Follow Five Tips When Calculating Rents for Low-Income Units

When charging restricted rents for low-income units at your tax credit site, it’s important to calculate the amount of each household’s rent properly. Managers too often make mistakes in their calculations and this can lead to big problems.

Charging more than the maximum rent for a low-income unit could put the owner’s tax credits in jeopardy. And although charging less than the maximum won’t lead to noncompliance, it will cost the owner rent revenue and leave you with some explaining to do.

We’ve put together five tips to help you properly calculate the rents for low-income units.

Tip #1: Base Rent on Income Limits—Not on Household Income

Tenants often get confused and feel the rent is not reasonable because the assumption is that rent should equal 30 percent of their income. But the LIHTC max rent is based on 30 percent of an income limit.

Unlike some other housing programs, the tax credit program doesn’t base the amount of rent a low-income household must pay on how much that household earns. Instead, you start calculating the rents you can charge for your low-income units by taking 30 percent of the appropriate income limit. That income limit depends on the percentage of area median gross income (AMGI) the owner agreed on with your state housing agency, the particular household size, and the location of your site.

For example, suppose you manage a tax credit site that has a minimum set-aside of 20-50, which means that households must earn no more than 50 percent of AMGI to occupy your low-income units. And suppose you want to calculate the rent for a two-bedroom low-income unit at the site with an imputed household size of three people. The income limit for a three-person household in your county at the 50 percent level is $25,150. So you can charge a household up to $628.75 a month ($25,150 ÷ 12 months x 30 percent) to occupy a two-bedroom low-income unit at your site. This is true whether the household’s annual income is $15,000 or $25,000.

Tip #2: Multiply Number of Bedrooms by 1.5 to Get ‘Imputed’ Household Size

Income limits aren’t expressed in terms of the number of bedrooms in a unit. Instead, they’re organized by household size. If the building was allocated credits before 1990, you must base each unit’s rent on the household’s actual size or on the number of bedrooms in the unit, depending on whether the owner made its “cross-over election” and when the household moved in. However, if your building was allocated credits in 1990 or later, you must use the number of bedrooms in the unit to calculate rent for all units in the building.

In 1990, the formula adopted for rent was based on an “imputed” number or a fictitious 1.5 person per bedroom with an efficiency/studio unit using the one-person household income limit. To calculate that, multiply the actual bedrooms by 1.5. For example, a four-bedroom unit would have an imputed household size of six.

If the household size falls between two whole numbers, calculate the rent based on the average of the two whole-number household sizes. For instance, the imputed household size for a three-bedroom unit is 4.5. To calculate the rent for your three-bedroom units, take the average of the four-person household income limit and the five-person household income limit. Use this number as the income limit in your rent calculations for three-bedroom units.

Tip #3: Round Down When Calculating Maximum Allowable Rent

Whenever you get a decimal point in rent calculation, always round down to the nearest dollar. This means that if you calculate a household’s rent to be $499.99 and you want to charge a whole-dollar amount, you must round down to $499—not up to $500. The rent you calculate is the maximum amount you can charge households, including the utility allowance, so rounding up would mean you were charging households more than the tax credit law allows.

Tip #4: Subtract Utility Allowance from Household’s Rent

Don’t turn off your calculator until you’ve subtracted the household’s utility allowance from the rent. Do not take this lightly since utilities are part of rent, and overcharging rent can take the unit out of compliance. If you forget to perform this last step, you’ll overcharge your households and put the owner’s tax credits in jeopardy.

The amount you calculated before subtracting the utility allowance is known as the “gross rent.” The gross rent calculation includes any utilities that must be paid by the tenant. Subtracting the utility allowance from the gross rent gives you the “net rent” (also known as the “tenant rent”), which is the maximum amount you can actually charge a household each month.

Utilities normally are items such as electricity, heat, water, sewer, oil, or gas. However, if a supportive service or any other charge is mandatory it becomes part of the gross rent calculation. This may include parking fees, a telephone if one is required to open the door for visitors, meal service, or other required costs.

A separate estimate is computed for each utility and different methods can be used to compute the individual utility allowances. The utility allowance is computed on a building-by-building basis. The maximum rent that may be paid by the tenant must be reduced by utility allowance(s) obtained in the following manner.

RHS-assisted building. If a building receives assistance from the Rural Housing Service then the utility allowance is determined using the method prescribed by the Rural Housing Service (RHS) for the building, regardless of whether the building or its tenants also receive other state or federal assistance.

RHS tenant assistance and HUD assistance. If any tenant in a building receives RHS rental assistance payments (RHS tenant assistance), the applicable utility allowance for all rent-restricted units is the applicable RHS utility allowance, including any units occupied by tenants receiving rental assistance payments from the Department of Housing and Urban Development (HUD).

HUD-regulated building. If neither a building nor any tenant in the building receives RHS housing assistance, and the building’s rents and utility allowances are reviewed by HUD on an annual basis (HUD-regulated building), then the applicable HUD utility allowance is the utility allowance for all rent-restricted units in the building.

Conventional building with Section 8 vouchers. If a building is neither an RHS-assisted nor HUD-regulated, and no tenant receives RHS tenant assistance, the applicable utility allowance for any rent-restricted unit occupied by tenants receiving HUD rental assistance payments (HUD tenant assistance) is the applicable public housing authority (PHA) utility allowance established for the Section 8 Existing Housing Program.

Conventional building without Section 8. If neither the building nor tenants are subject to the rules described in 1-4 above, then the local PHA allowance is used. However, if an estimate is obtained for any unit in the building, that estimate is used as the utility allowance for all similar units in the building. Estimates may be obtained from a local utility company or a state or local housing credit agency, or calculated using HUD’s Utility Schedule Model or an energy consumption model.

Tip #5: Lower Rent Within 90 Days of Utility Allowance Increase

If the applicable utility allowance for a unit changes, the new utility allowance must be used to compute gross rents of LIHTC units due 90 days after the change (90-day period). However, an owner is not required to implement new utility allowances until the building has achieved 90 percent occupancy for a period of 90 days or by the end of the first year of the credit period, whichever is earlier.

Very importantly, the utility allowance should be reviewed at least annually. Have clear proof of your utility allowance amounts, where they were obtained, and annual updates in your file. An update doesn’t necessarily mean a change, but you must document your annual review. If applicable, the owner must also demonstrate that households and the state housing agency have been notified of any changes in a timely manner, and the new utility allowance was used to compute gross rents for LIHTC units due after the end of the 90-day period.

In addition, the IRS requires that the owner retain any consumption estimates and supporting data as part of the permanent records [Treas. Reg. §1.6001-1(a)]. Under this requirement, taxpayers are required to keep such permanent books of account or records as are sufficient to establish the utility allowances used.