Each Compliance Stoplight Test presents a real-world scenario. What color is the compliance stoplight for situation: Green Light (tax credits are safe), Yellow Light (proceed with caution), or Red Light (tax credit loss is imminent)?

Scenario

An LIHTC property does not have utility allowances regulated by HUD, and no resident or building is assisted by Rural Development. The property uses HUSM-based UAs. A new utility allowance analysis shows that allowances have decreased significantly. After calculating the new allowance, the property follows state law regarding rent increases and provides 30 days’ notice to residents before adjusting rents based on the new allowance.

What color is the compliance stoplight?

🟢 Green Light – Tax credits are safe
🟡 Yellow Light – Proceed with Caution
🔴 Red Light – Tax credit loss imminent

Food for thought: Does following local law provide a safe harbor in LIHTC rules?

Stoplight Reveal

 🔴 Red Light – Tax credit loss imminent

When a utility allowance decreases, the allowable tenant rent increases—but the lower allowance cannot be used immediately. During a required 90-day period, the prior allowance must continue to be used to determine the maximum LIHTC rent.

More Details

Utility allowances are part of the gross rent calculation under Section 42. When an allowance decreases, the regulations require a 90-day period before the lower allowance—and the resulting higher maximum tenant rent—can be used. This transition period allows the state LIHTC agency and residents time to review and comment on the proposed change.

In this scenario, the property calculated a lower utility allowance and increased rents after giving the notice required under state law. Because a lower allowance increases the amount of tenant rent that may be charged, applying the new allowance before the LIHTC transition period expired caused rents to exceed the LIHTC maximum during that period.

State landlord-tenant laws often require advance notice before rent increases take effect, and owners comply with those notice rules. However, state law timing does not override LIHTC rent limits. If rents are increased based on a lower utility allowance before the 90-day transition period expires, the property may charge gross rent above the LIHTC limit, resulting in noncompliance.

Compliance Insight

When a utility allowance decreases, the resulting rent increase cannot be implemented immediately. Even if state law allows rents to rise sooner, LIHTC rules may delay when the higher rent becomes permissible.

References

• 26 CFR § 1.42-10(c)(1)

• 8823 Guide (2024) V, A.3

Did the result surprise you? Watch for next week’s Compliance Stoplight Test.