With rent growth on the up, it’s easy for managers to get a bit overzealous in rent raising strategies. But not every owner is invited to the party.
“Tax-credit properties in particular can’t always take advantage of that,” says Pierce Ledbetter, CEO of Memphis-based LEDIC Management. “Sometimes too much of a good thing can really backfire.”
When rent is established at a property financed by low-income housing tax credits, and it’s already at its maximum, something as little as a change in the utility allowance can alter the rent, resulting in a heavy fine to the owner.
If the utility allowance is $100, for example, and the max rent is $1,000, you can only charge the difference in rent. The overcharge, however, is something Ledbetter has seen plenty of times. Most recently, LEDIC came in to remediate damage left from a former management company when the property was deemed out of compliance.
“If the property is already at maximum rent and the utility allowance increases by as little as 7 bucks, that can make the property out of compliance,” Ledbetter says. “If that occurs in the lease-up of a property and is not caught and immediately corrected, a 7-dollar mistake can result in a $70,000 fine.”
And that’s exactly what happened to the property before LEDIC took control; a $7 change in the allowance caused the management company to overcharge its tenants. Ledbetter’s seen it across many other properties where there’s excitement to raise rents, “but failure to go back and dot I’s, and cross t’s,” he says.
“When we run into this situation, the first thing we need to do is make sure the issue is resolved moving forward so there’s no more liability,” says Oke Johnson, senior vice president of compliance services and senior asset manager with LEDIC.
Resolving the issue includes figuring out how to remediate an overcharge, which will likely entail a refund to the tenants. Checks can be cut for as little as a dollar, Johnson says, showing the local, state or federal authorities that they’re working on it.
The allowance, itself, is revised around the same time each year. But it’s easy for an owner or manager to forget that timing.
“Particularly in the early phases of a property, the lease up, that’s the most critical period,” Johnson adds. “The property doesn’t adjust for that, then the state can find out or the investor during an audit can find out and catch it.”
Owners can seek out other methods to lower the allowance and achieve higher rents. Properties built more energy efficiently from the outset–like a LEED-certified community–will allow managers to lower utility costs and appropriately raise their rent.
Although it exclusively affects affordable properties, utility allowances can be confusing to those new to the space, or those managing a mixed-income community for the first time. If it’s not something you do every day, managers might not be aware of the potential fine awaiting them.
“Just because the allowance was one number last year, doesn’t mean it won’t change frequently,” Ledbetter says. “The challenge we see ahead is that as the market gets stronger and we raise rent, the other things have to be taken out.”
Linsey Isaacs is an assistant editor with Multifamily Executive magazine. Follow her on twitter @LinseyI