LIHTC utility allowances: every method in 26 CFR 1.42-10

The LIHTC rent limit is a cap on gross rent: what the tenant pays the owner plus a utility allowance for any utilities the tenant pays directly (IRC 42(g)(2)(B)(ii)). Every dollar of allowance comes out of the owner’s collectible rent. On a 100-unit property, a $25 a month difference in the allowance is $30,000 a year of income, which at a 1.15x coverage ratio is real debt capacity.

Which method applies

26 CFR 1.42-10(b) sets a hierarchy. Work down it in order:

#	Building or tenant	Required allowance
1	Building receives Rural Housing Service assistance (for example, Section 515)	The RHS allowance, for all rent-restricted units, whatever other assistance exists
2	Any tenant in the building receives RHS rental assistance	The RHS allowance for all rent-restricted units, including HUD-assisted tenants
3	Rents and allowances regulated by HUD (no RHS assistance)	The HUD allowance for all rent-restricted units
4	Other buildings: units of tenants with HUD rental assistance, such as vouchers	The PHA allowance for the Section 8 Existing Housing program
5	Other buildings: all other units	The PHA allowance, unless the owner uses one of the four estimates below

For row 5, the owner may replace the PHA allowance with:

Method	Who does it	Conditions
Local utility company estimate	Any interested party, including a tenant, the owner or the agency	Written estimate from a utility that serves the building, for units of similar size and construction; deregulated services need only one provider’s estimate, including all component charges
Agency estimate	The state housing credit agency, if it agrees	Must consider local rates, property type, climate, taxes and fees, building materials and mechanical systems; may use the building’s actual consumption data for a 12-month period ending no earlier than 60 days before the 90-day period
HUD Utility Schedule Model	The owner	Rates no older than those in place 60 days before the 90-day period (HUD model)
Energy consumption model	The owner, using a licensed engineer or qualified professional	Must account for unit size, orientation, design, materials, mechanical systems, appliances and location; the professional can’t be related to the owner; agency may approve or disapprove the model

Once any of these four is obtained for a unit, it becomes the allowance for all rent-restricted units of similar size and construction in the building. The estimate methods can’t override rows 1 to 4.

The 90-day rule

If the applicable allowance changes at any time during the extended use period, the new allowance must be used for rents due 90 days after the change (1.42-10(c)(1)). For the utility company estimate, HUD Utility Schedule Model or energy consumption model, the owner must, at the beginning of the 90-day period:

1. submit copies of the estimates to the agency, and
2. make the estimates available to all tenants.

Only then can the new allowance be used to compute gross rents. The agency may ask for more information during the 90 days. The owner pays for obtaining the estimates and providing them.

The rule cuts both ways. If a new estimate shows higher costs, rents must come down by the end of the 90-day period. If it shows lower costs, rents can go up only after the 90 days and only within the rent limit and the lease.

Annual review

The owner must review the basis for its allowances at least once each calendar year and update them under the 90-day rule, taking into account building changes such as energy conservation measures and changes in utility rates (1.42-10(c)(2)). Keep the estimates and supporting data as tax records (1.42-10(d)).

There’s a lease-up grace period: the owner doesn’t have to review or implement new allowances until the building has been 90% occupied for 90 consecutive days, or the end of the first year of the credit period, whichever comes first.

Worked example: what an allowance does to rent

Assumptions only: a 2-bedroom unit at 60% AMI with a maximum gross rent of $1,500. Tenants pay electric (heat, cooking, lights) and water. The PHA schedule produces $165 a month; an energy consumption model for the building’s efficient design produces $110.

	PHA allowance	Energy model
Max gross rent	$1,500	$1,500
Utility allowance	$165	$110
Max tenant-paid rent	$1,335	$1,390
Annual rent per unit	$16,020	$16,680
80 such units, annual	$1,281,600	$1,334,400
Difference		$52,800 a year

At 1.15x coverage, $52,800 of NOI supports about $45,900 a year more debt service, which at a 6.60% loan constant (6.00%, 40-year amortization, an assumption) is roughly $695,000 of loan. That is why new, efficient buildings often pay for an engineer’s model. Find the maximum gross rent for your county on the income limits pages and the net rent in the rent calculator.

Submetering and renewable energy

A utility is treated as paid directly by the tenant, so an allowance applies, if it’s billed under an actual-consumption submetering arrangement (1.42-10(e)). The utility must be bought by the owner from or through a local utility company, or produced on-site from a qualifying renewable source (energy property under section 48, certain section 45(d) facilities, or sources named in IRS guidance). Check the regulation’s billing and fee limits before setting up a submetering program, since charges that don’t meet them can count as rent.

Interactions with other programs

• HOME units use the allowance the participating jurisdiction sets, which may differ (24 CFR 92.252(b)).
• HUD-regulated buildings have one allowance, the HUD one, for LIHTC purposes too.
• Voucher holders in non-HUD-regulated buildings use the PHA allowance for their units regardless of what the owner uses elsewhere.

Agencies report utility allowance errors as noncompliance on Form 8823, line 11m (“Owner did not properly calculate utility allowance”) (Form 8823). Overcharging even a few dollars a month makes a unit’s gross rent exceed the limit, which can take the unit out of the applicable fraction until corrected.