Set Clear Procedures for Application Fees and Holding Deposits
The tough economy has many low-income housing tax credit sites operating with minimal staffing and restricted budgets. Some find that carefully managing operating costs can help to offset the lack of rent growth caused by declining median incomes in the past few years.
Requiring upfront fees during the application process can help to defray certain expenses and save valuable staff time spent processing applications. For instance, charging an application fee can cover the cost of conducting credit and criminal background checks, while reducing the number of unqualified applicants (those with a bad credit history or felony convictions will probably not bother to apply if they know that their background will be checked by a third party). Similarly, requiring a holding deposit will decrease the likelihood an applicant will decline a unit assignment at the last minute.
What Do Fees Cover?
The IRS has approved charging application fees at 100 percent tax credit sites, as long as they cover only the cost associated with processing, says Christopher Voss, CEO of RightSource Compliance, a LIHTC compliance consulting firm with offices in Arlington, Va., and Minneapolis. According to the 8823 Guide: “Application fees may be charged to cover the actual cost of checking a prospective tenant's income, credit history, and landlord references. The fee is limited to recovery of actual out-of-pocket costs. No amount may be charged in excess of the average expected out-of-pocket costs of checking tenant qualifications at the project.”
Application fees typically are nonrefundable and vary from $15 to $50. Voss points out that there is no standard approach that can be taken with application fees. “It is a state-by-state determination of what is allowed,” he says. “If you have a program that is layered, such as Section 8, HOME funds, etc., your ability to charge an application fee or a holding deposit is limited and, in many cases, is not allowed. Before you implement any type of fee structure, make sure that it has been approved by your state housing authority.”
Also, keep in mind that there may come a time when you will have to show proof of the processing costs charged to a household, so make sure that all application fees are fully documented in the household's file with invoices from the third-party firms, along with the credit and background reports they provided.
In addition to application fees, tax credit sites may be able to require a holding deposit to reserve a unit. Holding deposits can range from $100 to $250 or more. Unlike the application fee, the holding deposit may be refunded if the applicant is no longer eligible when the unit becomes available, or if the applicant withdraws the application. And if a lease is signed, the fee can be credited toward the security deposit. As with application fees, before you implement any type of holding fee make sure that it has been approved by your state housing authority.
PRACTICAL POINTER: If you're considering whether your site should charge application fees, Voss recommends that you first “thoroughly examine the purpose behind the fees, as well as what you're hoping to achieve, and then weigh that against the potential costs to your site.” In some cases, it may be worthwhile to absorb the expense rather than passing it on to the applicant. For instance, if your site is charging a $40 application fee, but other tax credit sites in the area are not, that may discourage potential households from applying at your site. But “if the market allows you to do it, I encourage it,” says Voss. “Having those screening costs offset by application fees is important for the financial health of the site.”
Make Sure Staff Follow Consistent Procedures
Inconsistent procedures can cause troubles for your site in the form of a fair housing complaint. “The implementation is key,” says Voss. “If you're going to require application fees or holding deposits, be sure that you charge those fees to everyone. Make it very clear that your site staff is not being selective about when, how, and to whom they assess those fees.”
If you decide to waive the fees on occasion—for instance, if your site is running a leasing special—you need to ensure that the promotion begins and ends on specific dates, and that the fee is waived for everyone who comes to the site during that time frame.
Other standard practices for charging application fees include:
Application fees should be charged on a per-applicant basis—that is, for every adult household member.
Before collecting the fee, check the application to make sure that it is completed correctly and that there is no missing information.
Review the application and holding deposit fee agreement with applicants to ensure that they clearly understand what the fees cover, and that the holding deposit is pending the applicant's completing the screening and certification process when the unit becomes available.
Have the applicant sign the agreement and give written receipts for the application fee and the holding deposit.
While application fees can be deposited with the site's other receivables, the holding deposit should be placed in an onsite lockbox or other secure location. If your site's policy is to deposit holding deposit checks, then that should be made clear to applicants to ensure that they have sufficient funds in their account to cover the check.
Create Agreement for Application and Holding Deposit Fees
In addition to consistent procedures, the application fee and holding deposit agreement is your best protection against misunderstandings and discrimination claims, says Voss. Your state housing agency can provide specific guidelines for assessing application fees and holding deposits in your area. Be sure to check with your attorney on the specific points and language to include in your agreement.
In general, a written agreement should include:
Statement of nondiscrimination. Clearly state that you are following all fair housing rules and requirements.
Equal Housing Opportunity: It is our policy to lease apartments to the public on a nondiscriminatory basis, without regard to race, religion, creed, color, sex, handicap, familial status, national origin, age, ancestry, sexual orientation, marital status, or lawful source of income or any other protected class pursuant to federal, state or local laws. We practice equal opportunity.
Explanation of why fee is being assessed and to whom. Inform applicants that the application fee is nonrefundable, it covers the cost of processing the application, and it is assessed per applicant or for each adult household member. Then define who is considered an applicant (whether it is the household or the individual applicant). Voss recommends that the language also clarify who is considered an adult (for example, household members age 18 and older).
Applicant has submitted the sum of $[insert amt.], which is a nonrefundable payment for credit check and processing charges. Such sum is not a Rental payment or Security Deposit and is not a guarantee of approval for Residency. Management, to cover the cost of processing this application as furnished by Applicant, will retain this amount; any false information will constitute grounds for rejection of this application. All occupants 18 years of age or older must complete an application and pay this nonrefundable application fee for screening purposes.
Explanation of holding deposit terms. Clearly spell out the expectations and terms to ensure that applicants understand that the holding deposit is not considered a security deposit on a unit, and that it does not guarantee a lease.
Explain what will happen to the holding deposit if: (1) the applicant is no longer eligible due to changes in the applicant's circumstances; (2) the applicant withdraws the application or fails to enter into the lease upon being approved; and (3) the applicant fails to provide the information required for certification.
By submitting this complete application, I hereby apply for the apartment. I/We understand that I am required to leave a $[insert amt.] deposit with this application. This holding deposit is not a guarantee of approval for Residency. Upon application approval, the full amount is applied toward the security deposit of $[insert amt.]. The balance of the security deposit and any other deposits along with the signed Lease Agreement, are due within forty-eight (48) hours of approval. If my/our application is not approved, the $[insert amt.] will be returned to me/us. If I/we refuse to enter into a Lease Agreement after approval, the balance of the my/our paid deposit may be retained as compensation of lost rent provided the Landlord makes reasonable efforts to mitigate the rental loss in accordance with [insert reference to relevant federal, state, and/or local statutes].
Applicant(s) signatures. Make sure that the applicant and every adult household member signs the agreement to acknowledge that they understand what the fees cover, their terms and conditions, and the amount received by site management.
Christopher Voss: CEO, RightSource Compliance; 1-877-59-CERTS; cvoss@RightSourceCompliance.com; http://www.RightSourceCompliance.com.
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