Get Extended Use Restriction Agreement Signed and Recorded to Avoid Losing Tax Credits

Sites awarded low-income housing credits prior to 1990 had a compliance period of 15 years. Beginning in 1990, a change in federal law required an additional 15 years of compliance, which is known as the extended use period. As a result, IRC Section 42(h)(6) establishes that sites that were awarded housing credits in 1990 or later must comply with restrictions for a total of 30 years or more, subject to certain exceptions. These restrictions are embodied in a recorded real estate agreement.

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 Restriction 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. The extended use period continues after the 15-year compliance period and lasts an additional 15 years or longer.

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.

According to the IRS, extended use agreements must:

• Specify that the applicable fraction for the building for each year in the extended use period won’t be less than the applicable fraction specified in the extended use agreement;
• Prohibit the eviction or the termination of tenancy (other than for good cause) of an existing tenant of any low-income unit, or any increase in the gross rent with respect to such unit not otherwise permitted under tax credit regulations;
• Allow individuals (whether prospective, present, or former occupants) who meet the LIHTC income limitations the right to enforce in state court the maintenance of the applicable fraction and the prohibition against the eviction or the termination of tenancy (other than for good cause) of an existing tenant of any low-income unit, or any increase in the gross rent with respect to such unit not otherwise permitted under tax credit regulations;
• Prohibit the disposition to any person of any portion of the building unless all of the building is disposed of to that person;
• Prohibit the refusal to lease to Section 8 voucher holders because of the status of the prospective tenant as such a holder; and
• Provide that the agreement is binding on all successors of the owner.

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 of the Extended Use Restriction Agreement or a photocopy. 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 Restrictions 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 and the reel and page numbers.

[] 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 during the 15-year compliance period, the IRS will give you one year to correct it. If the noncompliance isn’t remedied within one year after the notification, the owner loses the credit for past taxable years until the taxable year in which the extended use agreement is properly in effect.

One year should be ample 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.