HUD Clarifies New Methodology for Calculating Utility Allowances
In HUD multifamily sites where the residents pay either all or a portion of their own utility expenses, HUD provides a utility allowance in addition to the subsidy for each unit. This utility allowance is based on an estimate of the average monthly utility costs for each unit size.
In June 2011, HUD released a memo that described the multifamily industry’s responsibility to adjust the utility allowance on an annual basis when the contract rent is adjusted. The memo clarified that owners and agents must submit a utility analysis with the rent adjustment submission or the rent adjustment would be held until the proper documentation was received. The memo, however, gave very little detail on how this utility analysis should be conducted, so HUD offices released their own information on how to conduct this analysis.
Earlier this year, as detailed in the August issue of the Insider, HUD issued Notice H-2015-04, which standardized the methodology for completing this utility analysis. This new methodology is part of a larger effort by HUD to make multifamily sites more energy efficient. Currently, HUD’s annual outlay for utilities is more than $6 billion a year. The affected HUD housing programs included:
- Project-based Section 8 (New Construction, State Agency Financed, Substantial Rehabilitation, Section 202/8, Rural Housing Services (RHS) Section 515/8, Loan Management Set-Aside, Property Disposition Set-Aside);
- Section 101 Rent Supplement;
- Section 202/162 Project Assistance Contract;
- Section 202 Project Rental Assistance Contract;
- Section 202 Senior Preservation Rental Assistance Contracts;
- Section 811 PRAC (Project Rental Assistance site with a contract that specifies use of the HUD Multifamily Housing policy for developing utility allowances);
- Section 236;
- Section 236 Rental Assistance Payments; and
- Section 221(d)(3) Below Market Interest Rate (BMIR).
This is the first time a required methodology for calculating utility allowances has been based on actual consumption. Owners are required to use the sampling methodology once every third year to determine baseline utility allowances for each of their bedroom sizes. In the interim years, they can use the HUD Utility Allowance Factor.
Most recently, HUD provided clarification about the new Utility Allowance Calculation Methodology. The following are some of the highlights from the issued guidance.
Q What is the effective date of this notice?
A Although the Utility Allowance Methodology Notice was effective on June 22, 2015, the implementation schedule is based on the site’s HAP contract anniversary date. If the anniversary date of the HAP contract falls within the first 180 days after June 22, 2015 (on or before Dec. 19, 2015), then the owner can follow the new methodology or follow the existing one. If the contract anniversary date exceeds the 180 days after the publication of the notice, the owner must follow the methodology in the notice.
Q What documentation will an owner or agent be required to submit with a utility analysis and request for approval of a utility allowance?
A The owner or agent will submit all of the backup information required to demonstrate how the new utility allowances were calculated. Some examples of backup information include:
- Copies of the tenant data received from utility providers (this is typically in summary format); or
- Copies of the printouts indicating a summary of monthly data if the tenant was able to obtain data online from the utility provider for the previous 12 months, or 10 months as the case may be; or
- If the owner obtained actual monthly utility bills from a tenant, the owner may submit a spreadsheet summarizing the average of the monthly bills. The actual utility bills don’t need to be submitted to the contract administrator but will need to be retained in the tenant files for the term of tenancy plus three years and will be subject to contract administrator review; or
- Some combination of the above methods.
Q Some residents have utility accounts in a relative’s name, and the utility company won’t provide the information based on the resident’s signature. What is the course of action in this case?
A Have the relative obtain the information, or if possible, use other units for your sample.
Q If a unit is occupied by a resident for only 10 months, how do we handle the other two months and any partial months?
A Owners should get an average for the unit for the 10 months to determine the allowance. Owners shouldn’t use the partial months.
Q When a resident vacates a unit and another resident moves in, the utility company will release the information for only the current resident. Even if the unit was vacant for only a few days, we may not have 10 months of usage for the new resident. How do we handle that?
A In years when utility allowance baseline calculations are anticipated, owners should make every effort to collect information for the vacating resident prior to his departure. While you need 10 months of utility data for the same unit, the resident can change. In other words, you could have five months for one resident and five months for another resident. If you can’t obtain the information for at least 10 months, you should not use the unit in the sample.
Q Some contract administrators or HUD offices require that estimated amounts for certain appliance usage be removed from the total utility bill. For example, an owner may be required to remove costs to run A/C or to use washer/dryers installed in the units. Is this a HUD requirement or are individual agencies allowed to implement such requirements?
A This is not a HUD requirement, nor should any agency or HUD office impose such a requirement.
Q Please clarify the rounding to the nearest whole dollar—in some cases there have been differences due to rounding.
A Collect the data and calculate the average in dollars and cents, and then round the resulting utility allowance to the nearest dollar (>=.50 round up, <=.49 round down)
Q If the owner is unable to obtain the minimum sample size despite best efforts, will the analysis be accepted based on available data?
A The owner must demonstrate that every effort has been made to obtain the required sample and to otherwise meet the requirements of the analysis. It is an owner’s responsibility to provide an analysis that follows the protocol outlined in the notice as closely as possible, recognizing that the “perfect” sample may not always be available. It will be HUD’s or the contract administrator’s responsibility, as appropriate, to make sure that the analysis justifies the resulting utility allowance, with whatever compromises in the sampling were necessary to achieve that analysis. The contract administrator, in consultation with HUD, may require the owner to complete another baseline the following year.
Q For smaller sites, especially senior properties, that may have to use 100 percent sampling, certain circumstances will skew the resulting utility allowance up or down, such as residents spending weeks or months in a hospital, residents spending (colder) months with relatives, residents with medical conditions who need their units to be exceptionally warm, cold, or where they use medical equipment that uses a lot of energy. In most cases, the resident hasn’t requested a reasonable accommodation to increase the utility allowance. Should owners or managers do anything to avoid this skewing?
A Smaller sites will necessarily require a proportionately larger sample size (including 100 percent sampling) in order to ensure statistically valid results. Management should encourage residents with medical equipment who have extraordinary utility bills to seek a reasonable accommodation for a higher utility allowance.
Q If the property has 20 or fewer units and information isn’t available for at least 10 months in any number of units, does the sample size get reduced? For example, a site has 15 units so all the units must be included in the sample. But two units are vacant and two units have been occupied by the current resident for only five or six months.
A Even if 100 percent sampling is required, owners must exclude units that haven’t been occupied for at least 10 months.
Q In the June memo, there was instruction on excluding units with less than 12 months of occupancy. The instructions indicate that a unit must be excluded if it has been vacant for two or more months, but then indicate that a unit with only 10 months of occupancy may be included. Is there a clarification on this?
A The notice should have said to exclude units that have been vacant more than two months. When selecting sample units, no unit that has been vacant for more than two months of the prior 12 months may be used in the sample. Units with only 10 months of occupancy may be included.
Q How should owners handle sample sizes when the site has two or more floor plans for the same bedroom size?
A Owners would treat them as two different unit sizes if they appear on your rent schedule that way and sample for both sizes. For example, your rent schedule may indicate both a One-Bedroom Unit and then a One-Bedroom Unit (Large). This indicates that the unit size is different but the number of bedrooms is the same. It’s likely that the utility allowance is different as well. If this is the case, these unit types should be considered individually. If you’re using the HUD worksheet attachment to the notice, you would amend it to include this additional unit type.
Q Is the utility allowance analysis for all units at the site or just Section 8 units?
A The utility allowance analysis covers only those units that receive a utility allowance. According to HUD, only HUD-assisted units should be included in the analysis.
Q The HUD-provided worksheet that was attached to the notice calculates averages based on the values entered. If an owner has only 10 months of data and enters zeroes in the other two months, the average will calculate on all months that have data. Is this correct?
A No, you shouldn’t enter any value for the months that are vacant (do not enter $0). Or, using the unprotected version of the worksheet that’s now available, change the formula so that the average is calculated on only non-zero months. If you have only 10 months of data, the average must be calculated on only those 10 months.
Q The utility company asks that we use their form for the release of information—is this okay?
A The release form included with the notice is a sample. Owners and agents may use their own release form or a release form provided by the utility provider.
Mid-Year Utility Allowance Adjustments
Q When a change in utility rates results in a 10 percent or more increase in the utility allowance, how does an owner compute the new allowance? Does the owner simply apply the percentage increase to the existing utility allowance?
A Yes, the owner would apply the utility rate increase to that component of the allowance. For example, if electric rates go up 15 percent and if the utility allowance for the site comprises both electricity costs and gas costs, an owner would apply the 15 percent to the electricity component of the utility allowance.
Q What would be the historical time period to use for the new analysis?
A The notice indicates that when rate increases cause utility allowances to increase 10 percent or more, an owner can submit the following evidence of the change:
- Utility bills from the month prior to the rate change and the first month after; or
- Other verification of the increase from the utility provider.
As a result, the owner isn’t looking at historical data, but actually justifying the rate increase with the most current data.
Utility Assistance as Income
Q Some tenants receive assistance under the Department of Health and Human Services Low-Income Home Energy Assistance Program (LIHEAP). According to Handbook 4350.3 Exhibit 5-1 Income Inclusions and Exclusions, this form of assistance is listed under Income Exclusions. The notice states that tenants must report this type of assistance as income and that it must be counted as income. Is it included or excluded?
A Although the notice indicates that this type of assistance must be reported as income, according to the May 20, 2014, Federal Register for the current list of federally mandated exclusions from income, assistance under this specific program is excluded from income.