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Master Meters, Applicable Rates, Actual Use: Calculating Utility Allowance at LIHTC Properties

Published by Stephanie Naquin on Wednesday, April 3, 2024

Journal Cover April 2024   Download PDF

When a tenant of a low-income housing tax credit (LIHTC)-financed property is financially responsible for utilities (other than phone, cable or internet), a utility allowance for that utility must be established. That utility allowance must then be subtracted from the applicable rent limit to determine how much rent can be charged to a low-income tenant. Treasury Regulation (Treas. Reg.) Section 1.42-10 details the process and options for determining how the owner establishes the utility allowance.

A utility allowance is only established when the tenant is billed directly from the utility provider or to/through the owner of the building where the billed amount is based in the apartment’s actual consumption of the utility. This is known as a sub-metered system. If the tenant pays for a utility and the billing method is not based on the apartment’s actual consumption of the utility, then the utility is not recognized in the utility allowance. Instead, it is considered a mandatory fee in the gross rent calculation.

A sub-metering system typically includes a master meter, which is owned or controlled by the utility provider, with overall utility consumption billed to the building owner. In a sub-metered system, building owners (or their agents) use unit-based meters to measure utility consumption and prepare a bill for each home based on consumption. 

In addition to how utility allowances are established, Treas. Reg. Section 1.42-10 also regulates the rate(s) applied to the tenant consumption for the purposes of calculating the tenant’s monthly utility bill.

Treas. Reg. Section 1.42-10(e)(iv)(A)

(iv) The rate at which the building owner bills for the utility satisfies the following requirements:

(A) To the extent that the utility consumed is described in paragraph (e)(1)(i)(A) of this section, the utility rate charged to the tenants of the unit does not exceed the rate incurred by the building owner for that utility; 

The building owner receives its utility bill for the master meter and that bill includes the rates that the owner incurs. The building owner (or their agents) then applies that rate to the actual consumption of that utility based on the consumption measurement in each home’s sub-meter to prepare the bill for that utility. 

Correctly identifying the applicable rates can be challenging. In general, a utility will publish rates for both commercial and residential service where the commercial rates are usually less than the residential rates. If a tenant accesses the utility directly from the utility provider, then the rates the providers would use in assessing their bill would be the residential rates. However, the rates that the utility provider uses for the purposes of the building’s master meter are the commercial rates. If the incorrect rates are applied, then the billing for that utility has not been compliantly calculated, resulting in a violation of the utility allowance regulation.


The following example is used to illustrate the dynamics of a sub-metering system: 

The owner of ABC Property has a sub-metering arrangement for the electric utility. On a monthly basis, their agent reads each apartment’s sub-meter to determine the actual kilowatts consumed and issues bills to tenants. 

Commercial rate = $0.03 per kWh

Residential rate = $0.07 per kWh

The bill that the building owner received from the utility provided for the master meter uses the commercial rate of $0.03 per kWh, which is the rate incurred by the building owner for this utility. In calculating the tenant bills, no more than $0.03 kWh can be applied. If the owner applied the residential rate of $0.07 per kWh, that would result in the tenant paying more for the utility than the owner.

A building with four units has a single master meter and the homes are sub-metered. In March 2024, the utility provider determined that the actual consumption for the building master meter is 5,000 kilowatts, resulting in a bill for $150 (5,000 kilowatts x $0.03 per kWh).

The following details the actual consumption of electricity based on each apartment’s sub-metered reading for the billing cycle:

Unit Actual Consumption in Kilwatts
101 750
201 1,200
301 500
401 975


The total consumption for the units in the building is 3,425 kilowatts. Note, this is less than the kilowatts consumed in the master meter because the master meter includes consumption for common areas not part of the units.

To calculate each apartment’s bill, apply the rate incurred on the owner’s bill of $0.03 per kWh to each unit’s actual consumption:

Unit Actual Consumption in Kilowatts Bill
101 750 $22.50
201 1,200 $36.00
301 500 $15.00
401 975 $29.25


The total amount to be collected in all four units is $102.75. This means that $47.25 is the portion of the owner’s common area.
If the owner incorrectly applied the residential rate of $0.07 per kWh to the tenant bills, the amount billed to each tenant would be:

Unit Actual Consumption in Kilowatts Bill
101 750 $52.50
201 1,200 $84.00
301 500 $35.00
401 975 $68.25


This would result in a total amount to be collected in all four units of $239.75, which is more than the building owner’s bill of $150 for the entire building. Under this application, the owner collects $89.75 ($239.75 minus $150) more than they paid, profiting from the low-income tenant.

Calculating Renewable Source Utility Bills

When the utility is produced from a renewable source and not purchased from the utility provider, the rate used in calculating a tenant’s utility bill is also regulated under Treas. Reg. 1.42-10 in sub-paragraph (e)(iv)(B)

(B) To the extent that the utility consumed is described in paragraph (e)(1)(i)(B) of this section, the utility rate charged to the tenants of the unit does not exceed the highest rate that the tenants would have paid if they had obtained the utility from a local utility company. In determining whether a rate satisfies the preceding sentence, a building owner may rely on the rates published by local utility companies.

In this scenario, unless a specific rate was otherwise prescribed by the type/nature of the renewable energy, it would be appropriate to apply the residential rate of $0.07 per kWh to calculate the tenant bill, resulting in:

Unit Actual Consumption in Kilowatts Bill
101 750 $52.50
201 1,200 $84.00
301 500 $35.00
401 975 $68.25


In addition to the cost per unit of measurement of a utility, other costs are applicable; including, but not limited to, tariffs, riders, fees and taxes. The above discussion does not include these additional costs to effectively illustrate the practical effect of applying the incorrect rates when preparing a bill for a low-income tenant in a sub-metering arrangement. 

Failure to comply will result in a finding of noncompliance under Category 11m–Owner Did Not Properly Calculate Utility Allowance. Because the utility allowance is a component in determining if rent is restricted, it is likely that this will also result in additional noncompliance under Category 11g–Gross Rent(s) Exceed Tax Credit Limits. Once an apartment is determined to be out of compliance with the rent limits, the apartment ceases to be a low-income apartment for the remainder of the owner’s tax year, causing a potentially catastrophic effect to the low-income housing credit delivery for the building. 

Conclusion: Diligence Required

The correct calculation of the utility bill for a tenant in a LIHTC unit with a sub-meter isn’t extremely complicated, but there remain some mistakes that a property owner or manager can make. The consequences of such errors–which could result in an apartment ceasing to be a low-income apartment for the rest of the year–highlight the need for diligence in determining the allowance.

Consider consulting a property management advisor to ensure correct calculation of bills.

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