Allowable Fees and Charges for All Residents at LIHTC Properties

Operating a low-income housing tax credit (LIHTC) property comes with a laundry list of fees and charges. Although some of these can be absorbed by the property owners, there are fees, charges and services that residents pay

To be in compliance for both the federal and state housing agency guidelines, property managers should consider if the intended fee or charge is already included in eligible basis. Generally, a property’s common areas and amenities are included in eligible basis. If unsure, the owner of the property and state agency would be able to assist with identifying this information.

Internal Revenue Code (IRC) 42(d)(4)(B) reads "The adjusted basis of any building shall be determined by taking into account the adjusted basis of property (of a character subject to the allowance for depreciation) used in common areas or provided as comparable amenities to all residential rental units in such building."

The IRS Audit Technique, Chapter 8, page 8-13, continues: “Common areas are facilities expected to be used by the tenants and can be reasonably associated with residential rental property.”

Areas that are reasonably associated with residential rental property include:

• common areas include the leasing office, hallways, elevators, lobby areas and laundry rooms;
• amenities include indoor or outdoor recreational facilities such as a basketball court or swimming pool;
• fixed assets include parking garages and parking areas.

The use of areas that are reasonably associated with residential rental property are not reserved exclusively for market-rate residents or exclusively for low-income residents.

As stated in Chapter 8, page 8-12 of the IRS Audit Technique Guide, the facility must meet two requirements:

• The common area must be made available on a comparable basis to the tenants of all residential rental units (not only low-income tenants) and,
• No separate fee is required for the use of these facilities.”

This also applies to visitors. Certain common areas and amenities may provide a desirable or useful feature to a facility of a building or location. For example, a scenic backdrop of the city or unique amenities may attract both residents and visitors who wish to use these areas or facilities. If included in the eligible basis, there is no allowable fees or charges for the use.

So far, we’ve discussed that fees and charges are not allowed for areas that are included in eligible basis. Now, we will briefly discuss allowable fees or charges if not included in the eligible basis.

Per the IRS Audit Technique Guide, the property owner may decide to exclude an allowable cost from eligible basis. In which case, IRC §42 does not control the property manager’s use of the common area.

Therefore, if a common area or amenity is not included in the eligible basis, management may consider allowable fees or charges for the use of the common area and/or amenity.

Next, we will determine specific allowable fees and charges that are considered nonoptional and optional. Keep in mind, all fees and charges must be reasonably priced and comply with state and local laws.

Nonoptional charges

Treasury Reg 1.42-11 Provision for Services (b)(3) states “The cost of services that are required as a condition of occupancy must be included in gross rent even if federal or state law requires that the services be offered to tenants by building owners.”

This nonoptional fee must be included in the gross rent for the unit and supported on the income certification and lease agreement/addendum. Also, this nonoptional fee must keep the unit within the applicable maximum rent limit. Overcharging gross rent is not allowed in the LIHTC program. Nonoptional charges are property specific and not always required. It’s advised to refer to your local laws and State Agency for what’s applicable for your area.

Optional charges

Treasury Reg 1.42-11 Provision for Services (b)(1) states “a service is optional if payment for the service is not required as a condition of occupancy.”

Truly optional charges should not be included in the gross rent or supported on the income certification. However, depending on language of the lease agreement/addendum, the optional charge may be included.

Below is a list of various optional charges that can be passed to the resident:

• application and background check (only the actual out-of-pocket expenses),
• coin-operated laundry machines or other vending machines,
• excessive cleaning or repair of unit beyond normal wear and tear (unit turnover),
• late rent fees,
• lease breakage fees,
• pet deposits and pet rent,
• security deposits,
• service fees (such as emergency lock-out services or lock change),
• unit transfer fees,
• use of areas not included in the eligible basis (i.e., covered parking, garage fees, storage unit or shed fee).

Below is a list of various optional charges that should not be passed to the resident:

• assistance animal deposits,
• assistance completing paperwork necessary for the LIHTC program,
• fees to pay for third-party verification,
• month-to-month tenancy fees,
• required renter’s insurance,
• unit turn around for normal wear and tear,
• use of areas included in the eligible basis (i.e., pool, basketball court, parking).

The IRS Audit Technique Guide also identifies allowable fees and charges for services that may be offered. The provision of services by the property owner for tenants is not a violation of the General Public Use Requirements of IRC §42, which states that the rental units must be for the use by the general public and all the units in the property must be used on a non-transient basis.  This is true when it can be anticipated that a large percentage of tenants will contract with the property owner for the services.

• The services may or may not be intended to address a special need,
• The property owner can charge a fee in addition to rent for providing the services, however the use of the services must not be a condition of occupancy, and
• The services cannot include nursing, medical, or psychiatric care.

As example provided on page 12-37 of the IRS Audit Technique Guide states the following:

A property owner may provide housing units on a non-transient basis for individuals of retirement age or older. All the units are available to members of the general public. Each unit has living, cooking, sleeping, bathing, and sanitation facilities. The property owner also makes other services available to the tenants so that they can live independently, such as laundry, housekeeping, meals in a common dining area, planned social activities, transportation, and a 24-hour monitored emergency call service. These services do not include continual or frequent nursing, medical or psychiatric services.  These services are optional, and the fees charged for providing the services are separately stated from the rent.  The provision of these services does not violate the general public use requirement.

In summary, fees and charges are allowable for LIHTC properties, but certain conditions must be met. The fees and charges must not be included in eligible basis. The eligible basis includes common areas that are reasonably associated with the residential rental property.  The fees and charges may be nonoptional charges that are required as a condition of occupancy and included in the gross rent. The fees and charges that are truly optional are not required as a condition of occupancy and for the use of the facilities or services. Lastly, all fees and charges must be reasonably priced.