of time, than wait for a noncompliance notice.