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Determining the Applicable Utility Allowances for LIHTC Properties

Published by Sayeda Quayyum and Sun-Ae Woo on Friday, June 2, 2023

Journal Cover June 2023   Download PDF

Treasury Regulation (Treas. Reg.) 1.42-10 provides the rules for determining the applicable utility allowance for low-income housing tax credit (LIHTC) properties. This article discusses the various utility allowance methods available for LIHTC properties and how to determine the applicable utility allowance based on the type of building.

For LIHTC units, Internal Revenue Code (IRC) Section 42 dictates that gross rent includes the applicable utility allowance only if the tenant pays for their own utilities. However, some utilities–such as telephone, cable and internet–are excluded from this definition.

As mentioned previously, there are several options for calculating the appropriate utility allowance amount. For most LIHTC properties, especially those already at maximum allowable rent, the calculated utility allowance amount could have a significant effect on rent collections.

Treas. Reg. 1.42-10(b) provides the rules for determining the applicable utility allowance based upon whether (1) the building receives rental assistance from the Rural Housing Service (RHS) (RHS-assisted building), (2) the building has any tenant that receives RHS rental assistance payments (RHS tenant assistance), (3) the rents and utility allowances of the budling are reviewed by the Department of Housing and Urban Development (HUD) (HUD-regulated building), or (4) the building is not described in (1), (2), or (3) (other buildings).

For an RHS-assisted building and a building with RHS tenant assistance, the applicable utility allowance is the applicable RHS utility allowance. Just one tenant receiving RHS rental assistance in a building triggers RHS for the entire building, even if some tenants receive HUD or other state or federal assistance. For a HUD-regulated building, the applicable utility allowance is the applicable HUD utility allowance. In other buildings, the applicable utility allowance for all rent-restricted units occupied by tenants receiving HUD tenant assistance is the applicable public housing authority (PHA) utility allowance established for the Section 8 existing housing program.

For all other tenants in rent-restricted units in other buildings, the applicable utility allowance is the applicable PHA utility allowance. However, if an estimate listed below is obtained for any unit in the building, it becomes the applicable utility allowance for all rent-restricted units of similar size and construction in the building.

  1. Utility company estimate. Any interested party may obtain a local utility company estimate for a unit of similar size and construction for the geographic area in which the property is located or obtained during the extended-use period as defined by IRC 42(h)(6)(D). The estimate must be in writing. The interested party must retain the original estimate and furnish a copy to the owner and the agency that allocated the tax credits to the building. The owner of the property must also make available copies to the tenants. As utility companies may not necessarily be motivated to provide estimates, these estimates are often not readily available. This is a challenge of adopting this estimate.
  2. Agency estimate. A building owner may obtain a utility estimate for each unit in the building from the agency that has jurisdiction over the building if the agency agrees to provide the estimate. The agency estimate may be obtained by a building owner at any time during the extended-use period. There are additional requirements associated with the use of agency estimates which has been fully described in Treas. Reg. 1.42-10. The most common challenges with using this method include a possible extensive time between requesting and receiving an approved agency estimate and obtaining and supplying the substantial supporting documentation requested by some state agencies. This could be especially difficult for property owners operating in multiple states.
  3. HUD Utility Schedule Model. The HUD Utility Schedule Model was developed to provide a consistent basis for determining and updating utility schedules, using form HUD-52667. The “Tariffs” tab of the model helps to update the rates paid for utilities. A building owner may calculate a utility estimate using the “HUD Utility Schedule Model” located at www.huduser.org. Utility rates used for the model should not be older than 60 days. LIHTC property owners may be able to obtain utility rates from the utility company website and/or actual utility bills. Difficulties with this model include some subjectivity of the input data, as well as difficulty interpreting the various sources of utility rates. The utility bill may include a main tariff and many riders, some locations may have deregulated utilities and some utility companies may have multiple block rates. Determining the appropriate rates to use may be time-consuming and using of third-party specialist for help may be costly, especially if they operate in multiple states and localities.
  4. Energy consumption model. A building owner may calculate utility estimates using an energy and water and sewage consumption and analysis model (energy consumption model). The energy consumption model must be calculated by a properly licensed engineer or other qualified professional. Therefore, it may be costly for the building owner. If a qualified professional is not a properly licensed engineer and if the building owner wants to use that qualified professional to calculate utility consumption estimates, then the owner must obtain approval from the agency that has jurisdiction over the building. Further, regardless of the type of qualified professional, the agency may approve or disapprove of the energy consumption model or require information before permitting its use. Treas. Reg. 1.42-10 discusses the energy consumption model in detail as to what must be taken into account for this model.

As explained in 24 CFR 982.517, Utility Allowance Schedule, a PHA is required to review its schedule of utility allowances each year and revise its allowance for a utility category if there has been a change of 10% or more since the last revision. Owners have 90 days to implement the new utility allowance from the date the new revised utility allowance is available. Property owners using PHA utility allowances face some challenges while keeping up with compliance requirements. For instance, the notification of increase in utility allowance may not reach on time and therefore, owner may not be able to implement new utility allowance on time, which may result in noncompliance. However, a property owner that checks the PHA utility allowance every 60 days would have at least 30 days in which to adjust rents.

If, at any time during the building’s extended-use period, the applicable utility allowance for units changes, the new utility allowance must be used to compute gross rents of the units due 90 days after the change. The property owners must submit copies of the utility estimates to the agency that has jurisdiction over the building and make the estimates available to all tenants in the building at the beginning of the 90-day period before the utility allowances can be used in determining the gross rent of rent-restricted units. An agency may require additional information from the owner during the 90-day period. The property owner must pay for all costs incurred in obtaining the estimates. The property owner is not required to review the utility allowances, or implement new utility allowances, until the building has achieved 90% occupancy for a period of 90 consecutive days or the end of the first year of the credit period, whichever is earlier.

In conclusion, the LIHTC property owners have the option to choose the applicable utility allowance calculation method based on the cost-benefits discussed above. However, there are some time restrictions applicable to utility allowances, therefore, the owners must review at least once annually the basis on which utility allowances have been established and must update the applicable utility allowance appropriately to remain compliant with regulations.

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