IRS Issues Regulations on Submetering of LIHTC Utility Allowance

On March 3, the Internal Revenue Service (IRS) published final and temporary regulations amending utility allowance rules in the Low Income Housing Tax Credit (LIHTC) program. The final regulations clarify the circumstances in which utility costs paid by a tenant based on actual consumption in a submetered rent-restricted unit are treated as paid by the tenant directly to the utility company and thus do not count towards the maximum rent an owner may charge. The temporary regulations extend the principles of the submetering rule to situations in which a building owner sells tenants energy produced from a renewable source not provided by a utility company. The text of the temporary regulations also serves as the text of proposed regulations.

HUD published proposed submetering rules on August 7, 2012. The 2016 final rule adopts the 2012 proposed rule with a few modifications. The proposed rule explained that a submetering system typically includes a master meter owned or controlled by a utility company, with overall utility consumption billed to a building owner. A building owner in turn uses residential unit-based meters to measure utility consumption and bill each unit based on actual consumption. Consequently, tenants are in effect paying for their actual utility consumption to the utility company.

If submetering is used with energy directly acquired from a renewable source without the intervention of a utility company, a building owner’s energy charges to tenants must not exceed rates the utility company would charge tenants.

One of the changes in the final rule is the elimination of the proposed rule’s provision requiring an owner to determine the actual monthly cost of any fee an owner charges a tenant for administering an actual-consumption submetering arrangement. If an owner charges such an administrative fee, the fee is not considered gross rent unless the aggregate amount of monthly fees for all of a unit’s utilities under submetering exceeds the greater of $5 per month, an amount designated in an Internal Revenue Bulletin (IRB), or the lesser of either a dollar amount specifically prescribed under a state or local law or a maximum amount designated by an IRB publication.

In response to comments about the existing regulations, the final rule removes the provision requiring an energy consumption model to use a building’s consumption data for a particular twelve-month period. Instead, the final rule requires consideration of available historic consumption data. Other factors to be considered include unit size, building orientation, design and materials, mechanical systems, appliances, and characteristics of a building’s location. The final rule also specifically authorizes a housing finance agency to approve or disapprove use of an energy consumption model or to require information about the model before permitting its use.

The final and temporary rule is at:

The proposed rule is at: