Under current IRS rules tax credit rents there is a utility allowance for resident-paid utilities. According to the property owners' lobbying efforts, the current methods used to calculate the resident's utility cost tend to overestimate these costs.
The result, supporters of the new regs say, is reduced gross rents for the owner and, potentially, a LIHTC project that is no longer financially feasible.
"The current methodology is not based on data that is comparable to the properties in which the tenants live," David Cardwell, vice president of capital markets and technology for the National Multi Housing Council, tells GlobeSt.com. The NMHC and the National Apartment Association have been lobbying the IRS to change the regulations since 2004.
"As fixed costs have increased and the rents have not kept up with those costs, the owners have found themselves in a position where they are unable to maintain the properties and meet the long-term housing needs," he says. "This legislation tries to provide a more accurate methodology to calculate those adjustments."
The new proposal, if enacted, would expand the allowable data sources for estimating utility costs, such as data from a utility company or data from a new HUD utility modeling program. It would allow state LIHTC allocating agencies, such as state housing finance agencies, to provide utility estimates.
It would also allow for a grace period before rents can be adjusted during the initial stabilization period: rents would remain unadjusted for one year, or until the property has achieved 90% occupancy for 90 days, whichever comes first. This would allow properties to stabilize before rents are lowered to account for increased utility charges, Cardwell explains. Under the current regs, properties can find it difficult to stabilize, he says.
Currently, the IRS is soliciting comments on the proposal, with a deadline of Sept. 17. It will hold a public hearing on the issue on Oct. 9.
It is unclear how much of the proposed regs will survive in their current form. One of the concerns held by both the IRS and low income housing advocacy groups is that the regulations would result in unaffordable rent increases for tenants.
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Erika Morphy
Erika Morphy has been writing about commercial real estate at GlobeSt.com for more than ten years, covering the capital markets, the Mid-Atlantic region and national topics. She's a nerd so favorite examples of the former include accounting standards, Basel III and what Congress is brewing.
