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Additional Ways to Estimate Utility Allowances for Tax Credit Properties Proposed

On June 19, the Internal Revenue Service (IRS) proposed two new options for estimating tenant utility costs under the Low Income Housing Tax Credit (LIHTC) program.

The LIHTC program requires project owners to target a minimum number of units ("tax credit units") to lower income households. The owner chooses a minimum set-aside of either 20% of the units for households with incomes at or below 50% of the area median income (AMI) or 40% of the units for households with incomes at or below 60% AMI. Because there is great competition for tax credits and because the value of tax credits increases the more tax credit units there are in a project, most projects have more than the minimum number of tax credit units.

Income-eligible residents of tax credit units pay rent equal to 30% of whichever AMI applies to their project (i.e., 30% of 50% AMI or 30% of 60% AMI). It is possible for projects to charge rents below these levels, for example 30% of 40% AMI. It is important to realize that the rent paid by lower income occupants in tax credit projects is not tied to 30% of their income; they could be spending far more than 30% of their income for rent.

If utilities are directly paid by the tenant, a utility allowance must be built into the gross rent. HUD determines utility allowances for tax credit units that also receive project-based assistance, and the Rural Housing Service (RHS) sets utility allowances for its project-based properties and units occupied by households receiving RHS tenant-based assistance.

For tax credit units occupied by households assisted with HUD tenant-based assistance, the Housing Choice Voucher (HCV) utility allowance must be used. For all others, the IRS offers two options: the HCV utility allowance or local utility company estimate.

The IRS has received comments from a variety of sources claiming that the current options for estimating utility allowances at non-HUD and non-RHS units are not adequate. One set of comments asserts that the current regulatory option of using PHA utility schedules is inappropriate because it is designed for Section 8 properties, which are generally much older than LIHTC properties and therefore have higher utility costs. Another set of complaints is that project owners cannot use the option of local utility company estimates because there is a lack of data, annual updates are difficult to obtain, or the utility company is unwilling to provide the data.

Therefore, the IRS is proposing two additional options for estimating utility allowances for properties not regulated by HUD or RHS. Owners may use the "HUD Utility Schedule Model" or obtain estimates from the Housing Finance Agency (HFA), if the HFA agrees.

Another proposed amendment pertains to implementing a change in the amount of rent paid to an owner as a result of a change in utility costs. Currently, the modified rent paid to the owner must start 90 days after the new utility allowance is determined. The IRS proposes an exception which would postpone changed rent to the owner until 90% of the units in a building have been occupied for 90 consecutive days or until the end of the first year a building has been eligible for tax credits, whichever is earlier.

Comments are due September 17.  In addition, a public hearing will be held in Washington, DC, on October 9.

The proposed amendment is in the Federal Register (72 FR 33703) and available at

http://a257.g.akamaitech.net/7/257/2422/01jan20071800/edocket.access.gpo.gov/2007/pdf/E7-11731.pdf.