Limit Upfront Rental Charges for New Residents

August 11, 2010
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Some low-income housing tax credit (LIHTC) sites are charging upfront fees (e.g., for credit checks or holding deposits) during the application process to defray certain expenses. (See the feature article, "Set Clear Procedures for Application Fees and Holding Deposits.") Although the IRS has approved charging application fees, it is still important for site owners and managers to check whether their state imposes any further restrictions for any type of upfront rental charge. For example, Washington State'sTax Credit Compliance and Procedures Manual states that LIHTC properties must limit their upfront rental charges for new residents to:

  • A reasonable damage or security deposit no greater than the maximum applicable monthly gross rent. (If the household cannot pay this amount, the owner or manager shall charge no more than 50 percent upfront and then provide a payment plan for the remaining amount spread over at least a five-month period.)
  • A reasonable pet deposit.
  • A reasonable credit check fee. In addition, application fees cannot exceed the out-of-pocket expense to the owner.

Washington State LIHTC property owners and managers cannot charge new residents with fees for mandatory assisted living services, or the project is in danger of losing all its tax credits for the year in which those fees are charged. However, the manual does note that charging for meals is acceptable "as long as the meals are optional and not a requirement of residency." In addition, washer/dryer hook-up fees and garage/carport fees are prohibited, unless they are optional (in other words, there are reasonable alternatives for residents). "All optional services must be clearly described in writing as optional; these descriptions must be included with all leases and must be readily accessible to residents upon request," states the manual. Finally, owners cannot charge any "lease-breaking" fees if a resident moves out in the middle of the lease term. As the manual explains, the state's landlord-tenant law already makes residents responsible for the remainder of any rent owed on an outstanding lease terms, "so it is inappropriate to charge additional fees in this situation." For more information, go to the Washington State Housing Finance Commission Web site, at: