Gather Necessary Administrative Documents for Key Compliance Information

Unless you get the right documents from the owner, you may not be able to manage your tax credit site effectively. Part of keeping your site in compliance is making sure your staff knows all the requirements and restrictions that affect it. The most authoritative sources for much of this information are forms and agreements that the owner signed before the compliance period even began. Therefore, it's important to get the documents you need from the owner as early as you can to ensure that your site complies with them.

We'll tell you what documents to get from the owner and what you can learn from them. We'll also give you a Model Letter: Ask Owner for Documents You Need, that you can use to request the documents from the owner.

GET FOUR TYPES OF TAX CREDIT DOCUMENTS

There are four types of documents you should get copies of for each tax credit site you manage. Here's what to look for in each.

[ ] IRS Form 8609

The owner must file IRS Form 8609 no later than the end of the year following the year the building was placed in service. Form 8609 gives you three critical pieces of information you need to manage your site successfully.

Placed-in-service date. The first piece of information you get from the form is the placed-in-service date. You'll need to know this date early on, since you can't rent up your site until the date arrives. That's because the placed-in-service date is the date from which you must start complying with IRS and state housing agency regulations. Each building has its own placed-in-service date. It's also the date that starts the clock for record-keeping purposes. The placed-in-service date appears on line 5.

"Minimum set-aside" requirement. Form 8609 will also let you know the minimum set-aside for your site. The minimum set-aside is the percentage of units that you must rent to qualified low-income households to meet IRS requirements. If you fail to meet the target date, the IRS can disallow all credits. If your site meets the minimum set-aside by the compliance date, but later falls below the minimum, the IRS can take back credits for the entire site going back to the first year the property was placed in service.

You can find this information on line 10c. The owner has checked a box electing its minimum set-aside requirement. The choices are either 20-50, 40-60, or (in New York City only) 25-60. The first number in the pair (for example, the 20 in 20-50) tells the percentage of total units in the site that must be rented to qualified low-income households. The second number in the pair (for example, the 50 in 20-50) is the maximum percentage of median area income qualified households can earn.

Deadline for meeting minimum set-aside. An owner can't begin to claim tax credits for a site until you rent up the units to meet the minimum set-aside. That's why you must know the deadline for meeting the minimum set-aside.

You can learn how much time you have to rent up the building to meet your minimum set-aside by looking at line 10a. This line asks whether the owner "elect[s] to begin credit period the first year after the building is placed in service." If the owner checked "no," then the compliance period began in the year the building was placed in service. But if the owner checked "yes," then the compliance period began the first year after the year the building was placed in service.

If you don't meet your initial minimum set-aside on time, the IRS may disallow all tax credits. Even worse, the building may be removed from the tax credit program completely—meaning the owner would lose the opportunity to claim tax credits in the future.

[ ] Land Use Restriction Agreements or Extended Use Restriction Agreements

An owner must agree to comply with Section 42 of the Internal Revenue Code and maintain an agreed percentage of low-income units in a "Land Use Restriction Agreement" (LURA) or Extended Use Restriction Agreement, which is recorded. Under the LURA, a site is required to meet the particular project's low-income requirements for a 15-year initial "compliance period" and a subsequent 15-year "extended use period" (or longer, if required by the local authority). The extended use rules were added in 1989, and don’t apply to projects developed in the first few years of the program.

One common condition you may find in the Extended Use Restriction Agreement affects the minimum set-aside, says tax credit expert A.J. Johnson. The owner tells the IRS its choice of minimum set-asides on Form 8609. But the owner may have agreed on lower income limits for some of the same units with the state housing agency, warns Johnson. For example, the owner may elect 40-60 on Form 8609, which means that 40 percent of the units must go to households that earn no more than 60 percent of median area income. But the Extended Use Restriction Agreement may contain a provision that requires that 5 percent of the units go to households that earn no more than 40 percent of median area income.

It's also common to find a provision that reserves a specified number of units for people with special needs, says Johnson. Whatever the provisions may be, he adds, you should make sure you're renting up your units with your site's Extended Use Restriction Agreement in mind. Otherwise, you risk noncompliance, which can cost you time and money to correct and put the owner's tax credits at risk.

[ ] Financing Agreements

Your site may also be getting financial assistance from other government housing programs or other lenders, or it may have grants. The HOME Investment Partnership (HOME), the Rural Development Section 515 Program, Housing Development Action Grants, Community Development Block Grants, and tax-exempt bond financing are among the most common sources of affordable housing financing.

You should become familiar with the financing requirements of any sources that provide funding for the site. You need to know these requirements because, if your site fails to meet them, you risk losing the funding the site relies on.

For example, a financing agreement for tax-exempt bonds may impose a more restrictive minimum set-aside than the owner chose on IRS Form 8609, says Johnson. This can happen because the bond issuer—not the owner—is the one who chooses the minimum set-aside for tax-exempt bonds, he adds. So, although your site will keep its tax credits if you rent it up to meet the minimum set-aside on Form 8609, you risk losing the site's tax-exempt bond financing if you don't comply with the financial agreement.

[ ] Tax Credit Application

Ask the owner for its tax credit application. This is the document the owner filled out to apply to the state housing agency for a commitment of credits, known as a reservation. Review the main part of the application, called the "Application for Reservation of Credits"—it resembles a small bookto see if there are any requirements that will affect how you manage your site, says Johnson.

The restrictions you might find in the tax credit application are the same as the ones you might find in the Extended Use Restriction Agreement. But, Johnson warns, the two documents don't necessarily contain the same restrictions. For example, the tax credit application might require you to rent 15 percent of all low-income units at your site to elderly residents, while the Extended Use Restriction Agreement might have no such requirement. The state housing agency awards the owner its tax credits based on the commitments in the owner's tax credit application. So ignoring any of these commitments may place those tax credits in jeopardy.

It's possible the owner will object to giving you this document, warns Johnson. The tax credit application contains financial information that many owners want to keep confidential. If the owner objects for this reason, explain that you need the tax credit application because it may contain information to help you manage the site more effectively. Assure the owner that you aren't interested in its financial information and would like to get a copy of the application with the financial information removed. Any reasonable owner should find this solution acceptable, says Johnson.

Send Letter to Request Documents

Send a short letter to the owner to ask for the documents you need. The letter should tell the owner that you need the documents to help you manage the tax credit site effectively. It should list the documents and mention that you only need copies, since you're just interested in the information they contain.

Insider Source

A.J. Johnson, HCCP: President, A.J. Johnson Consulting Services, Inc., 3521 Frances Berkeley, Williamsburg, VA 23188; www.ajjcs.net.