IRS Issues Utility Allowance Final Rule
The Internal Revenue Service has issued final regulations amending the requirements for determining utility allowances under the low-income housing tax credit (LIHTC) program.
Published 7/29/08 in the Federal Register for immediate effect, the final rule modifies parts of the proposed rule issued 6/19/07, adding a new option for calculating utility allowances, mandating use of timely data, and clarifying certain requirements.
The final rule generally applies to building owners for taxable years beginning after 7/28/08.
Utility Allowance Rule
Under the LIHTC program, the gross rent charged for a housing credit unit must include the dollar amount of a utility allowance for any utility (other than telephone), the cost of which is directly paid by the tenant. The final rule expands the exception for telephone to add cable TV and Internet costs. It also indicates an allowance isn’t available if tenant payments for utilities are made “by or through” the owner.
The final rule continues the following basic steps for determining how to establish the utility allowance for rent-restricted units in a low-income building:
- RHS-Assisted Buildings. The USDA Rural Housing Service (RHS) utility allowance must be used for all rent-restricted units in a building that receives assistance from RHS. This applies whether or not the building or its tenants also receive other state or federal assistance.
- Buildings with RHS-Assisted Tenants. The RHS utility allowance must also be used for all rent-restricted units in a building if any tenant receives rental assistance payments from RHS. This includes any units occupied by tenants receiving rental assistance from the U.S. Department of Housing and Urban Development (HUD).
- HUD-Regulated Buildings. The HUD utility allowance must be used for all rent-restricted units in a building if the building’s rents and utility allowances are reviewed annually by HUD, and if neither the building nor any tenant receives RHS housing assistance.
- Other Buildings. If none of the above applies, the applicable local public housing authority (PHA) utility allowance schedule for the HUD Section 8 Existing Housing Program generally must be used for all rent-restricted units in the building. Use of the PHA allowance is mandatory for units occupied by tenants received HUD rental assistance (HUD Housing Choice Vouchers). However, other than for these units, the final rule provides four optional methods - three of them new - that may be used to establish utility allowances for rent-restricted units in such buildings, as an alternative to the PHA utility allowance schedule.
The first option, continued from before, is a utility company estimate. Under this, any interested party (e.g., building owner, tenant, housing credit agency) may obtain from the applicable local utility company a written estimate of the cost of the particular utility service for a unit of similar size and construction for the geographic area in which the building is located. If obtained, this estimate must be used as the utility allowance for all rent-restricted units of similar size and construction in the building.
The final rule clarifies that if the utility service is deregulated, the estimate may be obtained from just one of the multiple utility companies offering the same utility service to the building.
Under the second option, an owner may obtain a utility cost estimate for each unit in the building from the state or local housing credit agency (HCA) with jurisdiction over the building. This “agency estimate” may be obtained anytime during the building’s extended use period, and must provide in writing the agency’s estimate of the per-unit cost of utilities for units of similar size and construction in the same geographic area as the building. In computing the estimate, the agency must consider various factors, including local utility rates, property type, climate and degree-day variables by region in the state, taxes and fees on utility charges, building materials, and mechanical systems. An agency may use actual utility consumption data and utility rates for the building in computing the estimates. In addition, an agency can have the estimate prepared by an agent or private contractor that is a “qualified professional” and not related to the owner.
Under the third option, an owner can calculate the utility estimate using HUD’s Utility Schedule Model (at http://www.huduser.org/ datasets/lihtc.html). This HUD model provides energy consumption data by structure for heating, air conditioning, cooking, water heating, etc., and incorporates building location and climate.
Under the fourth option, added by the final rule, an owner may retain a licensed professional engineer or a qualified professional unrelated to the owner and approved by the HCA with jurisdiction over the building, to calculate utility estimates using an energy and water and sewage consumption and analysis model (“energy consumption model”). At a minimum, this model must take into account unit size and the building’s orientation, location characteristics, design and materials, mechanical systems, and appliances.
The final rule establishes timeliness standards for actual building consumption data and utility rates used to compute estimates under the agency estimate and energy consumption model options, and for utility rates used to compute estimates under the HUD Utility Schedule Model option. A special rule is provided under the agency estimate and energy consumption model options for newly constructed or renovated buildings with less than 12 months of consumption data.
The final rule requires owners to make copies available to building tenants of proposed new utility allowances, 90 days before the date the new utility allowance amount will be used to compute gross rents, for utility cost estimates developed under all four alternative methods. In addition, owners at such time also must provide a copy of the proposed new estimate to the HCA with jurisdiction over the building, under all the options other than the agency estimate method. Owners are required to pay for costs associated with obtaining estimates and providing copies under all four optional methods.
Annual Review, Adjustment
The final rule requires building owners, at least once each calendar year, to review the current utility allowances used for their building and update them if necessary, for utility allowances developed under the regular or optional methods. Reviews must consider any changes to the building, such as any energy conservation measures affecting energy consumption or changes in utility rates. Owners must retain as records any utility consumption estimates and supporting data.
If the utility allowance amount changes at any time during the building’s extended use period, the new utility allowance must be applied in computing gross rents due 90 days after the change. However, in an accommodation to new buildings, the final rule provides that reviews, updates, or initial implementation of utility allowances aren’t required until the earlier of: (1) the date the building has been 90% occupied for 90 consecutive days; or (2) the end of the first year of the tax credit period.
In addition, the final rule:
- Doesn’t bar an owner from using different options for computing utility allowances for different utilities, or from changing the option used to calculate the utility allowance.
- Permits owners, if they wish, to review and update utility allowances more frequently than once a year.
- Clarifies that the HCA must report to the IRS as noncompliance if the owner has understated the utility allowance for the building under the particular option chosen, and some or all of the building’s units are no longer rent-restricted as a result.
The final utility allowance rule has drawn praise generally, with comments that it should enable owners to use more accurate utility allowances for energy-efficient buildings eligible to use the alternative options.
LIHTC compliance professional A. J. Johnson, of A. J. Johnson Consulting Services, Inc., Williamsburg, VA, while hailing the final rule as beneficial, noted it also effectively ends the ability of owners to use a utility allowance if they employ a utility sub-metering or a ratio utility billing system (RUBS) in their building. He explained this is because of the new language in the final rule that disqualifies for a utility allowance utility costs that are paid for by tenants but “by or through” the owner. With sub-metering and RUBS systems, tenants are billed monthly for utility costs, with the amount based on actual usage or a formula, and don’t make payments to the utility company.
Johnson said owners can continuing using such systems but won’t be able to use a utility allowance and instead will have to carefully track and keep records of the amount they bill each tenant each month, and make sure that the sum of this charge and the rent payment by each LIHTC tenant each month doesn’t exceed the maximum permitted tax credit gross rent amount.
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