Add Nine Key Protections to Your Employee Lease Addendum
The tax credit law doesn’t bar you from renting to employees. In fact, many sites have on-site employees—from property managers to security officers to maintenance workers—who reside at the LIHTC site and are essential to the success of the property. Having someone employed by the site living there makes it easy for residents to get help with an issue and continue to enjoy where they live.
Typically, an owner has three options for the type of unit you can rent to employees—a market-rate unit, a low-income unit, or an exempt unit that’s considered part of your common area. The main advantage of renting a market-rate unit to an employee is that there aren’t any compliance issues involved. Market-rate units aren’t included in your buildings’ applicable fractions. So you needn’t worry about checking whether an employee is eligible to occupy a market-rate unit or certifying and verifying the employee’s income.
However, if you let an employee occupy a low-income unit at your site, you must first make sure that the employee’s income makes her eligible to occupy such a unit. In this scenario, an owner can claim credits for the unit and can charge the employee restricted rent to occupy it. But if you need to fire an employee down the road, you can’t automatically evict the employee from her low-income unit if she hasn’t violated her lease.
The last option, which is most commonly used, is when owners set aside one or more units for full-time employees as part of their site’s common area (along with areas such as community rooms, swimming pools, and laundry facilities). To take advantage of this option, the site owner must have requested that an employee unit or units be set aside as part of the site’s common area at the time of the original allocation agreement with the state agency. Here, because this type of employee unit is part of the common area, it’s part of your site’s eligible basis and the owner can claim credits for it. And because this type of employee unit isn’t part of your buildings’ applicable fractions, you can let employees occupy this type of unit regardless of their income and their membership in a special population group. As a result, you also needn’t worry about keeping the unit in compliance with the tax credit program’s requirements, as you would have to with a low-income unit.
If you rent an apartment to your employees, whether it’s a market-rate unit or an exempt unit set aside for employees, you probably use a separate lease addressing the specific issues that might arise from this living situation. We’ll provide a list of nine protections to add to your employee lease addendums. And we’ll give you model language for each of these protections that you can adapt and use. Make sure you show the model language to your attorney before using it.
Exempt Unit Restrictions
Before you can use exempt units as employee units, it’s important to consider the restrictions the IRS imposes. The Section 42 Audit Technique Guide identifies three key elements required in order to utilize a unit as an employee or security unit:
Necessary services. The unit can’t be occupied by an employee who doesn’t provide services required by the site. The live-in employee should perform whatever duties are reasonably required to make operations run smoothly at the site. Be sure to consider what’s warranted by the type, size, and/or location of the site, as well as what’s needed in terms of the resident population. As a general guide, a manager who performs management functions such as leasing units, preparing certification paperwork, cleaning, general maintenance, preparing turnovers, collecting rent, etc., and is available to the site on an on-call basis to respond to emergencies will most likely be considered a full-time manager.
Specificity requirement. The IRS requires that the services provided by the live-in employee be specific for the site in which the employee resides. For example, suppose a management company operates 10 sites within a 50-mile radius. To provide proper supervision for the managers living at the 10 projects, a supervisor makes quarterly visits to each site. The supervisor travels from out of town, stays at the site nearest the airport in a unit held vacant for the supervisor, and then travels each day by car to a different project. Although the supervisor may be a full-time employee for the property management company, the supervisor is not working “full time” on the premises where the employee has temporary lodgings.
Full-time requirement. The employee or security officer must work full time at the site. For example, suppose a property management company has contracts with three different owners for sites in close proximity and directs the property manager occupying a unit at an owner’s site to manage all three projects. The property manager generally visits each site daily. The unit isn’t a “facility reasonably required for the project” because the employee isn’t working full time on the premises where the employee is occupying a unit.
Also, be sure to check with your state housing agency about any of its own restrictions or any arrangements that may have been made regarding setting aside an employee unit as part of the common area when the owner obtained its tax credit allocation. For instance, your state housing agency may consider an employee to be full time if she works 40 hours a week, or it may say an employee still qualifies as full time if she works only 35 hours.
In addition, according to the Section 42 Audit Technique Guide, units can be “switched,” meaning that the unit initially designated as an employee unit can be switched to another unit. For example, to accommodate a manager’s family size, a vacant unit, last occupied by a nonqualified tenant, is “switched” with a unit currently occupied by a resident manager to accommodate the resident manager’s family size. The manager’s new unit is treated as a facility required for the project and the unit the manager lived in is treated as a vacant residential rental unit not qualifying for the credit.
ADD NINE PROTECTIONS TO EMPLOYEE LEASE ADDENDUM
Protection #1: Give Employees Month-to-Month Leases
Consider giving your on-site employees month-to month leases. That way, the lease will continue for each month that you want the employee to continue living at your site. But, because the notice period for terminating a month-to-month lease is shorter than the notice period for terminating a set-term lease, such as a one-year lease, you’ll be able to end the month-to-month lease faster than you’d be able to end a set-term lease, if need be.
Model Language
Subject to the provisions herein, this Lease shall commence on [insert date lease starts] and continue thereafter on a month-to-month basis.
Protection #2: Get Right to Move Employee to Different Apartment
There may be times when you’ll need or want to transfer an on-site employee to another apartment. For example, if an employee has been living on-site in a three-bedroom apartment with her children, who have since grown up and moved away, you may want to put her three-bedroom apartment back on the market, especially if such apartments are in demand. So get the right to move the employee to a different apartment with 10 days’ written notice. You probably don’t want to exercise this right too often, though, as frequently uprooting employees will create dissatisfaction.
Model Language
ABC Site has the right to change the Assigned Apartment at any time, and the Employee expressly agrees to move to another apartment within 10 days of receiving written notice, if requested to do so by ABC Site.
Protection #3: Get Right to Ask Employee to Vacate Apartment Even If Not Terminated
There may be times when you want an on-site employee to vacate her apartment, but still work for you. For example, you may want an employee who was recently promoted to manager to vacate her apartment if your managers typically don’t live on-site and the apartments are typically used for lower level employees. So get the right to ask an on-site employee to vacate her apartment upon 10 days’ written notice, even if she hasn’t been terminated.
Model Language
ABC Site has the right at any time to ask Employee to vacate the Assigned Apartment within 10 days of receiving written notice without terminating the employment relationship between Employee and ABC Site.
Protection #4: Require Employee to Pay Eviction Costs If He Fails to Vacate
If an employee who was asked to vacate fails to do so, you’ll have to sue to evict him, which could be quite costly for you. So require the employee to pay all costs—including attorney’s fees—associated with the enforcement of your lease with regard to vacating the apartment.
Model Language
Employee agrees to pay all costs, expenses, and attorney’s fees that shall arise from ABC Site’s enforcement of the provisions of this Lease with regard to vacating the Assigned Apartment.
Protection #5: Require Employee to Abide by Site Rules and Regulations
Give the employee and all other occupants of his apartment a copy of your site’s rules and regulations, and require them to acknowledge that they got that copy. And require them to agree to abide by your site’s rules and regulations. Doing so will make it easier to evict or terminate the employee for a violation of your site’s rules and regulations.
Model Language
Employee acknowledges that he and all occupants of the Assigned Apartment have been furnished with a copy of all Rules and Regulations governing residency and the use of all facilities at ABC Site. Employee expressly agrees that he and all occupants of the Assigned Apartment will abide by said Rules and Regulations.
Protection #6: Reserve Right to Adjust Rent
If your on-site employee will be paying rent, make sure you reserve the right to adjust the rent to reflect market values or changes in the cost of living, as long as you comply with applicable landlord/tenant law notice requirements. There’s no reason you should have to keep the employee’s rent at the same level for the entire lease term.
Model Language
Employee agrees and understands that ABC Site reserves the right to establish and adjust the rent for the Assigned Apartment on a periodic basis.
Protection #7: Spell Out Which Utilities Employee Must Pay For
Spell out which utilities the resident must pay for and which you’ll pay for, if any. Otherwise, an employee may assume that the free or discounted apartment rent includes utilities. You’ll need to adapt our language to reflect your agreement with your employee.
Model Language
Employee agrees to pay all utility expenses for water, electricity, and gas or oil for the Assigned Apartment. Employee further agrees to pay any other costs, including, but not limited to, telephone and cable television service, arising from his or her occupancy of the Assigned Apartment.
Protection #8: Require Employee to Get Management’s Approval of Occupants
You don’t want an employee moving into an apartment at your site and then moving in all of his friends as roommates. The employee may then make money on the apartment or get it free by charging his roommates rent. So require the employee to get management’s approval of every apartment occupant.
Model Language
Employee agrees that the only persons authorized to occupy the Assigned Apartment are those persons specifically identified on the attached lease and in this addendum. Employee further agrees not to let any other person(s) occupy the apartment without prior written consent of ABC Site.
Protection #9: Require Employee to Abide by Site’s Pet Rules
Requiring an employee who lives on-site to abide by your site’s pet policy is important. If your site bans dogs and your employee keeps a dog, this may create ill will among residents who also want to keep a dog but are banned from doing so. And if you do allow pets at your site, require your employee to abide by all your pet rules, such as those regulating the size of the animal and the animal’s behavior. The employee shouldn’t get special privileges just because he’s an employee of the site.
Model Language
Employee shall not keep any pets in the Assigned Apartment if it is in violation of ABC Site’s rules. If ABC Site permits a resident to keep a pet, then the Employee may do so as long as he/she executes a Pet Agreement and agrees to abide by all ABC Site’s pet rules.