What You Need to Know When Updating Utility Allowances
If residents at your tax credit site pay for their own utilities, the amount of each unit’s utility allowance affects the maximum monthly rent you can collect from the household. The utility allowance is generally based on an estimate of reasonable household consumption and cost for the unit size. Utility allowances are intended to reflect “typical” utility costs, not actual bills or costs paid by any individual household.
The lower the utility allowance, the more rent you can collect from the household. This is because when utility allowances are adjusted, the adjustment doesn’t affect the LIHTC program’s maximum gross rent. In other words, as utility allowances are increased or decreased, the household’s rent payment must be adjusted by an equivalent amount.
As an owner or manager, failure to calculate utility allowances properly and charging gross rents that exceed the maximum rent allowed are both considered reportable noncompliance by the IRS and will result in a loss of tax credits. We’ll go over the basics of utility allowances and any owner obligations related to calculating utility allowances and making sure your site’s gross rents don’t exceed the maximum rent allowed.
5 Sources for Utility Allowances
At tax credit sites where households pay for some or all of their own utilities, the maximum gross rent limit on each unit must include a utility allowance. The utility allowance is an estimate of what utilities should cost for that unit. The rent paid by the household plus the utility allowance must not exceed the maximum tax credit rent limit for that unit.
If your site receives assistance from a Rural Housing Service (RHS) program through Rural Development (RD), the utility allowance for all LIHTC units at your site must be determined by the method required by RD. Likewise, if an LIHTC building doesn’t receive RHS assistance but is a HUD-regulated building, the applicable HUD utility allowance is to be used for all LIHTC units in the building.
However, if your site isn’t RD assisted or HUD-regulated, there are four utility allowance options you may use to calculate the utility allowances for your units.
Public Housing Authority (PHA) schedule. Owners using this option must obtain the applicable utility allowance schedule (HUD Form 52667) published by the PHA serving the jurisdiction where the site is located. Using this form, you need to determine the utility allowance for each unit size based on the source for each type of utility paid by the resident. For example, for heating costs, the form breaks down the costs by fuel type such as natural gas, electric, fuel oil, etc.
It’s important to note that if an applicant or tenant is using a Section 8 voucher, you must use the PHA utility allowance, even if you’re using a different utility allowance option for all the other units. You must do this even if the PHA utility allowance is less than the utility allowance for your current method utilized for your other units.
If you use this method, once your PHA publishes an updated utility allowance schedule, you have 90 days to get the new utility allowance implemented. In other words, the 90-day period ends 90 days after the effective date of the revised PHA allowance. So be sure to have a system in place to check with the PHA for any updates to the utility allowance schedule. 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.”
Local utility company estimate. The utility company estimate option involves obtaining information from a local utility company. You can reach out to the local office of each company that provides each type of utility paid for by households. You can ask the “energy specialist” or someone with a similar title who handles utility billing to send you a written estimate of the total monthly cost of that utility for each unit type.
Ideally, the utility company will give you a bottom-line estimate of the monthly utility cost. For example, an electric company may send a written estimate stating that, based on the information you gave them, the estimated average electric bill for a one-bedroom would be $50 per month. But some utility companies won’t do this. They’ll only estimate the monthly usage and tell you their rates. For instance, an electric company may give you an estimate of the number of kilowatt-hours per month and the rate per kilowatt-hour. Or the utility may give you only the dollar amount per square foot. For instance, a gas company might tell you that, based on your description of the site, it should cost 10 cents per square foot to heat each unit. In these cases, you’ll have to calculate the total monthly cost for each unit using the data the utility company gives you.
In some areas, utility services may be deregulated, meaning more than one company supplies the utility. In these areas, only an estimate from a single provider is required, even if there are more than one providing the same service to your site. This estimate from deregulated utilities should include all component deregulated charges for providing the utility service such as transmission and distribution fees.
Agency estimate based on similar building/actual consumption. This option permits a building owner to obtain a utility estimate from its state housing agency for each unit in a building. This option applies only when the building is exclusively regulated by the LIHTC program. An estimate may be obtained when the agency provides the owner with written information that gives the estimated per-unit cost of the utilities for units of similar size and construction for the geographic area in which the building is located.
The state agency may also use actual utility company usage data and rates of the building for which the utility allowance is requested. The agency estimate will take into account the local utility rates, property type, climate variables by region in the state, taxes and fees on utility charges, and property building materials and mechanical systems.
If the estimate is based on actual consumption, the usage data used to compute the estimate is limited to the building’s consumption data for a 12-month period ending no earlier than 60 days prior to the date the utility allowance will change. For newly constructed or renovated buildings with less than 12 months of consumption data, consumption data for the 12-month period for similarly sized and constructed units in the geographical area in which the building is located will be used. The utility rates used to compute the estimates must be the rates in place 60 days prior to the date the utility allowance will change.
HUD Utility Schedule Model. HUD Utility Schedule Model (HUSM) estimates are based on national data on energy characteristics of housing, usage, and demographics, on local weather data, and on local utility rates and property-specific information entered by the owner into the model. Information regarding this model can be found at www.huduser.gov/portal/resources/utilallowance.html.
Owners must enter various data such as project location, project type, unit information, energy-saving design, utility tariffs, extra charges and fees, and utilities paid by tenants. And the utility rates entered by the owner into the HUSM must be no older than the rates in place 60 days prior to new schedule’s effective date.
Energy consumption model. This option requires owners to retain the services of a qualified professional to calculate utility allowances based on an energy consumption model. The regulation doesn’t define a “qualified professional,” but it does state that if the qualified professional isn’t a licensed engineer, the owner must obtain approval from the state housing agency to use the qualified professional.
The energy consumption model must, at a minimum, take into account specific factors including, but not limited to, unit size, building orientation, design and materials, mechanical systems, appliances, and characteristics of the building location. This option is beneficial for housing using new energy-reducing technologies, such as solar and other renewable energy systems, because the estimate is based on the specific building and its particular energy-saving features.
Your residents are entitled to a utility allowance if they’re responsible for payment for their gas, electric, water, sewer, or trash service. A unit is out of compliance if you aren’t crediting the resident with a utility allowance. In the process of charging proper rents for these residents, Treasury Regulation 1.42-10 requires that owners conduct a review of the utility allowance at least once during each calendar year. This means the deadline to review the utility allowance is the end of each calendar year and not 12 months from the last review.
90-day period. If the utility allowance does change, the new utility allowance must be implemented 90 days after the change. The application of the 90-day period is slightly different depending on the utility allowance method used.
If your site uses the PHA utility allowance, the owner must implement the new utility allowance 90 days after publication by the PHA. For buildings using the utility company estimate, the HUSM, and energy consumption models, the owner must provide the updated utility allowance estimates to the state housing agency and make the estimates available to all resident 90 days before implementing the updated utility allowance. And for buildings using the agency estimate, the owner must make the new utility allowance estimate available to all residents 90 days before implementing the updated allowance.
Record retention. To comply with tax credit recordkeeping requirements, you must keep the utility allowance documentation on file at your site. Treasury Regulations 1.32 says, “The building owner must retain any utility consumption estimates and supporting data as part of the taxpayer’s records for purposes of Section 1.6001-1(a).”
You should be prepared to provide documents supporting the utility allowance during state agency monitoring reviews. As such, be sure to check with your state agency to determine exactly what types of documentation and data the agency wants you to keep. It’s also wise to put a copy of any estimate supporting the utility allowance in each household file to show that you’ve properly calculated the rent for each unit.
Implementation Timeline for Updated Utility Allowances
Failure to implement updated utility allowances and adjust rents by a certain day could cause gross rents to exceed the applicable maximum rent and lead to reportable noncompliance. Because resident notification during the 90-day period is not required if your site uses the PHA utility allowance schedule, the sample timeline below is for sites that use the other utility allowance options for LIHTC sites.
For these sites, to comply with data collection and resident notification requirements, it’s recommended to begin the data collection and/or model preparation process at least 30 to 60 days prior to your annual utility allowance schedule effective date.
Utility Allowance Schedule Effective Date – Sept. 1, 2022
July 1, 2022 – Aug. 31, 2022:
- Begin preparing the HUD Utility Schedule Model, Energy Consumption Model, or obtain state agency estimate based on similar building/actual consumption.
- Calculate new utility allowances.
- Any usage data and utility rates used to compute new allowances must be no older than 60 days prior to the new schedule’s effective date.
Sept. 1, 2022 – Nov. 30, 2022:
- Sept. 1 is the effective date of the new utility allowance schedule.
- Owner notifies all residents of new utility allowances (the 90-day period).
Dec. 1, 2022:
- Owner implements new utility allowances and uses the allowances to calculate gross rent.
- Updated utility allowances must be implemented on the first day following the 90-day period.