Charging Residents Fees: What's Allowed, What's Not
Charging residents fees for processing applications, running a credit check, transferring to another unit, or for the use of a parking space seems like a practical way to recoup operating costs. After all, these tasks and services require staff time, maintenance, and additional business expenses. However, there is risk involved. Tax credit regulations restrict what you can charge residents on top of their rent, and there are severe penalties for sites that go over the maximum rent. It's important that your site staff has a clear understanding of what types of fees are allowed, what types of restrictions apply, and which fees you cannot charge to residents.
The release of the revised 8823 Guide in 2009 forced tax credit sites to rethink some of their standard fees, and many found that the new rules led to an increase in operating costs. But the consequences of being out of compliance on rent—even for one month—are too significant to ignore.
“The IRS is very serious about gross rents,” says Barbara Crook, compliance director for Affordable Housing Support Services, an affordable housing compliance consulting firm in Littleton, Colo. “If you make a mistake and charge more than the maximum rent for a unit, that unit will be considered out of compliance for the entire year, regardless of how fast you fix it.”
To avoid losing tax credits, site staff need to pay close attention to any fees that the site may charge in addition to rent, including:
Upfront fees—one-time administrative fees that applicants or residents must pay for processing their application or maintaining their residency at your site;
Ongoing fees—for services or amenities that are typically charged on a monthly basis; and
Penalty fees—one-time default fees for returned checks or breaking a lease, or fees to deter inappropriate behavior, such as parking or pet violations, garbage removal, etc.
Limit Application Fees to Out-of-Pocket Costs
Charging applicants a one-time administrative fee to process their application and to conduct credit and criminal background checks is a standard practice for most sites. In the past, many have included operating costs in their application fees, including manpower, long-distance fees, postage, copies, and even office supplies, says tax credit expert Karen Graham, president of Karen A. Graham Consulting, LLC. However, in 2009, the IRS ruled that application fees “may not exceed the actual out-of-pocket costs incurred by the site for checking a prospective tenant's income, credit history, and landlord references.” While some states may allow sites to add a small percentage to cover additional administrative costs, most do not, she adds.
The 8823 Guide also states that “no amount may be charged in excess of the average expected out-of-pocket costs of checking tenant qualifications at the project.”
Words like “average” and “reasonable” often create a gray area that can mislead site staff about what is allowed, says Crook. Take, for instance, criminal background checks. There is a cost difference between conducting statewide and national criminal background checks, so which would be considered “average”? Should a site restrict its process to statewide checks if other sites in their area do so?
“Sites need to consider what a reasonable expected out-of-pocket cost is,” Crook explains. “In some cases, sites need to do the full criminal background check—for instance, when residents are moving from out of state.” If in doubt, she says, always check with your state housing agency.
Don't Charge Fees for Preparing Unit for Occupancy
Most sites consider the expenses associated with unit turnover (such as painting, repairs, replacing carpets, cleaning, etc.) to be standard operating costs. But when a current household requests a unit transfer, who foots the bill for preparing the new unit for occupancy? In the past, sites generally passed along some of those costs to the residents.
The IRS put a stop to unit transfer fees and utility transfer fees in the revised 8823 Guide. Terminating utility transfer fees, in particular, “took properties by surprise,” says Crook. “That was pretty much a standard cost in leases, since the utility company charges the property to reestablish the service in the resident's name.”
Eliminating transfer-related fees caused many tax credit sites to reevaluate their unit transfer policies, says Crook. Not surprisingly, some sites no longer allow unit transfers unless there is a health or safety reason to make the transfer.
One exception to charging fees related to condition of occupancy are optional redecorating fees, which are permitted in some states, Crook says. For instance, some sites will repaint units a standard color, usually white or beige, but will allow the option for residents to “upgrade” to other colors for a fee. “The site is allowed to do that and charge an additional cost because it is an option,” she says.
Ongoing Fees Must Be Optional
Understanding whether or not a fee is optional is also the rule of thumb to follow when considering ongoing fees for amenities or services, says Crook. “Does the resident have an alternative to the service or amenity for which you want to charge a fee? If it's an option, then there is the capacity to charge a fee for it.”
Anything that is not optional must be included in the rent calculation, says Graham. For instance, if a unit has a washer and dryer installed and you want to charge a fee of $30 a month for its use, you can do so as long as the fee is included in the rent calculation and the unit does not exceed the maximum rent, she explains.
The same rule applies to most ongoing fees, such as for cable, meals, and pet fees (although keep in mind that you cannot charge fees for service, therapy, or assistance animals).
A common question among tax credit site staff is whether you can charge residents a monthly fee for onsite parking. If the owner included the cost of the parking garage or lot in the site's eligible basis, then it must be available to all residents and you cannot charge a fee for it, says Graham.
If the parking lot is not part of your site's eligible basis, you still cannot charge a fee unless it is an optional amenity. For instance, do residents have other options for parking their cars, such as street parking or other nearby lots? If residents have no choice, and there are no other lots or other parking options available, then your parking lot is probably a necessary amenity, and you can't charge a fee.
“It must be an optional charge,” Graham says. “That's the key for any ongoing monthly fee.”
Include Lease Provision for Penalty Fees
While penalty fees were not affected by revisions to the 8823 Guide, there has been some confusion regarding fees charged to residents who break their leases. Some sites assumed that they could no longer charge lease-breaking fees, but if the lease includes a provision that there's a fee for breaking the lease, then it's an allowable fee. It is the resident's option to break the lease or to continue through the entire term of the lease.
Keep in mind that there may be restrictions that vary by state. For instance, in Washington state, tax credit sites cannot charge a lease-breaking fee if a resident moves out in the middle of the lease term. The state agency manual explains that the state's landlord-tenant law already makes residents responsible for the remainder of any rent owed on an outstanding lease term, “so it is inappropriate to charge additional fees in this situation.”
Other types of penalty fees, such as insufficient funds fees, late fees, damage to the unit, etc., are allowed as long as they are reasonable, says Graham.
A few additional considerations regarding fees:
Make sure that your fees do not violate state and local landlord-tenant laws.
Check your state housing agency's compliance manual for additional restrictions on fees that go beyond the restrictions that the IRS imposes.
Make sure that you include a provision in your lease that authorizes penalty fees, such as returned check and late fees.
Most important, if you have any concerns, Crook stresses, “check with your state housing agency before you implement the fee, because the consequences can be very expensive for the site.”
Barbara Crook: Compliance Director, Affordable Housing Support Services; (303) 798-6234; BarbaraCrook@ahsscolorado.com.
Karen A. Graham, CPM, HCCP: President, Karen A. Graham Consulting, LLC; (513) 755-7009; email@example.com.
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