How to Notify Households of Upcoming Rent Increases
At some point, you’re going to have to notify households that you’re raising their rent. Reasons for raising the rent on a low-income unit can include a utility allowance decrease, an over-income household, a change in your area’s median gross income, or, if the rent is below the maximum allowable limit, a decision to raise it. But it’s ill-advised to just slip the rent increase into a household’s next rent statement.
Most states and state housing agencies have laws or rules that require a certain number of days’ notice before you can increase a household’s rent. States can require anywhere from 30 to 60 days’ notice of a rent increase or decrease. To make it easier to send rent increase notices on time, we’ll give you a Model Notice: Notify Household About Rent Increase. Our notice leaves space to fill in the amount and effective date of the rent increase and includes a checklist of the four most common reasons for a rent increase on a low-income unit. There’s also space to write in the reason for the rent increase if none of the listed reasons apply. The notice also instructs adult household members to sign a lease addendum indicating that you’ve notified them of the rent increase and that they agree to it.
Reasons for Rent Increases
The amount of rent you can charge for a low-income unit is controlled by a site-specific formula and federal and state regulations. So you can’t raise rents whenever you like. But because rent increases for low-income units are difficult to come by, you want to get the full rent that regulations allow you to charge. The following are a few common circumstances that may permit you to increase the rent on a low-income unit.
Utility allowance decreases. The gross rent calculation includes any utilities that must be paid by the resident. In other words, the rent charged to the tenant plus the utility allowance cannot exceed the low-income housing tax credit gross maximum rent. A low-income unit’s utility allowance is an estimate of what utilities for the unit should cost each month.
You must deduct the utility allowance from the maximum gross rent you can charge to come up with the maximum monthly rent. Utility allowances may be derived from Federal Housing Agencies, local Public Housing Agencies, utility companies, State Housing Finance Agencies, use of the HUD Model Utility Allowance, or professional engineers, says tax credit management expert A.J. Johnson. If the utility allowance for a unit decreases, you should be able to increase the monthly rent.
Over-income household. Since the Housing and Economic Recovery Act of 2008, there are no annual income recertification requirements for 100 percent tax credit buildings. However, you must recertify your households if your site utilizes other affordable housing programs.
When a tax credit household’s income rises to more than 140 percent of tax credit limits (or 170 percent in deep rent-skewed sites) at a mixed-program site, you may get the chance to raise that household’s rent to market rate. However, management must ensure compliance with the Available Unit Rule and be careful to maintain the building's required applicable fraction, says Johnson. You can comply with the Available Unit Rule by leasing a comparable or smaller market-rate unit in the building to a low-income household. Once that happens, the newly leased unit becomes a low-income unit, swapping its status with the over-income unit. If the newly leased unit happened to have been a market-rate unit, you won’t want to be stuck with an over-income household living in a market-rate unit, but paying tax credit rent. So, if your lease allows it, you’ll probably want to raise the over-income household’s rent to market rate. But before you do so, check to ensure that your applicable fractions will be maintained once you start charging market rent to the unit with the over-income household.
Remember that if you manage a 100 percent tax credit site, you can never raise the rent of an over-income household to market rate. Every unit must be occupied by a low-income household, and the maximum allowable tax credit rent is the highest rent you can charge.
Change in area median gross income. According to tax credit regulations, you may keep household rents at maximum allowable levels at all times. The maximum rent you can charge is directly tied to HUD’s area median gross income (AMGI) figures for your area, which are published each year. If HUD’s new AMGI figures have increased, you should be able to raise rents on low-income units as long as your lease allows you to do so and your state agency and allocation agreement don’t apply special restrictions, says Johnson.
Increase to maximum allowable rent. Occasionally, your rent on a tax credit unit may not be as high as the maximum allowable rent for that unit, says Johnson. If the market allows it and you still have room to increase the rent, you may wish to do so, he adds.
Other. There may be other, less common reasons to change the rent on a low-income unit. If you plan to change the rent for a reason other than the four just discussed, check with your state housing agency to make sure you can do so.
What to Tell Households
A notice form makes it easy for you to give households a “heads up” on a rent increase that will go into effect for their unit. Check with your attorney to find out how many days in advance the state landlord-tenant law or your state housing agency requires you to send the notice. Like our notice, here’s what yours should cover:
Effective date. Tell the resident the date that the rent increase will go into effect. Make sure the date is far enough in the future that your notice complies with state notice requirements.
Reason for increase. Say why you’re raising the rent. Our form lists the four most common reasons for a rent increase, allowing you to check off the one that applies. If your reason doesn’t fit into one of these four categories, check “other” and write the reason for the rent increase in the space provided.
Enclose lease addendum. You should always have a record in your file indicating that a household has been notified of and agrees to a rent increase. Enclose a lease addendum with your notice and ask that all adult household members sign it and return it within two weeks. Here’s an example of what your lease addendum should say:
Model Lease Addendum
Effective the [insert day] day of [insert month], 2013, I agree that the monthly rent payment for apartment [insert #] is increased to $[insert amount] per month. This increase is in accordance with Section [insert section #] of the Lease Agreement entered into on [insert date].
Make sure the lease addendum includes spaces for the household head’s name and address, signature lines for all adult residents and the site manager, and a line for the date of signing.
A.J. Johnson: A.J. Johnson Consulting Services, Inc., 3521 Frances Berkeley, Williamsburg, VA 23188; www.ajjcs.net.
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