HB-2-3560 

CHAPTER 7: RENTS, SHELTER COST, AND 

UTILITY ALLOWANCES 

7.1 INTRODUCTION 

The purpose of the low interest rate loans that the Agency makes is to enable borrowers 

to set rents at rates that are affordable to low- and moderate-income tenants, the target occupants 

for Agency-financed multi-family housing. Rents provide the necessary income stream to 

maintain and operate the housing. Thus, the Agency has a twofold interest in maintaining the 

rent streams in multi-family housing to protect the value of the property at affordable rates. 

This chapter presents the program rules regarding rents, occupancy charges, and utility 

allowances for multi-family housing projects and the Agency’s procedures for determining 

borrower compliance, including those for Farm Labor Housing projects. After reading this 

chapter, the Loan Servicer will understand the various types of project rents and how they are 

set, how rents are to be paid by tenants and collected and reported on by the borrower, and the 

procedure for changing rents in a project. They will also learn how security deposits are set and 

when they may be collected. 

The Agency defines “rent” as the amount established as a charge for occupancy in a 

rental unit of Agency-financed multi-family housing. Rents must be established at the same rate 

for all similar units in the housing project: basic or note rent plus the utility allowance (when 

used) or the occupancy charge plus the utility allowance. If the utility costs are included in the 

rent, the rent will equal shelter costs. 

Unless otherwise noted, for purposes of this discussion the term “rents” refers to both 

rents and occupancy charge, and “tenants” refers to both tenant and members of a cooperative. 

SECTION 1: RENT REQUIREMENTS 

7.2 RENT REQUIREMENTS BY PROJECT TYPE [7 CFR 3560.202]

A. Major Rent Levels 

Subject to Agency approval, borrowers set project rents and utility allowances based 

on debt service and reasonable operating and maintenance expenses. Projects will have 

one or more of the following four rents: 

• Note rent is the rental charge established to cover expenses in the housing project’s 

approved budget and the required loan payment set at the interest rate shown in Form 

RD 3560-52, Promissory Note.

• Basic rent is the rental charge established to cover expenses in the housing project’s 

approved budget and the required loan payment contained in Form RD 3560-52

reduced by the interest credit agreement. 

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• U.S. Department of Housing and Urban Development (HUD) contract rent is the 

rental charge established for housing receiving project-based HUD Section 8 rental 

subsidies in accordance with 24 CFR Part 880 or Part 884, as applicable. 

• Low-income housing tax credit (LIHTC) rent is the rental charge established in 

accordance with LIHTC requirements. 

B. Rent Levels by Project Type 

These rent levels will apply depending upon the project type as follows: 

• Plan I projects, direct and full-profit projects with loans made prior to 1968, and 

unrestricted Farm Labor Housing projects all have rents that are note rate only. 

Tenants all pay the same rent depending upon the size of their unit. 

• Plan II projects have a minimum rent that is the basic rent and a ceiling rent that is the 

note rate rent. Tenants without rental subsidies (see Chapter 8, Rental Subsidies, for 

details) pay a rent within that range, based on their incomes. Tenants with rental 

assistance pay the basic rent, although the rental subsidy may pay all or a portion of 

the rent on behalf of the tenant. 

• HUD Section 8 projects with interest credit have a minimum basic rent, a maximum 

note rate rent, and a HUD rent. 

• HUD Section 8 projects without interest credit have a note rate rent and a HUD rent. 

Exhibit 7-1 summarizes the rents that appear in each project type. 

Exhibit 7-1 

Rents by Project Type

Project Type Rents 

Plan I projects Note rent 

Plan II projects Note, basic 

Section 8/515 projects without interest credit Note rent, HUD contract rent 

Section 8/515 projects with interest credit Note rent, basic rent, HUD contract rent

Early projects (pre-1968, direct loan and full 

profit projects) 

Note rent 

Labor housing—On Farm No rent or note rent 

Labor housing—Off Farm Note 

Congregate housing/group homes Note rent, basic rent 

Cooperatives Note rent, basic rent 

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C. Setting Rent Levels 

Rents are set by unit size and established by the borrower through a project budget at 

levels adequate to cover debt service, reasonable project operating expenses, and a return 

to owner if appropriate. Initial rents and any changes must be approved by the Field 

Office as part of the project budget approval process. Chapter 4 addresses procedures for 

determining whether project budgets are reasonable. 

7.3 UTILITY ALLOWANCES [7 CFR 3560.202]

When tenants pay some or all of their utility costs themselves, borrowers must establish a 

utility allowance to determine the amount tenants pay toward rent. The utility allowance is 

deducted from the total shelter cost calculated for the tenant, and the difference is paid by the 

tenant as rent. If the tenant is entitled to a utility reimbursement, management companies may 

issue a joint check payable to the tenant and utility company, if they choose to do so. 

A. Setting Utility Allowances 

The utility allowance is based on expected costs for utilities. Once established, the 

borrower must review the utility allowance annually. This is done in conjunction with 

the annual budget process. The borrower must submit Form RD 3560-7, Multiple Family 

Housing Project Budget/Utility Allowance to the Field Office and follow the procedures 

described in Section 4 of this chapter. 

B. Approving Utility Allowances 

Field Office Staff must review the utility allowance documents submitted with the 

budget to make sure that the numbers being used are reasonable and comparable to other 

projects in the same market area. The Loan Servicer should check current rate schedules 

and known rate increases from such sources as suppliers of electric utility, natural gas 

utility, water and sewer service, fuel oil and bottle gas; public service commissions; real 

estate and property management firms; and state and local agencies, including public 

housing authorities. In addition, the Loan Servicer should check project budgets of any 

other Agency-funded projects in the area to see if utility allowances are similar. 

Chapter 4 provides further guidance on revising cost increase justifications. 

C. Monitoring Utility Allowances 

To make sure that borrowers are correctly applying utility allowances, servicing staff 

must check tenant leases during supervisory visits of projects where tenants pay their 

own utilities. These leases should reflect the current utility allowances as shown on the 

current approved budget for the project. 

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7.4 DETERMINING TENANT RENT PAYMENT [7 CFR 3560.203]

Tenants pay rents in an amount that depends on the project type, whether utilities are 

included in the rent, the tenant’s income, and the availability of rental subsidy. 

Form RD 3560-8, Tenant Certificate is used to determine individual rents. Borrowers must 

adjust net tenant contribution and unit rents, if applicable, whenever there is a change in tenant 

household status sufficient to generate a new certification in accordance with 7 CFR 3560.152. 

A. Net Tenant Contribution 

Form RD 3560-8 is used to calculate a tenant’s rent based on their income. The net 

tenant contribution to rent must not exceed the highest of: 

• Thirty percent of monthly adjusted income, with an adjustment for any utility 

allowances, or 

• Ten percent of gross monthly income, with an adjustment for any utility allowances, 

or 

• If the household is receiving payment for public assistance from a public agency, the 

portion of such payment which is specifically designated by that agency to meet the 

household’s shelter costs, or 

• The basic rent, unless Rural Housing Service (RHS) rental assistance is provided to 

the household. 

For an example of how to calculate the net tenant contribution, refer to Exhibit 7-2. 

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Exhibit 7-2 

Examples—Net Tenant Contribution 

(Where Rental Assistance (RA) is Available)

Example 1: The basic rent for a one-bedroom unit at Beautiful Acres Apartments is $350 and the note 

rate rent is $450. Tenants at Beautiful Acres pay their utilities directly, so there is a utility allowance of 

$60. Form RD 3560-8 for Joe Smith shows that he has an annual income of $12,000. Since he is elderly, 

he receives a $400 adjustment for elderly status, giving him an adjusted annual income of $11,600. In 

completing Form RD 3560-8, the site manager calculates that 30 percent of Mr. Smith’s adjusted 

monthly income is $290 and 10 percent of his gross monthly income is $100. Since he is receiving no 

payment for public assistance, the site manager enters $290 on line 30 (which is the highest of 30 percent 

of adjusted income, or 10 percent of monthly gross income, or the public assistance payment) of Form 

RD 3560-8 as the Gross Tenant Contribution. The utility allowance must then be deducted, leaving a 

unit rent payment by Mr. Smith of $230.

 Basic Rent $350 

 Note Rate Rent $450 

 Utility Allowance $60 

 Mr. Smith’s Annual Income $12,000 

 Adjustment for Elderly Status $400 

 Adjusted Annual Income $11,600 

 30 Percent Adjusted Monthly Income $290 

 10 Percent Gross Annual Income $100 

 Payment for Public Assistance $0 

 Highest of Above $290 

 Deduction for Utility Allowance $60 

 Unit Rent Payment for Mr. Smith $230 

Example 2: Joe Smith has decided to move to Cozy Home Apartments. The rents there include utilities. 

The basic rent for a one-bedroom unit for which he qualifies is $360 and the note rate rent is $460. His 

income information is the same, which means $290 is again entered onto line 30, Gross Tenant 

Contribution, of Form RD 3560-8. Since there is no utility allowance, Mr. Smith will make a unit rent 

payment of $290. 

 Basic Rent $360 

 Note Rate Rent $460 

 Utility Allowance $0 

 Mr. Smith’s Annual Income $12,000 

 Adjustment for Elderly Status $400 

 Adjusted Annual Income $11,600 

 30 Percent Adjusted Monthly Income $290 

 10 Percent Gross Monthly Income $100 

 Payment for Public Assistance $0 

 Highest of Above $290 

 Deduction for Utility Allowance $0 

 Unit Rent payment for Mr. Smith $290 

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Example

Jimmy Smits pays $180 a month in 

rent, which is 30 percent of his adjusted 

monthly income. The basic rent is $150. 

The $30 difference between the basic rent 

and Mr. Smits’s rent payment is called 

overage. 

B. Unit Rents 

1. Note Rents 

In projects with note rents only, tenants will pay the note rent, regardless of income, 

unless they are income ineligible, in which case they will pay a surcharge. 

When a Plan II project is experiencing severe vacancies due to market conditions, the 

Agency may allow the borrower to charge a Special Note Rent (SNR) to attract or retain 

tenants whose income level would require them to pay note rent. An SNR is less than the 

note rent but is higher than the basic rent. The requirements for requesting and receiving 

an SNR are established under 7 CFR 3560.454. 

2. Basic Rents 

In projects with basic and note rents, tenants will pay their net tenant contribution, but 

no less than the basic rent and no more than the note rent. 

3. Rental Assistance Rents 

Tenants who are eligible to receive available rental assistance in a project pay the net 

tenant contribution. Rental assistance makes up the difference between the net tenant 

contribution and approved shelter costs (basic rent). Chapter 8 provides further details on 

charging and collecting rents from tenants with rental assistance. 

4. HUD Section 8/USDA Section 515 Rents 

In projects with HUD Section 8 housing assistance contracts, HUD sets the rents and 

utility allowances and tenants pay the borrower rent the total tenant payment (TTP), 

which is the greater of: 30 percent of monthly adjusted income or 10 percent of gross 

income; welfare rent or; $25. The HUD rent should never be less than the basic rent. If 

it is, the borrower must make up the difference, since it cannot be collected from the 

tenant. 

5. Tenant-Based Subsidies 

Tenants with tenant-based subsidies such as HUD vouchers pay the rents established 

at the project. If the voucher is less than the project rent, the tenant is responsible for the 

difference. 

C. Overage 

Overage is that portion of a tenant’s net 

tenant contribution that exceeds basic rent up 

to note rent. Full overage is an amount equal 

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to the difference between the note rent for a unit and the basic rent. 

D. Unit Rents for Ineligible Tenants 

There will be times when ineligible tenants occupy multi-family housing units. Such 

tenants must pay rent based on the type of project they occupy. 

1. Surcharge for Ineligible Tenants in Plan I Projects 

Ineligible tenants occupying a Plan I project must pay the established note rate rent 

plus a rent surcharge of 25 percent of the established rent. A Plan I project is defined in 

7 CFR 3560.11. 

2. Income-Ineligible Tenants in Plan II Projects 

Income-ineligible tenants occupying Plan II projects must pay the note rate rent. A 

Plan II project is defined in 7 CFR 3560.11. 

E. Unit Rents for Site Managers, Caretakers, and Owner-Occupied Units 

When used as a revenue producing unit at approved rental rates, the salary paid to 

the site manager and/or caretaker will be included in the project operation and 

maintenance expenses. The same amount will be included in the annual income of the 

site manager and/or caretaker. The site manager and/or caretaker may be an eligible or 

ineligible tenant and their rent contribution will be based on their total income from all 

sources as shown on the tenant certification form. 

When the unit is used as a non-revenue producing unit, the project cost of 

providing the unit will be treated the same as those of other non-revenue producing 

portions of the project. Project rental rates will be established as if the unit did not exist 

as living quarters. Debt payment will be as if the units were rented at basic rent. A tenant 

certification form will not be prepared for this situation. 

With prior approval of the State Director, an owner may occupy a unit in the 

project when the owner will manage the project rather than hiring a management agent or 

site manager. If the unit is a revenue-producing unit, rental rates will apply to the 

borrower as they would to any other caretaker or manager. 

F. Unit Rents for Low Income Housing Tax Credit Units 

1. Setting and Collecting Rents 

Unit rents in projects with LIHTCs will be set in accordance with regular Agency 

program rules. Two examples of setting such rents are provided in Exhibit 7-3. The 

Field Office must be aware that the LIHTC program prohibits owners from charging 

tenants more than a certain amount of rent in LIHTC units. Borrowers who do this risk 

recapture of their tax credits and stiff penalties. While the law does not allow the 

borrower to collect basic rent from the tenant if it exceeds the LIHTC limitation, overage 

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may be collected from the tenant in only those projects with 1991 and later tax credit 

allocations, if necessary, according to Form RD 3560-8 even if that rent exceeds the 

LIHTC limitations. 

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Exhibit 7-3 

Setting Unit Rents for Section 515 Projects with LIHTCs

Example 1: Assume the units receive only interest credit and no rental assistance or HUD 

Section 8 assistance. One-bedroom apartment: basic rent = $275, LIHTC rent = $250. 

The expense level required to meet financial requirements of the project exceeds the rent 

allowed to be charged by the low-income housing LIHTC program by $25. 

Example 2: Assume a project where LIHTC rent is equal to or greater than the basic rent, 

and a previously eligible tenant’s household income increases beyond the LIHTC rent. In 

this case, the tenant may or may not have previously received rental assistance or HUD 

Section 8. Example: One-bedroom apartment: basic rent = $250, LIHTC rent = $300. 

Only one co-tenant works. Household pays $200 per month and rental assistance is $50. 

Household is Agency and LIHTC eligible. Second co-tenant goes to work, causing the 

household rent to go up to $350. The new rent level exceeds both basic and LIHTC rents. 

Overage of $100 is due. LIHTC rent limitations require that the owner charge tenants no 

more than $300, which causes a shortage of $50 per month in overage due the Agency. 

Therefore, the owner is accountable for this shortage if the project was allocated LIHTCs 

prior to 1991. For projects allocated LIHTCs after 1990, the owner is allowed to collect 

the overage due from the tenants because gross rent that tenants pay in the LIHTC unit 

does not include any rental payment to the owner of the unit to the extent such owner pays 

an equivalent amount to the Agency under Section 515. The tenant cannot be required to 

move based on LIHTC ineligibility. 

2. Agency Review and Monitoring of LIHTC Rents 

The law does not excuse the borrower from paying the basic rents required to the 

Agency; these rents must be deposited into the operating account in full. Borrowers must 

be informed by Loan Servicers that the borrowers are responsible for funding any gap 

between basic rents and tax credit rents collected from tenants when basic rent exceeds 

LIHTC rents. This fact should be noted when the Loan Servicer reviews the project 

operating budget. 

Borrowers must not use project funds to make up any difference between rents 

required under Agency program rules and the maximum allowed rents under the LIHTC 

program, and they must collect the required rents. During the annual review process, 

Loan Servicers should review the previous year’s budget with a focus on any cash 

shortfalls. If the Loan Servicer determines that a shortfall exists due to differences 

between tax credit limitations and basic rents, they must ensure that a provision is made 

in the coming year’s budget and future years on line 11, “Cash-non project” of Form RD 

3560-7 for the owner to contribute necessary funds to meet the required rents. 

G. Adjustments to Unit Rents 

Borrowers must adjust net tenant contribution and unit rents, if applicable, whenever 

there is a change in tenant household status sufficient to generate a new certification in 

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accordance with 7 CFR 3560.152. Borrowers are not required to recertify a household 

prior to the annual recertification unless a change in household income of $100 or more 

per month occurs. If a tenant requests it, the borrower must recertify the tenant for a 

change in household income of $50 or more per month (see Chapter 6 for further details 

on interim recertifications). 

A change in household status could take place in any one of the following 

circumstances: 

• The tenant has had a change in income (increase or decrease); 

• The tenant has had a change in the size of the household (increase or decrease in 

number of people residing in the unit); or 

• The tenant has had a change in the type of household (the household may become 

handicapped or elderly, or a 17-year-old child may turn 18). 

If Form RD 3560-8 shows that a change in rents is in order as a result of the change 

in household status, the effective date of a tenant’s changed rent is the first day of the 

month following third-party verification of the tenant’s reported changes. However, the 

management agent must complete the verification process no later than 30 days following 

the tenant’s notice of the change. 

7.5 RENTS DURING EVICTION OR FAILURE TO RECERTIFY [7 CFR 3560.208]

Tenants must continue to pay rents during termination through eviction and if they are 

not recertified for occupancy. 

A. Rents for Tenants Being Evicted 

Tenants must continue to pay rents as per Form RD 3560-8 while the eviction process 

is underway. 

B. Rents for Tenants without a Current Certification 

A tenant who is not recertified is technically an ineligible tenant, and note rate rent 

must be collected and deposited to the general operating account for that tenant. Whether 

the tenant or the borrower/management agent pays the note rate depends upon who is to 

blame for the failure to recertify. 

1. Tenant Failure to Recertify 

If a borrower can document that a tenant received a notice specifying a tenant 

recertification date, and the tenant fails to comply by the specified date or fails to 

cooperate with verification or other procedures related to the tenant’s recertification so 

that the tenant recertification cannot be completed by the recertification date, the 

borrower, within 10 days of the recertification date, will give the tenant and the Agency 

written notification that: 

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• Termination proceedings are being initiated, in accordance with 7 CFR 3560.159; and 

• The tenant will be charged note rent until the tenant’s lease is terminated. 

2. Borrower Failure to Recertify 

If a borrower cannot document that a tenant received a recertification notice, and a 

tenant is not recertified within 12 months of the most recently executed tenant 

certification, tenants will continue to make net tenant contributions to rent based on their 

most recent Form RD 3560-8. The borrower must remit to the Agency from non-project 

funds, full overage as if the tenant was paying the note rent until the tenant is re-certified. 

7.6 IMPROPERLY ADVANCED RENTS [7 CFR 3560.209]

Improperly advanced interest credit or rental assistance, whether it was the fault of the 

borrower or the tenant, will be recaptured in accordance with the requirements established by 

7 CFR part 3560, subpart O. 

A. Borrower Error 

When rents have been improperly collected from a tenant due to borrower error, such 

as a miscalculated Form RD 3560-8 the borrower must make up the difference to the 

Agency for any additional rents that should have been collected or reimburse the tenant 

for any excess rents collected. 

B. Tenant Fraud 

When the borrower has collected an incorrect rent amount from the tenant due to 

tenant fraud, the borrower must make every attempt to recapture the rent due from the 

tenant. Once the borrower has delivered documentation to the Loan Servicer of failed 

attempts to collect, the Loan Servicer must comply with the requirements of 7 CFR part 

3560, subpart O to pursue collection. 

7.7 MONITORING TENANT CONTRIBUTION AND UNIT RENTS 

A. Borrower Monthly Submissions 

The Loan Servicer monitors unit rents and tenant contributions on a monthly basis via 

Forms RD 3560-29 and RD 3560-8. 

B. Site Visits 

The Loan Servicer will verify information on Forms RD 3560-29 and RD 3560-8

during site visits through random tenant interviews. If the Loan Servicer is told by any 

tenant that they pay a different amount of rent than is shown on Form RD 3560-29, 

Interest Credit and Rental Assistance Agreement, for that tenant, the Loan Servicer must 

ask the borrower or management agent to explain the discrepancy. 

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SECTION 2: SECURITY DEPOSITS 

7.8 SECURITY DEPOSITS [7 CFR 3560.204]

Borrowers should collect security deposits as assurance of rental payment or charges for 

damages when it is reasonable and customary for the area in which the project is located. 

Security deposits are largely governed by state and local laws; Loan Servicers must familiarize 

themselves with those laws. 

A. Allowable Amounts 

The borrower must specify the amount of the security deposit that will be charged in 

a project by unit size in the management plan and in the dwelling lease. This amount 

may not be changed without prior consent of the Agency. The following requirements 

must be met: 

• Borrowers may charge security deposits in an amount that is typical for the area, but 

the security deposit charged to a tenant may not exceed that tenant’s contribution for 

one month’s rent or the basic rent, whichever is greater; 

• Households receiving a HUD rental subsidy must pay security deposits according to 

HUD requirements; 

• Members in a cooperative must pay a membership fee equal to one month’s 

occupancy charge; and 

• Security deposits for tenants may not be increased in later years, even if the tenant has 

been residing in the project for a long time and the initial amount charged is not 

representative of current basic rents or security deposits. 

B. Payment Plans 

If tenants cannot pay the full amount of the security deposit initially, they may be 

placed on a payment plan. Should installments not be met, the total charge may become 

due and payable in full. 

C. Authorized Uses 

Funds in the security or membership fund account must only be used for authorized 

purposes as specified by the borrower’s management plan. 

Borrowers may charge tenants for damage or loss caused or allowed by the tenant 

equal to the cost of the damage or loss. 

Borrowers must consider expenses due for addressing normal wear and tear as normal 

operating expenses and must not charge tenants a fee or withhold security deposits to pay 

for such costs. 

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Borrowers may withhold security deposits and may charge tenants for damage or loss 

costs above security deposit amounts. An itemized accounting for any charges against the 

security deposit must be presented to the tenant after the move-out inspection, unless the 

tenant has abandoned the project and their whereabouts are unknown and cannot be 

ascertained after reasonable inquiry. Resolution of any security deposit disputes must be 

handled in accordance with state and local laws. 

Any amount which is kept by the borrower as a result of lease or occupancy 

agreement violation must be transferred to the general operating account and treated as 

project income. 

D. Accounting and Interest 

Security deposits must be held in a separate bank account in a Federally insured 

institution in accordance with 7 CFR 3560.302 (see Chapter 3). These funds are held in 

trust for the tenant until used or returned to the tenant. 

Any interest earned on security deposits will accrue in accordance with state law, but 

in no case will it accrue to the project management or the borrower. If a state requires the 

borrower to pay the interest earned on security deposits and the borrower collects more 

interest than is required by the state, the additional interest must be deposited into the 

general operating account for use by the project. 

Any interest on security deposits unclaimed by a tenant must accrue to the project and 

must be deposited by the borrower into the general operating account. 

E. Additional Deposits 

Borrowers may charge additional deposits for pets; however, these must not exceed 

basic rent for the animal owner’s unit. Where a service animal is necessary for the 

normal function of a household member, an additional security deposit must not be 

charged. 

Borrowers must not charge additional security deposits based on disabilities of 

tenants or other personal characteristics. 

7.9 MONITORING SECURITY DEPOSITS 

Loan Servicing staff will monitor security deposits charged to and collected from tenants 

during supervisory visits by: 

• Reviewing project annual financial statements; 

• Reviewing dwelling leases and comparing the amount charged with what has been 

specified in the current management plan; 

• Reviewing bank statements to see what the deposits of security deposits total; and 

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• Asking tenants to confirm what they have paid as security deposits. 

Any discrepancies must be explained by the borrower or management agent. Monitoring 

of security deposit accounts is further addressed in Chapter 3. 

SECTION 3: RENT COLLECTION 

7.10 RENT COLLECTION [7 CFR 3560.209]

Borrowers must collect rent on a monthly basis. Rents should be due on the first day of 

the month. The time and place of onsite collection and/or the address for payment by mail 

should be well publicized and consideration should be given to an after-hours depository, if 

needed. Borrowers must maintain an accounting system to collect and track receipts that can be 

audited. 

A. Tracking Rents 

Any collection system employed by the borrower must include the following: 

• A serially numbered receipt book or similar device to track collections; 

• A ledger that shows which tenants have paid their rents and which have not; and 

• If collections are held onsite, they must be secure. A safe may be used to ensure 

security. 

The borrower must explain how the above requirements are to be met in the 

management plan. The Loan Servicer will verify that these requirements are being met 

during onsite supervisory visits by asking to see the receipt book or similar tracking 

device, the ledger, and the onsite collection device, if any. 

B. Fees for Late Payments 

Borrowers may adopt a late fee schedule for overdue rental payments. Late fee schedules 

must be submitted to the agency for approval as part of the housing project’s management plan, 

be in accordance with state and local law, and consistent with the following requirements: 

(1) A grace period of 10 days from the rental payment due date must be allowed for all 

tenants. 

(2) The late fee must not exceed the higher of $10 or an amount equal to 5 percent of the 

tenant’s gross tenant contribution. 

(3) Tenants receiving housing benefits from sources other than the Agency may be 

subject to the late rent fee requirements of the other funding sources. 

Any other type of schedule must be submitted by the borrower to the Agency for 

approval. All schedules must be in accordance with state and local laws and must be 

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justifiable. To approve the schedule, the Loan Servicer needs to make sure that the fees 

are not excessive, are customary for the area, and allow for a reasonable grace period. 

The borrower must describe any late fee schedule in the management plan. During 

the onsite supervisory visit, the Loan Servicer must ask tenants about the late fees 

schedule to make sure it is as the borrower has described it. The Loan Servicer must also 

check leases to confirm that the late fee schedule is stated and matches its description in 

the most current management plan. Any discrepancies must be explained by the 

borrower. 

7.11 BORROWER REPORTING OF RENTS 

Borrowers must report to the Agency on Form RD 3560-29, Notice of Payment Due 

Report all rents, overages, and surcharges collected. This form shows the occupancy status of 

each unit, rents collected from each tenant, and borrower payment and agency tracking of 

overage. Overage is the amount by which total rental payments paid or to be paid by the tenants 

of a project exceed the total basic monthly charge (see paragraph 7.4). Borrowers identify any 

overage collected on Form RD 3560-29. Overage is returned by the borrower to the Agency. 

Overage for an account with an interest credit agreement is charged to the account as additional 

interest on the initial loan. Tenant contributions must be applied first to rental charges rather 

than to miscellaneous charges and fees, such as late fees. 

A. Agency Tracking of Overage 

The Loan Servicer must process overage that is reported and returned by the borrower 

with Form RD 3560-29 through the use of MFIS. Overage is coded for Agency 

accounting purposes depending upon the type of project it is collected from as follows: 

Overage Type 1: Occupancy surcharge paid by ineligible tenants in Plan I projects. 

Occupancy surcharge is equal to twenty-five percent (25%) of note rate rent. 

Overage Type 2: Rents paid by tenants in a Section 8/515 Project with an Interest Credit 

Plan Code of 7 or 8 that are greater than the basic rent, up to the note rent. 

Overage Type 3: Rents paid by tenants in a Plan II project that are in excess of the basic 

rent up to the note rate rent. This includes HUD contract rents in a Section 8/515 project 

with an Interest Credit Plan Code of 2 that are greater than the basic rent, up to the note 

rate rent. 

Overage collected that is in excess of the note rate rent in Section 8/515 projects with 

interest credit, where the HUD contract rent exceeds note rate rent, is reported on Form 

RD 3560-29 as excess Section 8 funds and is deposited into the project reserve account. 

For additional information on how the Agency handles overage, please refer to the 

Automated Multi-Family Housing Accounting System (AMAS) manual. 

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B. Payment of Overage for Multi-Family Housing Projects with Interest Credit and 

No Rental Assistance 

When 30 percent of a tenant’s adjusted income exceeds the basic rent, the difference 

they pay in rent between the basic rent and the note rate rent is referred to as overage. 

This is returned by the borrower to the Agency as extra interest payment on the loan. 

Exhibit 7-4 provides an example of how overage is paid. 

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Exhibit 7-4 

Example—Overage Payments at Sunny Brook 

Basic Rent: $350 Note Rate Rent: $400 Utility Allowance: $0

Tenant 

30% of Adjusted 

Monthly Income Rent Payment Overage Payment 

Smith $200 $250 $0 

Miller $350 $350 $0 

Jones $375 $375 $25 

Young $400 $400 $50 

Brown $400 $400 $50 

C. Payment of Overage for Section 8/515 Projects 

It is Agency policy that any funds paid by HUD are paid on behalf of a tenant. 

Therefore, the Agency does not consider any HUD Section 8 payments as excess funds 

until any benefits provided by the interest credit agreement are recovered. Borrowers 

must collect overage for their tenants as follows: 

1. For Section 8/515 Projects with a One Percent or Two Percent Reduced Interest 

Rate 

In 100 percent Section 8/515 projects when the HUD contract rental rate is more than 

the one or two percent reduced interest rate and is either equal to or less than the note rate 

rent, overage will be paid to the Agency in an amount equal to the difference between the 

HUD contract rental rate and the 1 or 2 percent reduced interest rate. The overage is 

reported as Overage Type 2. 

In 100 percent Section 8/515 projects when the HUD contract rental rate is greater 

than the note rate rent, the difference between the one or two percent reduced interest rate 

and the HUD contract rate will be paid to the Agency and reported as overage Type 2. 

The amount equal to the difference between the HUD contract rental rate and the Agency 

note rate rent will be deposited in the reserve account as excess income. 

In 100 percent Section 8/515 projects when the HUD contract rental rate exceeds the 

note rate rent, the borrower must use Form RD 3560-29 to document the required deposit 

in the reserve account. 

Exhibits 7-5 and 7-6 provide examples of how overage is determined in Section 8/515 

projects. 

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Exhibit 7-5 

Determining Overage in Section 8/515 Projects 

With 1 or 2 Percent Reduced Interest Rate—Examples 

Example 1 

1 or 2 Percent 

Reduced Interest Rate 

HUD 

Contract Rent Note Rate Rent 

 $250 $300 $375 

 $50 difference paid to $75 interest credit 

 Agency as overage type 2 

Example 2 

1 or 2 Percent 

Reduced Interest Rate Note Rate Rent 

HUD 

Contract Rent 

 $250 $375 $400 

 $125 difference paid to $25 required to be placed 

 Agency as overage type 2 into reserve 

Note: If the HUD contract rent and the Agency 1 or 2 percent 

reduced interest rent are the same, then the first column would 

not apply. 

2. For Section 8/515 Projects with Full Interest Credit 

In Section 8/515 projects the overage is the difference between basic rental rate and 

the note rate rent including the income from HUD. The overage will be reported as 

Type 3. 

In the cases where the HUD contract rental rate exceeds the note rate rent the 

difference is excess income and will be deposited in the reserve fund. The borrower 

should use Form RD 3560-29, Part I, items 23 through 29, to document the required 

deposit in the reserve account. 

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Exhibit 7-6 

Determining Overage in Section 8/515 Projects 

With Interest Credit—Examples 

Example 1 

Basic Rent HUD Contract Rent Note Rate Rent 

 $175 $300 $375 

 $125 difference paid to $75 interest credit and 

 Agency as overage type subject to overage Type 1 

 3 by Section 8 tenants from non-Section 8 tenants 

 and subject to overage 

 type 2 by non-Section 8 

 tenants 

Example 2 

Basic Rent Note Rate Rent HUD Contract Rent 

 $175 $375 $400 

 $200 difference paid to $25 required to be placed 

 Agency as overage by in reserve account as excess 

 Section 8 tenants and income 

 subject to type 2 overage 

 by non-Section 8 tenants 

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SECTION 4: RENT CHANGES 

7.12 OVERVIEW 

All borrowers, including those using HUD Section 8 contract assistance, must obtain 

prior Agency approval for a rent increase. Changes in rental rates will apply to all units in a 

project. Rent change requests for multi-family housing projects with no HUD subsidy are 

typically submitted and reviewed at the same time the borrower submits their annual budget for 

approval. Rent changes in Section 8/515 projects resulting from rent increases by HUD must 

also be reviewed and must not automatically be approved. For any project, only the amount of 

rent necessary to cover project expenses must be approved. This section covers rent changes in 

projects without HUD subsidies, then changes in projects with HUD subsidies. 

7.13 CHANGES IN RENTS AND UTILITY ALLOWANCES [7 CFR 3560.205]

It may be necessary as operating costs and/or revenues in a project fluctuate for the 

borrower to request Agency approval to effect a rent change. Exhibit 4-1 shows the timeline for 

borrower submission and Agency review of rent change requests. This process is also described 

in Chapter 4. 

A. Rent Change Requests under Special Circumstances 

The Loan Servicer may accept borrower requests for rent or utility allowance changes 

at times other than with the annual budget submission under special circumstances where 

a change is necessary to preserve the financial integrity of a project and the financial 

distress is due to circumstances beyond a borrower’s control. Such circumstances might 

be in the event of a natural disaster or when work-out procedures are necessary. 

When a Plan II housing project is experiencing severe vacancies due to market 

conditions, the Agency may allow the borrower to charge a special note rent (SNR), 

which is less than note rent but higher than basic rent, to attract or retain tenants whose 

income level would require them to pay special note rent. The requirements for receiving 

an SNR are established under 7 CFR 3560.454. 

B. Annual Utility Allowance Reviews 

The borrower should review utility allowances on an annual basis to determine 

whether any changes have to be made. The borrower should indicate no changes to 

utility rates in the comment section of the budget narrative. 

C. Tenant Notification and Comments 

At the same time the borrower submits the initial notice to the Agency that they 

intend to submit a rent change request, the borrower will send or deliver notices to each 

tenant in the project notifying them of the rent change request that will be submitted to 

the Agency with their annual budget. Appendix 4 provides an example of such a notice. 

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The borrower must also post this notice in a common area frequented by the tenants, such 

as the laundry room or near the mailboxes. 

The notice must notify tenants that they have 20 days to provide their comments to 

the Agency. If during this time the Agency receives any tenant comments, these must be 

immediately forwarded to the borrower, with the identity of the tenant protected. This 

can be done by either paraphrasing the comments for the borrower or by removing any 

identifying information from the correspondence received from the tenant and forwarding 

it on to the borrower. 

After the 20-day comment period, the Agency must notify the borrower of approval 

or rejection within 10 days. 

D. Documentation 

The borrower must fully document any rent change request. Requests for a rental 

charge change must be based on a realistic projected budget for the interim year or the 

ensuing full year. The borrower must provide to the Agency the information identified in 

Exhibit 7-8 with the rent or utility allowance change request. 

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Exhibit 7-8 

Information Required to Document Rent or Utility Allowance Change Request

1. Form RD 3560-7 must be used to reflect the project’s financial needs for the year 

and thereby rental charge requirements. A narrative cover letter must be included 

explaining why the rent change is necessary. A new operating budget for the fiscal 

year must show: 

• Currently approved budget at old rents; 

• Proposed budget at proposed new basic rents; and 

• Proposed budget at proposed new note rate rents (if applicable). 

2. Actual utility costs. Refer to Chapter 4 for a description of the information required 

to document utility allowance change requests. 

3. Additional documentation. Additional documentation must be attached to 

Form RD 3560-7 in accordance with the instructions to these forms as evidence of 

the need for the rent or utility allowance change. 

4. Other information. Any other information the borrower believes is necessary to 

justify the proposed shelter cost change. 

The narrative attached to the budget form must clearly explain the necessity for the 

change request and the Loan Servicer must analyze the supporting documentation to the 

budget and Form RD 3560-7 to see if it supports the request. For example, if the rent 

increase is due to increased taxes, then the Field Officer should look for copies of tax 

increase notices in the budget documentation. If the rent increase is due to an increase in 

general operating expenses, the Field Officer must review those expenses for 

reasonableness. Chapter 4 discusses reasonableness and how a budget should be reviewed 

for acceptability. 

E. Agency Responsibility 

1. Reviewing the Rent Change Request 

When the borrower submits a budget with a rent or utility allowance change request, 

the Agency must respond to the borrower within 60 days. If the Agency does not contact 

the borrower, the borrower may assume that any rent change request of $25 or less has 

been automatically approved. 

2. Circumstances in which the Agency Will Not Approve a Rent Increase 

The Loan Servicer must not approve a rent increase under the following 

circumstances: 

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• The borrower is able but unwilling to comply with program requirements. Such a 

borrower has ignored repeated requests from the Loan Servicer to take servicing 

actions by a specified deadline. 

• If the borrower is in default of the Agency loan agreement and does not have an 

Agency-approved work-out plan, or is not in compliance with an Agency-approved 

workout plan. 

• There are sufficient project funds under the existing rents to meet project operating 

expenses, and the borrower is not able to justify the higher rents. Such a condition is 

established when the project budget shows that income meets expenses at current rent 

levels. 

• The project is operated on a profit basis, and the rent change would result in rents 

higher than what tenants can afford. This condition is established by comparing rents 

with 30 percent of tenant adjusted incomes. If it is shown that tenants would be 

paying in excess of 30 percent of their adjusted incomes as new rents and the increase 

is not necessary to meet projected costs, then the increase must not be approved. 

3. Rejection of Rent Change Request 

If the Loan Servicer rejects the change request, the borrower must be notified and be 

provided with appeal rights. 

4. Effective Dates of Change 

The effective dates of any approved changes will coincide with the start of the 

project’s fiscal year or the start of the season for labor housing projects. For an 

allowance increase request on which comments were solicited, the borrower must deliver 

a notice to tenants announcing the rent or utility allowance increase to be effective 30 

calendar days from the date of the notification, unless the rent increase will be the same 

as what was stated in the initial notice to the tenants. 

If the figure is revised downward, the borrower must notify the tenants of their new 

rents prior to the first day of the month in which the new rent amounts are due. However, 

the borrower does not have to give 30 days’ notice of the new rents in this case. 

For notices to tenants, see Appendix 4. 

7.14 RENT CHANGES FOR UNITS RECEIVING HUD SECTION 8 ASSISTANCE 

[7 CFR 3560.207]

The Agency has the responsibility to review and approve project budgets on an annual 

basis based on need to meet cash flow and expense requirements. Therefore, the Loan Servicer 

will not take into account HUD’s automatic annual adjustment for Section 8 contract rents. The 

Loan Servicer must approve only the rents needed to provide sufficient income to meet approved 

project expenses. 

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A. Reviewing Budgets with HUD Subsidies 

Since HUD- and Agency-approved rental rates frequently differ, it may be necessary 

to have a three-column budget in properties with HUD Section 8 contracts. Exhibit 7-9 

depicts how many columns are required in the budget, depending upon the project type. 

Exhibit 7-9 

Reviewing Budgets with HUD Subsidies 

Project Type Columns Needed in Budget 

• 100 percent Section 8/515 with no 

interest credit; HUD contract rent rate is 

equal to basic rent 

• 100 percent Section 8/515 with interest 

credit; HUD contract rent is greater than 

basic rent and less than note rate rent 

• 100 percent Section 8/515 without 

interest credit; HUD contract rent is 

greater than note rate rent 

• Less than 100 percent Section 8/515 with 

interest credit; HUD contract rent is 

greater than basic and less than or greater 

than note rate rent 

• One column only showing HUD 

contract rent 

• Three columns showing basic rent, 

HUD contract rent and Agency note 

rate rent 

• Two columns showing HUD contract 

rent and note rate rent; difference is 

excess funds and deposited into 

reserves 

• Three columns showing basic rent, 

HUD contract rent and Agency note 

rate rent 

B. Excess Rents 

When reviewing the budget, if the Loan Servicer concludes that the HUD-authorized 

rent is more than what is needed to meet project expenses, a lesser amount than the HUD 

rent must be approved. When this occurs, in accordance with Exhibit 7-9, the borrower 

must deposit the difference between the Agency approved note rate rent and the higher 

HUD-authorized rate into the reserve account. The manager or borrower must use Form 

RD 3560-29 to document the required deposit in the reserve account. 

If excess HUD rents accumulate in the reserve account beyond the sum shown in the 

borrower’s loan agreement or resolution, the Loan Servicer may reduce or cancel the 

interest credit on the project. The Agency may reinstate interest credit whenever HUD 

rent should become lower than the Agency note rate rent. 

Before depositing excess funds in the reserve account, the borrower may have to 

collect overage. Whether overage is collected and a project is subject to cancellation of 

interest credit depend upon the issuance date and execution date of the project’s interest 

credit agreement. 

Certain early versions of the interest credit agreement do not have a legal basis to 

support the Agency’s policy to cancel interest credit or collect overage to offset interest 

credit. Each Section 8/515 project needs to be categorized according to the issuance date 

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and execution date of the project’s interest credit agreement on Form FHA 444-7 or its 

successor Forms FmHA 444-7 and RD 3560-9. Exhibit 7-10 provides a description of the 

rules that apply to each interest agreement form. 

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Exhibit 7-10 

Impact of Interest Credit Agreement on Ability to Cancel Interest Credit, 

Collect Overage, and Deposit Excess Funds in the Reserve Account

Form

Executed Before 

October 27, 1980 

Executed On Or After 

October 27, 1980 

FHA 444-7, dated 

11/17/69 and 

7/27/72 

No basis to cancel or reduce interest 

credit, collect overage, or deposit 

excess funds in the reserve account 

unless the borrower agrees. 

Legal basis exists to cancel or reduce 

interest credit, collect overage, and 

deposit excess funds in the reserve 

account and/or apply it on the loan. 

FmHA 444-7, 

dated 10/13/77 

• If first, second, fourth or fifth block 

of paragraph 2 checked, no legal 

basis to cancel or reduce interest 

credit, collect overage, or deposit 

excess funds into reserves. 

• If the third block of paragraph 2 is 

checked, no legal basis to cancel or 

reduce interest credit, unless 

borrower agrees. However, there is 

legal basis to collect overage and 

deposit excess funds to reserves 

and/or apply it on the loan. 

Legal basis exists to cancel or reduce 

interest credit, collect overage, and 

deposit excess funds in the reserve 

account and/or apply it on the loan. 

FmHA 1944-7, 

dated 11/29/82 

 Legal basis exists to cancel or reduce 

interest credit, collect overage, and 

deposit excess funds in the reserve 

account. 

FmHA 1944-7, 

dated 4/85 

 Legal basis exists to cancel or reduce 

interest credit, collect overage, and 

deposit excess funds in the reserve 

account. 

SECTION 5: RENTS FOR LABOR HOUSING PROJECTS 

7.15 OFF-FARM LABOR HOUSING 

A. Rent Structure 

Tenants in Off-Farm Labor Housing are required to make a monthly rent payment in 

the amount equal to: 

• In units with rental assistance, 30 percent of their income for rent in accordance with 

the amount calculated annually on Form RD 3560-8; or 

• The approved rent, when rental assistance is not available. 

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B. Establishing a Basic Rent at the Property 

For each Off-Farm Labor Housing project, the Agency will establish a basic rent in 

accordance with the project’s annual operating budget. This basic rent will be equal to 

the project’s operating expenses, plus the debt service payment based on the project’s one 

percent interest rate, as approved by the Agency. 

7.16 ON-FARM LABOR HOUSING 

Rents for On-Farm Labor Housing should be in accordance with the employment 

agreement between the tenant and the borrower. In general, rents should not be required for 

projects assisted through the On-Farm Labor Housing program. Borrowers who choose to 

charge rents at On-Farm Labor Housing properties must comply with the rent setting and 

adjustment procedures established for Section 515 projects in this chapter. 

On-farm labor housing borrowers are not required to charge security deposits, but if they 

do so, they must follow the terms described in Section 2 of this chapter. 

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