IRS Amends LIHTC Utility Allowance Submetering Regulations

IRS Amends LIHTC Utility Allowance Submetering Regulations

On March 3, the IRS and the Treasury Department published amended regulations for utility allowances at LIHTC sites. The two sets of regulations issued help owners use a consumption-based utility allowance at properties that are either submetered or generate and sell energy using onsite renewables. These regulations affect the maximum rent that LIHTC building owners can charge tenants.

This final regulation adopts the August 2012 proposed regulation and extends those rules to the provision of energy that the building owner acquires directly from renewable sources and then provides to low-income tenants (e.g., solar energy sources). The proposed regulations provided that utility costs paid by a tenant based on actual consumption in a submetered rent-restricted unit are treated as paid by the tenant directly to the utility company and thus do not count against the maximum rent that the building owner can charge. In these cases, the owner could establish a utility allowance in accordance with the IRS utility allowance Regulation 1.42-10 for submetered utilities. Before these regulations, Treasury Regulation 1.42-10 made it appear that submetered projects were not allowed to use a utility allowance.

These regulations are effective as of March 3, 2016. And the temporary regulations pertaining to renewable energy expire March 1, 2019.

Utility Allowances and Submetering

Utility submetering is the implementation of a system that allows a site owner to bill residents for individual measured utility usage. With the final regulation, LIHTC owners that submeter utilities at their sites can use the energy consumption model for calculating utility allowances. The change may help owners and energy-efficiency professionals because it is often difficult to get actual consumption data from utilities. With these regulations finalized some owners may opt not to individually meter apartments but rather choose to submeter their units so they can have easier access to the data.

Previously, an owner could use the energy consumption model only if the tenant paid the utility bill directly to the utility company. Under this model, utility consumption estimates are calculated by a properly licensed engineer or other qualified professional.

The change is significant because an owner of a site where the units are not individually metered can now submeter the property, bill the tenants for their actual energy usage, and now customize the utility allowances to reflect actual consumption, using the established methodology previously adopted by the IRS. Under this methodology, the utility rate charged to the tenants cannot exceed the rate incurred by the owner for that utility.

In 2012, when the submetering regulations were proposed and the IRS sought comments on them, the proposed regulations provided that, if the owner charges a unit’s tenants an administrative fee for the owner’s actual monthly costs of administering an actual-consumption submetering arrangement, then the fee is not considered gross rent for purposes of Section 42(g)(2) so long as the aggregate monthly fee or fees for all of the unit’s utilities under one or more actual-consumption submetering arrangements does not exceed the lesser of (1) $5 per month; or (2) the owner’s actual monthly costs paid or incurred for administering the arrangement.

In response to submitted comments, the IRS’ final regulations do not include a requirement to determine actual monthly cost, and they generally permit owners to charge tenants an administrative fee in accordance with a state or local law that specifically prescribes a dollar amount for the administrative fee. The final regulations authorize the Treasury Department and the IRS, by publication in the Internal Revenue Bulletin (IRB), both to provide for administrative fees in excess of $5 per month even in the absence a state or local law doing so and to put an upper boundary on administrative fees even if state or local law allows higher fees.

Thus, if an owner charges a unit’s tenants a fee for administering an actual-consumption submetering arrangement, then gross rent includes any amount by which the aggregate amount of monthly fees for all of the unit’s utilities under one or more actual-consumption submetering arrangements exceeds the greater of: (1) $5 per month; (2) an amount (if any) designated by publication in the IRB; or (3) the lesser of a dollar amount (if any) specifically prescribed under a state or local law or a maximum amount (if any) designated by publication in the IRB.

Energy Obtained Directly from Renewable Sources

The IRS and Treasury also issued a temporary regulation that extended the principles of the regulation to LIHTC sites where the energy is acquired directly from a renewable source instead of obtaining energy from a local utility provider.

The temporary regulations state that the energy does not have to be purchased from a utility company. Tenants can purchase renewable energy directly from the owner of the renewable energy installation and owners can use a utility allowance when setting rents. The rate charged to tenants is the rate at which the local utility company would have charged the tenants in the unit for the utility if that entity had provided it to them.

Issues Relating to Utility Allowances Generally

In addition to comments responding to the 2012 proposed regulations, the IRS received comments relating to the utility allowance regulations that existed prior to the final regulations. The final regulations incorporate some of the changes suggested by commenters.

Role of agencies regarding the utility allowance methods. Prior to these final regulations, the existing regulations provided that, under the energy consumption model, 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.” Now, state agency approval will be required only for qualified professionals that are not properly licensed engineers. However, the final regulations also clarify that an agency continues to have the option to review, and take appropriate action regarding, utility estimates based on the energy consumption model or the other optional methods.

Use of consumption data for the energy consumption model. Under the existing regulations prior to these final regulations, use of the energy consumption model was limited to the building’s consumption data for the 12-month period ending no earlier than 60 days prior to the beginning of the 90-day period under Section 1.42-10(c)(1).

The final regulations remove the requirement that an energy consumption model use the building’s consumption data for a particular 12-month period. Instead, the final regulations revise the specific factors used in determining estimates under the energy consumption model to include available historical data. This is because, as year-to-year variations occur, the most recent 12 months may not be a representative set of consumption data to provide an ongoing utility allowance.

Areas with no public housing authorities. The existing regulations provide that, if a building is neither a Rural Housing Service (RHS)-assisted building nor a HUD-regulated building and no tenant in the building receives RHS tenant assistance, then the appropriate utility allowance for the units in the building is the applicable public housing authority (PHA) utility allowance. One commenter requested clarification as to which method of calculating utility allowances applies if no PHA exists under these circumstances. Under the existing regulations, if a building owner obtains a local utility company estimate or uses one of the other options for determining the applicable utility allowance, then the selected option replaces the applicable PHA allowance as the appropriate utility allowance. The regulations do not include an option for using the allowance of a neighboring PHA.

Allowing the use of a neighboring PHA’s utility allowance might not be appropriate because climate and utility consumption can be dissimilar from one PHA jurisdiction to a neighboring jurisdiction. The IRS is requesting comments on how the rules might best address situations in which no PHA exists.

Changes in PHA utility allowances. The final regulation retains the requirement that if a PHA utility allowance changes, the building owner must use the new utility allowance to compute gross rents of the units due 90 days after the change. In other words, the 90-day period ends 90 days after the effective date of the revised PHA allowance. In the regulation, the IRS states that, “A building owner that checks the PHA utility allowance every 60 days would have at least 30 days in which to adjust rents.”