Utility Allowance

Of all the many frustrating tasks that affordable housing property managers are required to do, none is worse than creating a utility analysis. It is really the worst. When I get that initial notice from my contract administrators I literally get a headache.

Let me back up a little and explain the utility allowance program.

To understand what a utility allowance is it is helpful to look at it as a separate program from the rental subsidy. In the Section 8 and related programs, HUD will help a tenant pay their monthly rent; the tenant pays 30% of the income towards rent (for now) and HUD pays the rest*. So for example if the rent in an apartment is $1000 a month and the tenants annual income is $30,000 a year, the tenant will pay $750 towards their rent (30% of $30,000 is $9,000, $9,000 divided by 12 is $750) and HUD will pay the remaining $250.

When a property has a utility allowance, which many do**, that means the HUD will pay additional money to each tenant to help cover the cost of his/her utilities. So if the utility allowance is $100 (more on how that number is set in a minute) then the tenant will in theory get a $100 from HUD each month. But instead of sending out a check to the tenant each month, the tenant just pays $100 less rent each month and HUD gives the owner $350 each month instead of $250.

One of the more annoying and frankly infuriating situations of the utility allowance program is where the utility allowance is more than the tenants rent. So in the example above, lets suppose the tenant portion of the rent was $60 instead of $750. In this case HUD will give the owner $350 ($250 subsidy plus $100 utility allowance). Normally we would subtract $100 from the tenant's rent but in this case the tenant is only paying $60 so we would actually have to send the tenant a check for the difference - in this case $40***. This is what's called the utility reimbursement check. (HUD recently changed some of the rules regarding how often you have to send these checks, see our article about the change).

Because the utility allowance comes together with the subsidy some people make a mistake and think that the money is additional revenue to the owner. It is not. It is additional subsidy to the tenant. This issue can be confusing and through my work helping potential owners do their due diligence, I have had to explain this many times to the the buyers, their lenders and even their attorneys. In one understanding the true nature of the utility allowance caused a buyer to back out of a deal because the numbers no longer made sense to him.

Which bring us to the utility analysis. How does HUD decide how much the utility allowance should be. Obviously the amount that a tenant pays towards utilities depends on the size of their unit, the cost of utilities in their area, and countless other local factors that are hard to quantify. For this reason HUD demands that each property conduct a utility analysis in order to determine the average amount of money that tenants will pay a month for utilities. (This is not like the LIHTC program or Public Housing where a set utility allowance is published each year.) This is where the headache begins!

In all fairness to HUD the 2015 changes to the utility analysis have made some parts of the utility analysis a little easier. Being that these changes have been in place for a while already I am not going to discuss the old way because hopefully none of you are still using it! But basically the owner has to collect 12 months of utility information from their tenants and create a spreadsheet showing the average monthly utility cost for each unit size.

The challenge of gathering that utility information is immense. And being that you cannot renew your contract without it or even get your new OCAF rents approved without it, it is a high pressure situation that can leave you really frustrated.

This post has gone on for too long. I will return to the details of the analysis soon. As always remember that you if you have any questions or need help with a utility analysis or any affordable housing need, feel free to contact us at ARO RESOURCES.

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*Of course HUD pays nothing. It is the American tax payer who pays. HUD just takes the money and redistributes it - but I digress!

**I am still not sure how it was decided which Section 8 properties were granted utility allowances. It probably had something to do with how the original contract was set up. If anyone has any insight - or knows if it is possible to get a utility allowance or remove one, shoot me an email.

***I call this infuriating because in these situations, not only is the tenant not paying any rent, but they are actually getting paid to live in their apartment. This renders the minimum rent rule obsolete. HUD established a minimum rent amount of $25 a month, this means that even if a tenant earns so little that their portion of the rent is less than $25, they would still have to pay $25 (4350.3 5-26 D, there is a financial hardship exemption ). I always understood the point of this rule as being to establish that everyone should be contributing something towards their rent. If tenants contribute towards their rent they feel a closer connection and responsibility towards their home and community. This utility reimbursement check changes that dynamic and can have some negative effects. This is obviously only my personal feeling so feel free to disagree!