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March 16, 2016: New IRS Utility Allowance Rule Impacts Sub-Metering and Use of Energy Consumption Model
The IRS has released the final sub-metering rule for utility allowances in Low Income Housing Tax Credit properties. Sub-metering and utility allowances for sub-metered utility was initially approved under Notice 2009-44. IRS issued a proposed rule to codify actual-consumption sub-metering into the Code of Federal Regulations in 2012. This is the final rule as a result of that rulemaking process.
The IRS has released the final sub-metering rule for utility allowances in Low Income Housing Tax Credit properties. Sub-metering and utility allowances for sub-metered utility was initially approved under Notice 2009-44. IRS issued a proposed rule to codify actual-consumption sub-metering into the Code of Federal Regulations in 2012. This is the final rule as a result of that rulemaking process. A summary of the rule is provided below.
Please contact Jim Grow (firstname.lastname@example.org) or Kent Qian (email@example.com) if you have questions about the final rule. Also please let us know if you have suggestions for comments, which are due on May 2.
Note on the Impact of IRS final Rule on HUD properties
The IRS Final Rule will not affect HUD properties, nor those LIHTC properties with certain HUD- or RD-assisted units. Those properties, where utility allowances are subject to HUD or RD regulations, continue to follow the applicable HUD or RD rules. For example, the HUD rules are spelled out in NOTICE H-2015-04, Methodology for Completing a Multifamily Housing Utility Analysis.
Under the final rule, tenants with sub-metered utilities based on actual consumption will receive an utility allowance for the sub-metered utility the same way that tenants who receive bills directly from the local utility providers do. The owner may impose an administrative charge for sub-metering, but the owner must include in the gross rent any administrative charge that exceeds the greater of $5 or the specific dollar amount allowed by state or local law. IRS may also impose its own cap on administrative charges in future guidance.
The final rule clarifies that owners may use a ratio utility based system (RUBS) in LIHTC buildings. However, because RUBS does not use actual consumption to calculate bills, any amount paid under RUBS must be included in the gross rent (tenant rent plus utility allowance). So if the owner uses RUBS, the rent that the tenant pays to the owner is limited to gross rent minus the RUBS charges and the utility allowance for the utilities paid directly to the local utility.
Energy Consumption Model (Engineering Model)
Under the existing regulation, an allowance based on energy consumption model (engineering model) must be calculated by either a properly licensed engineer or a qualified professional approved by the state agency. The final rule clarified that if an energy consumption model is calculated by a properly licensed engineer, the engineer does not need to be approved by the state agency. However, the agency retains the authority to approve or disapprove an energy consumption modeling method or require more information before approving the method.
The IRS will also no longer be requiring the inclusion of actual consumption data when creating an energy consumption model. This requirement was often problematic – not only because many property owners don’t have access to tenant utility billing data, but also because there was no guidance on how to incorporate actual data into an energy model that does not consider actual consumption. The final rule will require only “available historical data” to be considered. This clarification will make the energy consumption model more accessible to LIHTC buildings.
The interim rule allows the owner to treat sub-metering owner-generated energy such as solar the same as sub-metering sources provided by a public utility. Rates charged by the building owner must not exceed the rates charged by the local utility company. Because this provision was not included in the original proposed rule, the Agency is soliciting comments on the interim rule.
The final regulations rejected suggestions that owners should be able to use UA schedules of neighboring PHAs where the project lies outside of a PHA's jurisdiction, and that owners should only have to check for updates to the PHA's schedule once annually. The final rule rejected both of these changes, but solicited comments on how the rules should address locations without PHAs.
Applicability of new rules
Most of the new revisions are applicable to taxable years on or after March 3, 2016, but the rule also contains unusual language permitting owners to apply these provisions to earlier taxable years.