LIHTC Utility Allowance: Calculation and Requirements

A utility allowance is an estimated monthly cost for utilities within the Low-Income Housing Tax Credit (LIHTC) program. Its purpose is to ensure a tenant’s total housing burden, combining rent with utility costs, does not surpass the maximum gross rent permitted for their income-restricted unit. The allowance prevents a situation where a low base rent is offset by high utility expenses, pushing a resident’s total housing cost above mandated limits. The calculation of gross rent starts with the maximum rent limit and subtracts the applicable utility allowance. The process is governed by federal regulations, specifically 26 CFR § 1.42-10, which outlines the acceptable methods for establishing these allowances.

Determining Utility Responsibility and Included Costs

A utility allowance is only necessary for utility costs that a tenant is contractually obligated to pay directly to a service provider. The lease agreement is the primary document that defines this responsibility. If the property owner pays for a utility and includes its cost within the regular rent, that utility is not factored into the separate allowance calculation.

The specific utilities included in an allowance cover essential services. These include:

• Electricity
• Natural gas
• Water and sewer services
• Trash collection
• A baseline charge for heating or cooling

A distinction must be made for properties using a Ratio Utility Billing System (RUBS), where costs are allocated to tenants based on a formula rather than direct metering. The IRS does not consider RUBS a valid utility allowance. Instead, these charges are treated as non-optional fees and must be included in the base rent, which reduces the amount of rent an owner can charge.

Approved Calculation Methods

The IRS approves several methods for calculating utility allowances, and owners must follow any additional requirements from their state Housing Finance Agency (HFA).

Public Housing Authority (PHA) Schedule

One method is to adopt the utility allowance schedule published by the local Public Housing Authority (PHA). PHAs develop these schedules for their own housing programs, such as the Section 8 Housing Choice Voucher program. This method involves applying an existing, publicly available figure to the LIHTC property. However, PHA schedules are based on the average consumption of an area’s entire housing stock, which may be older or less energy-efficient than a newly constructed or rehabilitated LIHTC building, potentially leading to an inaccurate allowance.

HUD Utility Schedule Model

The U.S. Department of Housing and Urban Development (HUD) provides an online tool called the Utility Schedule Model (HUSM). This method allows for a more tailored calculation based on a building’s specific characteristics. An owner inputs information into the model, such as the building’s location, age, construction type, and the efficiency of its systems and appliances, to generate a custom allowance. Owners must retain documentation supporting all data inputs used to generate the HUSM report.

Energy Consumption and Analysis Model

A more precise method involves hiring a qualified professional to conduct an energy consumption and analysis model. This analysis is performed by a licensed engineer or a certified energy professional who is independent of the property owner. This method is used for new construction or properties that have undergone significant energy-efficiency upgrades, as it can accurately capture the savings from these improvements. The analysis must consider a wide range of factors, including unit size, building orientation, construction materials, and local climate data. State HFAs often require pre-approval of the third-party professional conducting the analysis.

Actual-Use Method

The actual-use method calculates the allowance based on historical consumption data from the property itself. To use this method, an owner must collect 12 consecutive months of utility billing data for a representative sample of units. The sample must be statistically valid, often requiring data from a minimum number of units for each bedroom size. The collected data must be from units that were continuously occupied for the 12-month period. Once the average consumption for each unit type is determined, the owner applies the current utility rates to calculate the final allowance amount.

Annual Review and Implementation Process

Property owners are required to review their utility allowances at least once every calendar year. For new buildings, the first review is not required until the building has achieved 90 percent occupancy for 90 consecutive days or by the end of the first year of the credit period, whichever comes first. This yearly review is necessary to account for changes in utility rates or other factors that could affect tenant utility costs.

State HFAs may require owners to submit their annual utility allowance calculations and supporting documentation for review and approval. Owners should confirm their specific HFA’s submission requirements and deadlines to avoid compliance issues. The cost of obtaining these estimates and providing notifications cannot be passed on to residents.

After the new allowance is finalized, owners are required to provide tenants with at least 90 days’ notice before a change in the utility allowance affects their rent calculation. The new allowance is typically put into effect for each tenant at the time of their annual income recertification. This timing ensures a smooth transition and allows for proper adjustment of the tenant’s portion of the rent to keep the gross rent within the allowable LIHTC limits. Failure to properly implement the new allowance can result in noncompliance and potential recapture of tax credits.

Documentation and Record-Keeping Requirements

Property owners must be prepared to produce detailed documentation during physical inspections or audits by their state HFA or the IRS. These records serve as evidence that the allowance was calculated and implemented in accordance with federal and state regulations.

For each year, the owner must keep a copy of the document that establishes the utility allowance. This could be the printed PHA schedule, the final report from the HUD Utility Schedule Model, or the detailed analysis from the energy professional. This document proves which method was used and what the resulting allowance amount was for each unit type.

Beyond the final report, owners must retain all the underlying data used in the calculation. For the actual-use method, this includes the anonymized utility bills or consumption data for the sampled units. Proof of HFA approval, where applicable, and copies of the 90-day notices sent to tenants are also required. Tenant ledgers should clearly show that the correct allowance was applied to rent calculations starting on the proper effective date.