How to Determine Allowable Fees at LIHTC Sites
With widespread unemployment and reduced income among renters during the coronavirus pandemic, your site might be experiencing a decline in rental income. As a result, you may be considering charging fees for certain amenities and services to offset the revenue loss and to help cover operating expenses.
Tax credit regulations restrict what you can charge residents on top of their rent, and there are penalties for sites that go over the maximum rent. It’s important that you have a clear understanding of what types of fees are allowed and what types of restrictions apply.
Fees for Facility Use or Services
In general, fees for facilities or services may be charged to residents in addition to gross rent only if:
- The cost of the facilities is not included in eligible basis;
- The facilities or services are truly optional; and
- A reasonable alternative is provided.
If a site’s amenity is in the eligible basis, you cannot charge for it. As a manager, if you don’t know what is included in your building’s eligible basis, get the information from the owner. The eligible basis is the portion of a tax credit building that’s eligible for subsidy through the LIHTC program. It reflects the building’s development cost, and a tax credit resident can’t be charged an additional fee for the use of any part of the building the cost of which was included in the eligible basis. The eligible basis can include parking lots, parking garages, carports, swimming pools, playgrounds, gyms, libraries, common areas, cable/Internet access, and apartment hookups for washers and dryers, among other things.
A tax credit resident may be charged a fee for optional services. Tax credit regulations distinguish between required fees that must be included in gross rents charged to residents and fees for optional services. Under Treasury Regulation 1.42-11(a)(3), the cost of services that are required as a condition of occupancy must be included in the gross rent even if federal or state law required that the services be offered to tenants by building owners. Tax credit rents are restricted, and a maximum allowable rent according to the IRS formula must include all those non-optional utilities, fees, and services.
For services to be considered optional, there must be a truly viable, free alternative available to the resident. For example, suppose you’re considering charging a parking fee for spaces at the site’s off-street parking lot. First, you would find out whether the cost of developing the parking lot was included in the eligible basis for the site. If the site received tax credits for the parking lot, it’s part of the eligible basis and a fee can’t be charged for using this amenity. However, if it wasn’t included in the eligible basis, to be in compliance with tax credit regulations, there also must be free parking within reasonable distance of the building.
If fees can’t be charged to residents, you may be wondering if visitors or neighbors in the greater community can be charged a fee. Again, if the parking lot or some other amenity such as a pool or gym is part of your eligible basis, fees can’t be charged to visiting individuals wishing to use them.
With any potential fees you’re considering, the best practice would always be to check with your state agency before implementing any new charges because the consequences can be very expensive for your site. Your state housing agency may alert you to an additional lease addendum or separate agreement required by the state agency for optional services and charges. In addition, make sure your fees don’t violate state and local landlord-tenant laws.
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.” In other words, one-time fees charged at the time of application aren’t considered rent. So, unlike managers in other subsidized housing programs, LIHTC site managers may charge application fees and/or credit check fees.
However, only the amount the owner incurs for processing the application may be charged to the prospective tenant. The owner can’t make a profit from the processing fees charged to tax credit applicants. For example, if the real cost of processing an application including background and credit checks amounts to only $30, the owner can’t charge $60. As with fees charged for facility use or optional services, check with your state housing agency for any additional restrictions imposed on one-time application fees.
Examples of Ongoing Fees and Per-Usage Charges
Cable Television. These fees may be charged as long cable television is optional and a resident can receive a television signal without cable. If the sole potential source of the cable service is provided or controlled by the owner, the amount of the fee must be reasonable. Cable television isn’t included as part of the “utility allowance.”
Carports, Garages, Parking Spaces. If a fee is charged to each resident for a parking space, a reasonable alternative must be available to the resident, or else that charge must be included as part of the rent. Charges for garages and carports are permissible only if the items were not included as part of the eligible basis of the project and there is adequate free parking available as an alternative.
Cleaning. Fees charged to a resident to clean the unit upon move-out in order to get the unit ready to re-rent are not permissible, except for “damages” to the unit. Generally, fees that are charged to the resident must be included in the gross rent calculation if they are a condition of occupancy and no reasonable alternative exists.
Credit/Debit Card. Some sites may have a credit or debit card machine on-site (or contract with a third-party company to provide this service) to allow tenants to pay rent using this method. The monthly fee incurred in having a machine onsite can be passed on to the specific tenants who elect to use this payment method as long as it is an optional fee and charged on a per-usage basis. The fee would be considered optional if the tenants have alternate methods of paying rent that don’t include a fee such as cash or checks. The fee charged to the tenant may not surpass the actual cost incurred from using the machine and the cost must be disclosed to the tenant before processing the transaction.
Guests. Charging a fee to the guests of residents to use the community swimming pool is not allowed if the pool was included in eligible basis.
Laundry Facilities/Coin-Operated Washers and Dryers. These fees are permissible if the fee is reasonable and the cost of the washers and dryers wasn’t included in the eligible basis.
Storage. These fees are disallowed if the storage space was included in the eligible basis and/or if payment of fees for storage units isn’t optional.
Washer/Dryer Hookup or Connection Setup. If a unit has washer/dryer hookup provisions (such as designated utility and water outlets), residents must be allowed to hook up their personal machines without a fee for the hookup. Fees for hookups can’t be charged because it’s presumed that the mechanical structures (such as water lines, electrical outlets, etc.) were included in eligible basis, unless these structures were specifically excluded from eligible basis in the LIHTC allocation application.