On July 29, 2008 the Internal Revenue Service (IRS) published long-awaited final regulations that change the way rents are adjusted on Low-Income Housing Tax Credit (LIHTC) properties when residents pay for their own utilities. NMHC led the industry effort for such a change since 2004. The changes go into effect immediately.
Tax credit rents include a utility allowance for resident-paid utilities; however, the methods the IRS has traditionally allowed owners to use to estimate resident utility costs tend to overestimate them. This, in turn, reduces the gross rent received by owners and threatens the financial viability of many LIHTC properties. The new regulations are a significant victory for affordable LIHTC owners, developers and investors.
In 2005, an NMHC/NAA-led coalition submitted a proposal to the IRS that would allow owners to use more accurate data to calculate resident-paid utilities.
The 2008 IRS regulations, which are largely based on a proposal submitted by an NMHC/NAA-led coalition, increase the sources of data owners can use to calculate resident-paid utilities. Under the new rules, owners can use:
- estimates provided by state LIHTC allocating agencies (typically state housing finance agencies);
- estimates produced by a new HUD utility modeling program; and;
- certified engineering studies to estimate utilities (such models can also include water and sewer costs).
Finally, the rules clarify how to handle estimates for properties in deregulated energy markets where multiple providers serve the community.
In addition to the procedures to set utility adjustments, NMHC secured a provision to allow properties to obtain a stabilized occupancy before rents are adjusted at newly developed properties. The provision sought by NMHC would require rents to remain unadjusted for a period of one year, or until the property has achieved 90 percent occupancy for 90 consecutive days, whichever comes first.
Submetering Clarification Secured
Without any prior notice or discussion, the IRS added language to the final regulations that fundamentally changes an owner’s ability to submeter. Specifically, the regulations state that only utilities directly paid by the resident to the utility company can be included in the utility allowance.
NMHC immediately launched an effort challenging the IRS's interpretation and sought clarification. On May 5, 2009, the IRS issued guidance (Notice 2009-44) that confirms that utilities paid by a renter occupying a submetered unit that are based on actual consumption of that unit will count as resident-paid utilities under the utility allowance regulation.
The IRS notice further provides that, in the case of submetered utility costs:
- The rates charged to renters must not exceed the rates charged by the utility company to the building owner (or their agents).
- An administrative fee (not to exceed $5 per month unless otherwise provided by state law) charged to renters by the building owner (or their agents) will not be considered gross rent for purposes of the LIHTC rules.
- Sewage costs included in a combined water and sewage bill that are based on the resident's actual water consumption determined with a sub-metering system are likewise treated as paid directly by the resident.
Full Document2008 LIHTC Utility Allowance
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