How to Raise Rents When Households Go Over-Income
Suppose that, a few months after determining that a tax credit household is over-income, you've rented enough units to satisfy the next available unit (NAU) rule. If your lease doesn't give you the right to raise the over-income household's rent once you've complied with the NAU rule, you may not be able to maximize your site's earning potential. The unit no longer earns any tax credits, and it doesn't bring in market-rate rent either.
Unfortunately, many leases at tax credit sites don't have the appropriate remedy. They don't give you the right to raise an over-income household's rent to market rate when the unit no longer has tax credit status. To help you maximize your rental income, we'll give you a Model Lease Clause: Claim Right to Raise Over-Income Household's Rent.
How Over-Income Households Affect You
When a tax credit household's income exceeds 140 percent of tax credit limits or 170 percent in deep rent-skewed sites, you have to lease the next available comparable or smaller unit in the building to a qualified low-income household. In mixed-income buildings, you may have to use a market-rate unit to satisfy this rule, says management expert A.J. Johnson.
Once a market-rate NAU is leased to a low-income household, that unit becomes a tax credit unit, exchanging its status with the over-income unit. Until you comply with the NAU rule, the over-income household remains qualified for its unit and continues to pay the lower tax credit rent. But once you've met the NAU rule, you no longer claim tax credits on the over-income household's unit.
If you can't raise the over-income household's rent after you've complied with the tax credit rules, you're stuck with a household that pays tax credit rent while living in a market-rate unit. So you're losing out on an opportunity to increase the site's income and cash flow.
Use Clause to Provide Notice, Reserve Right
A lease clause will give you the right to raise the rent to market rate once you've complied with the NAU rule. By signing a lease that includes the clause, the household agrees that its rent may increase during the lease term, and isn't surprised by a sudden jump in rent.
Your clause should make it clear that the household will be considered over-income for rent determination purposes if its income exceeds 140 percent of the tax credit limit. The clause should also specify the amount of notice you'll give the household before you increase the rent to market rate.
Notice requirements are governed by state landlord-tenant laws, says Johnson, so ask your attorney how much notice your state requires before you use the lease clause. Also, find out from your state agency or your attorney whether there are any prohibitions against mid-lease rent increases or caps on the amount you can raise the rent in your state.
Public Relations and Market Considerations
For business and public relations reasons you may not want to increase the rent to market rate in all cases where household income exceeds 140 percent of the tax credit limit. Large rent increases can alienate good residents and perhaps create bad publicity for your site. Weigh the extra income and cash flow against the ability to attract and keep households at your site. The clause works best in tighter rental markets and not where a household has more choices of affordable rent levels, says Johnson. If you already have significant vacancies and high turnover at your tax credit site, a rent increase may not be a good idea.
EDITOR'S NOTE: It's important to note 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 filled with a low-income unit anyway, so you don't swap a market-rate unit for a tax credit unit as you do at mixed-income sites. At 100 percent tax credit sites, the maximum allowable tax credit rent is the highest rent you can charge a household regardless of whether the household is over-income.
Adding Clause to Lease
You should put the clause into the initial lease so that the household is aware that a rent increase is possible in the future. But this clause may not be triggered until the end of the initial 12-month lease term or later, since you may not discover the household's over-income status until the annual certification.
If you don't put the clause in the initial lease, make sure you include it when you renew the lease, says Johnson. Even if the household isn't over-income at that time, the clause ensures that you have the right to raise the rent later.
If you have a month-to-month lease after the initial lease term ends, you can raise the rent any time after you've satisfied the NAU rule, with the notice required by your state law. Many leases for tax credit sites begin with a 12-month lease term and then convert to a month-to-month lease after the initial term ends, says Johnson.
Alternatives to Raising Rent
In addition to the right to raise the rent, there are other options you may want to include in your lease. You may want the right to transfer an over-income household to an available market-rate unit instead of keeping the household in the low-income unit. That's because you might want to move the household to a pre-designated market-rate unit for its amenities, or you might want to put the household in a larger unit to maximize market-rate square footage and reserve the comparable or smaller units to satisfy the NAU rule. If you move the household into a market-rate unit in the same building, you'll have to fill the old unit with a low-income household before you can raise the over-income household's rent.
Another option is to give yourself the right to decline to renew an over-income household's lease. This way, you can avoid having to comply with the NAU rule altogether. But this option is available only if your state agency permits it, says Johnson. Many states don't let you refuse to renew an over-income household without “good cause,” such as criminal behavior or failure to pay rent.
A.J. Johnson, HCCP: President, A.J. Johnson Consulting Services, Inc., 3521 Frances Berkeley, Williamsburg, VA 23188; www.ajccs.net.
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