Additional Fees Charged at Tax Credit Properties

Jul 13, 2020

Written by Laurie Palmeira

It isn’t always clear what fees can be charged at a tax credit property. Spectrum analysts are often asked: “Can we charge for the use of _____?”

The only way to answer this question is by asking a question: “Is _____ included in the eligible basis?”

One of the ways tax credit properties find themselves out of compliance is by charging fees for use of amenities that were included in the property’s eligible basis.  As a component of the qualified basis, the eligible basis of a property includes the portion of the property for which credits were allocated. Often times, in addition to tax credit units and common areas, the qualified basis of a project includes parking areas, swimming pools, garages, and other fixed assets.  A basic explanation is that if it’s in the eligible basis, you cannot charge for it. 

Prior to charging any fees at a property, be aware of which fixed assets were included in the basis.  If the property received credits for the tennis court and garage, they are part the eligible basis therefore fees cannot be charged for use of those amenities. 

Since fees cannot be charged to tenants, can they be charged to individuals visiting tenants or to people in the community? 

Unfortunately, the answer is no.  If the parking lot is part of your eligible basis, fees cannot be charged to visiting individuals wishing to park there.  The same is true for tenant visitors wishing to use the swimming pool.

What about fees for optional services at your project, such as housekeeping or meals? 

As long as the services are optional and not a condition of occupancy, then fees can be charged for those services.  If, however, there are non-optional services that all tenants must pay for as a condition of occupancy, then the fees associated with such must be included in the gross rent. Keep in mind that tax credit rents are restricted, and that a maximum allowable rent according to the IRS formula must include all those non-optional utilities, fees, and services. 

Under Treas. Reg. 1.42-11(a)(3), the cost of services that are required as a condition of occupancy must be included in the gross rent even if federal or state law required that the services be offered to tenants by building owners.  According to the IRS Guide for Completing Form 8823, assuming the charges are optional, pet fees, laundry room fees, and storage fees may be charged in addition to the rent; i.e., they are not included in rent computation. (Give Page Numbers for reference). Best practice would always be to inquire with your state agency prior to implementing any new charges. There may be an additional lease addendum or separate agreement required by the state agency for optional services and charges.

Are application fees acceptable?

As far as application fees go, only the amount the owner incurs for processing the application may be charged to the prospective tenant.  For example, if the real cost of processing an application including background and credit checks only amounts to $25.00, the owner cannot charge $50.00.  No amount may be charged in excess of the expected out-of-pocket costs.

As with many issues in the tax credit world, it boils down to excellent record keeping and a thorough knowledge of your project and how credits were allocated to most certainly save you from fee-related compliance issues down the road.

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