How to Identify Correct Utility Allowances to Use at Your Site
Your residents are entitled to a utility allowance if they are responsible for payment for their gas, electric, water, sewer, or trash service. A unit is out of compliance if you are not crediting the resident with a utility allowance, and the amount you charge them for rent exceeds the tenant rent calculated when subtracting the correct utility allowance from the maximum allowable rent.
To properly calculate the rents you charge your low-income households, you must use correct utility allowances. If you use an incorrect utility allowance, you’ll end up charging a household too much or too little rent. If you charge too much for a unit, it will fall out of compliance, placing the owner’s tax credits at risk. If you charge too little, your mistake will cost the owner in lost rent revenue.
To use the correct utility allowances, you must make sure you get them from the right source. The source of utility allowances varies depending on the type of building you manage. We’ll tell you which sources the tax credit rules on utility allowances require you to look at to get your utility allowances. In addition, we’ll take a closer look at methods you’re allowed to use to estimate utility costs when your building is strictly tax credit only.
Sources of Utility Allowances for LIHTC Sites
The source of the utility allowances for your building depends on whether it must comply with another housing program. Utility allowances are applied individually to each building in the project. Therefore, it’s possible that an owner may be required to use different utility allowances for different buildings in a single site and in some circumstances for individual units within the same building.
There are four possible situations that may apply to your building. Here’s a rundown on these four situations and where you must get your utility allowances for each one.
1. Building is tax credit only. Internal Revenue Bulletin 2008-39 was published on July 29, 2008, and contained final regulations that amended the utility allowances regulations concerning the low-income housing tax credit. The amendment took effect for taxable years beginning on or after July 29, 2008.
Tax credit sites that are not Rural Housing Services-assisted or HUD-regulated have the option of using one of the following methods for estimating tenant utility costs:
- Public Housing Authority (PHA) Estimate
- Local Utility Company Estimate
- Agency Estimate based on Similar Building/Actual Consumption
- HUD Utility Schedule Model
- Energy Consumption Model
If any household members at your site hold Section 8 certificates or vouchers (that is, get tenant-based Section 8 assistance), you must always use the applicable PHA utility allowance for their units. In addition, the utility allowance of the particular PHA that granted the voucher or certificate must be used for that household. And the utility allowance for the non-HUD-assisted units in the building can be based on any of the acceptable methods listed above.
2. Building is also regulated by HUD. If your building is also regulated by HUD or participates in a HUD-financed program (such as a below-market HUD loan program, Section 8, and Section 236), the applicable utility allowance for all rent-restricted units in the building is the HUD utility allowance.
For instance, a tax credit building may be covered by a HUD-insured mortgage loan or get project-based Section 8 assistance. If any household members hold Section 8 certificates or vouchers, use the applicable PHA utility allowances for their units.
3. Building or residents also get RD assistance. Your building or some of your residents may also get assistance from the Rural Housing Services, formerly known as the Farmers Home Administration (FmHA) and now commonly known as the RD. For instance, you may have a building that has a mortgage or Section 515 financing from Rural Housing Services. The applicable utility allowance for all rent-restricted units in the building is the current RD utility allowance, regardless of whether or not the building also receives other state or federal assistance.
If any residents get RD assistance, use the utility allowance provided by the RD for all your building’s low-income units—even for any units that Section 8 voucher or certificate holders occupy.
4. Building is also regulated by HUD and building or residents get RD assistance. If any resident receives RD rental assistance payments, the applicable utility allowance for the entire building, including any units occupied by residents receiving HUD rental assistance payments and including tenants in the building who do not receive Rural Housing Services rental assistance is the applicable RD utility allowance.
Local Utility Company Estimates
If your site isn’t regulated or subsidized by any other housing program, you may get a written estimate of the monthly utility cost for each unit type from your local utility company. Before Treasury Regulation Section 1.42-10 was revised, the election to use a local utility company estimate was permanent, meaning that you could not switch back and forth between the local PHA and utility company estimates. State agencies reported that although utility companies may have been willing to provide owners with an initial estimate, utility companies were increasingly unwilling to provide estimates on an ongoing basis. Now, owners may switch between PHA and utility company estimates on a yearly basis.
Utility company estimates tend to be lower than PHA allowances. The PHAs tend to base their estimates on older, less energy-efficient buildings, where usage is higher. But newer buildings often have energy- and water-saving features built into them, such as double-paned windows, better insulation, energy-efficient heating and cooling systems, and state-of-the-art plumbing systems. Utility companies will take these features into account when coming up with estimates. The result is often a much lower utility allowance per unit. And that translates into a higher rent collected from each household.
Some companies won’t send written estimates unless you request them in writing. If you make your request in writing, you can adapt and use our Model Letter: Request Utility Company Estimate. Start by giving the utility company basic information about your site’s tax credit status and the program’s utility allowance requirement.
Next, tell the utility company about the units’ energy needs. Each company requires different types of information, so ask the representative what information the company needs to make the estimate. Some companies are satisfied with a breakdown of the square footage or the number of bedrooms for each unit. Others want more detail about your site’s energy efficiency.
Ideally, the utility company will give you a bottom-line estimate of the monthly utility cost. For example, an electric company may send a written estimate stating that, based on the information you gave them, the estimated average electric bill for a one-bedroom would be $35 per month. But some utility companies won’t do this. They’ll only estimate the monthly usage and tell you their rates.
For instance, an electric company may give you an estimate of the number of kilowatt-hours per month and the rate per kilowatt-hour. Or the utility may give you only the dollar amount per square foot. For instance, a gas company might tell you that, based on your description of the site, it should cost 6 cents per square foot to heat each unit. In these cases, you’ll have to calculate the total monthly cost for each unit using the data the utility company gives you.
Our letter gives the utility company the option of providing an estimate of the usage plus information about its rates instead of estimating the total monthly cost.
Agency Estimate Based on Similar Building/Actual Consumption
This option permits a building owner to obtain a utility estimate from its state housing agency for each unit in a building. This option applies only when the building is exclusively regulated by the LIHTC program.
An estimate may be obtained when the agency provides the owner with written information that gives the estimated per-unit cost of the utilities for units of similar size and construction for the geographic area in which the building is located.
The state agency may also use actual utility company usage data and rates of the building for which the utility allowance is requested. The agency estimate will take into account the local utility rates, property type, climate variables by region in the state, taxes and fees on utility charges, and property building materials and mechanical systems.
The data used to compute the estimate is limited to the building’s consumption data for a 12-month period ending no earlier than 60 days prior to the date the utility allowance will change. For newly constructed or renovated buildings with less than 12 months of consumption data, consumption data for the 12-month period for similarly sized and constructed units in the geographical area in which the building is located will be used.
The utility rates used to compute the estimates must be the rates in place 60 days prior to the date the utility allowance will change.
HUD Utility Schedule Model
This is another method an owner may use to estimate utilities for a strictly tax credit building. An owner may calculate utility allowance estimates using the HUD Utility Schedule Model, which is found on the HUD website at www.huduser.org/resources/utilmodel.html. The HUD Utility Schedule Model is based on data from the Residential Energy Consumption Survey (RECS) conducted by the Department of Energy. RECS data provides energy consumption by structure for heating, air conditioning, cooking, water heating, and other electric sources (lighting and refrigeration).
The HUD Utility Schedule Model also incorporates building location and climate. This model requires the identification of a weather station in close proximity of the project and requires the owner to collect local utility rate data.
Energy Consumption Model
This last method for tax credit-only buildings allows owners to retain the services of a qualified professional to calculate utility allowances based on an energy consumption model. An owner may calculate utility estimates using an energy, water, and sewage consumption and analysis model.
The energy consumption model must, at a minimum, take into account specific factors including, but not limited to, unit size, building orientation, design and materials, mechanical systems, appliances, and characteristics of the building location. The utility consumption estimates must be calculated by either a properly licensed engineer or a qualified professional approved by the agency that has jurisdiction over the building. This option is beneficial for housing using new energy-reducing technologies, such as solar and other renewable energy systems, because the estimate is based on the specific building and its particular energy-saving features.
Reviewing and Updating Utility Allowances
You should be able to document that at least annually you have reviewed the numbers you use to calculate your utility allowance. A unit is out of compliance if your utility allowance is out-of-date, and the amount you’re charging for rent is greater than the amount allowed by the LIHTC program when using the correct, current utility allowance.
Under tax credit rules, if the revised estimate increases the gross rent above the maximum allowable rent for the unit, you must reduce the household’s rent payment accordingly within 90 days of receiving the revised estimate.
In addition, you must also retain any utility consumption estimates and supporting data as part of your site’s recordkeeping requirements. Keep the original written estimate on file at your site. It’s also wise to put a copy of the estimate in each household file to show that you’ve properly calculated the rent for each unit.