The IRS and Extended Use Agreements

The IRS and Extended Use Agreements

 

As outlined in §42 (h) (6), all LIHTC properties allocated credits after 1989 must have an extended use agreement (EUA). The agreement is entered into by the taxpayer and the Housing Credit Agency (HCA), and has a minimum term of 30 years (15-years after the close of the 15-year compliance period).

 

• 42 provides that a building is eligible for credit only if there is a minimum long-term commitment to low-income housing.

 

Content of the EUA

 

Each EUA must have the following elements:

1. The applicable fraction of the building (i.e., the percentage of the building that must be low-income), must be maintained throughout the extended use period;
2. Individuals who meet the income limitation applicable to the building under §42 (whether prospective, present, or former occupants of the building) may enforce the agreement in State Court;
3. Prohibits the disposition to any person of any portion of the building, unless all of the building is disposed of to such person;
4. Prohibits the refusal to lease to a Section 8 voucher holder solely due to the status of the person as a voucher holder;
5. Is binding on all successors of the taxpayer; and
6. Must be recorded pursuant to State law as a restrictive covenant.

 

Tenant Protections

 

The EUA must include provisions protecting low-income residents against eviction or termination of tenancy for other than good cause throughout the entire extended use period. In addition, for a three-year period after the termination of the EUA, low-income residents may not have tenancy terminated without good cause and their rent may not be raised above the allowable LIHTC rent limit.

 

Early Termination of the EUA

 

An EUA may only be terminated prior to the end of the extended use period for two reasons:

1. Foreclosure (or instrument in lieu of foreclosure); or
2. Failure of the HCA to present a qualified contract for the acquisition of the low-income portion of the building within 12-months of the HCA acceptance of the taxpayer request to find a qualified contract purchaser. A qualified contract must be from a purchaser that agrees to operate the building as low-income for the remainder of the extended use period.

 

Purchase by Tenant

 

• 42 (g) (6) allows a low-income tenant to pay (on a voluntary basis) a small amount to be held toward the purchase of a low-income unit after the end of the 15-year compliance period. This does not negate the EUA. To qualify, the agreement must meet two conditions:

1. All amounts paid are refunded to the tenant if the tenant ceases to occupy the unit; and
2. The purchase of the unit is not permitted until after the end of the 15-year compliance period.

Also, any amount paid by the tenant is included as rent for determining whether the unit is rent-restricted under §42.

 

Since the primary objective of §42 is to promote housing for low-income individuals, and §§42 (h) and (i) are designed to promote such housing beyond the compliance period, the EUA satisfies the requirements of §42 even if a tenant holds a right of first refusal to purchase a low-income unit at the end of the compliance period.

 

Correction Period

 

If there is a determination that an EUA was not in effect at the beginning of a tax-year, there shall be no penalty if the EUA is recorded within one-year of the date of determination.

 

Audit Techniques

 

When conducting an audit of a LIHTC project, the IRS will make the following determinations relative to the EUA:

• Confirm that the EUA has been properly recorded by examining land records;
• Review mortgages and other restrictive covenants that have been recorded against the property. This will be done to ensure that the agreements do not include conditions that are inconsistent with §42 requirements;
• Evaluate whether the EUA contains Code required elements, as noted above, keeping in mind that HCAs may impose additional requirements as part of the EUA.
  • Any requirements in addition to those prescribed by §42 will not be audit issues, but may be enforced by the HCA in state court.

 

Disallowance of Credit

 

Noncompliance occurs if:

• The EUA does not meet the requirements of §42, is not properly recorded or executed; and
• The taxpayer failed to correct noncompliance relative to the EUA within the one-year correction period.

If noncompliance occurs, no credit is allowable for any building governed by the agreement until the taxable year in which the EUA is in effect.

 

It is important to note that since noncompliance related to an EUA does not result in a reduction in qualified basis, the credit recapture provisions of the Code do not apply.

 

In a nutshell, the IRS will ensure that an EUA is in existence, properly designed, and recorded. The Service will not enforce the provisions contained within the agreement.