How to Prevent or End Sublets that Endanger Tax Credits

Households that temporarily need to live elsewhere may decide to sublet their units while they’re gone. Or as Internet-based apartment-sharing services such as Airbnb have become more popular, households may seek to rent out their unit to strangers for short stays to supplement their income. Although many owners and managers of conventional sites allow this practice, letting low-income households sublet units at a tax credit site could lead to noncompliance.

The tax credit law requires you to certify the income of all households that occupy your low-income units. But if a qualified, low-income household sublets its unit, you’ll have a situation where the unit’s actual occupants were never certified. As a result, your state housing agency may cite you for noncompliance. And if you don’t correct the problem, the owner’s tax credits may be at risk.

We’ll give you steps you can take to prevent households from subletting. And we’ll also give you steps to take if you discover that a household has been subletting its unit and putting the owner’s credits at risk.

STEPS TO PREVENT SUBLETS

Here are two steps you can take to help prevent your low-income households from subletting their units.

Step #1: Ban Subletting in Lease

The best way to avoid compliance problems is to get households to agree beforehand not to sublet. Include a clause in the lease you sign with low-income households that bans subletting. We’ve prepared a Model Lease Clause: Ban Sublets in Lease, which you can adapt and use at your site.

Unless you tell them, households generally don’t realize that subletting their units could trigger compliance problems for you. In addition, households may not know that by using apartment-sharing websites to generate additional income, they could be violating their lease and several local laws, jeopardizing their housing in the process.

Once they understand that no-subletting clauses in your lease prohibit households from re-renting to others, nightly or otherwise, and agree in the lease to follow it, they’re much more likely to cooperate with your compliance efforts. And households that sign the lease and sublet anyway will be in violation of the lease.

Step #2: Get Household Head to Initial Ban

It’s important to stress to households that subletting is a serious issue at your tax credit site. Too often, household members don’t read their lease carefully before signing it, or they assume that certain paragraphs are just “boilerplate provisions” that you aren’t likely to enforce.

To show households that you’re serious, point out the clause in your lease that bans subletting and ask households if they have any questions. Then, get the household head to initial the clause to confirm that she read and understood it. Making this extra effort to communicate this restriction to households is especially important in apartment-dense places where subletting is very common.

STEPS TO END SUBLETS

If you discover that a low-income household is subletting its unit, it’s important to take action immediately. This way, you’ll increase the chances that you can fix the problem before your state housing agency visits your site. And your quick response to resolving compliance issues you discover on your own will help show your state housing agency that you’re proactive when it comes to tax credit compliance.

Here are two steps you can take to protect the owner’s tax credits when you learn about a sublet.

Step #1: Send Notice Demanding Removal of Unauthorized Occupants

Send a warning notice to a low-income household that you learn is subletting its unit. If the household forgot about the subletting ban or was just hoping to get away with subletting, it may end the sublet in response to the notice. If it doesn’t, your notice will show your state housing agency that you acted promptly once you learned about a sublet. And it will show a court that you took reasonable steps before resorting to eviction.

We’ve prepared a Model Notice: Warn Household to End Sublet, that you can adapt and use as a warning to households that are subletting.

Step #2: Evict Households that Don’t Cooperate

If a household doesn’t respond to your warning notice, consult your attorney about evicting the household and its subtenant from the unit.

You might not be able to evict a household if you didn’t take the steps we outlined above to prevent subletting. Or you might face a very pro-tenant judge who doesn’t understand the tax credit program’s requirements and won’t evict a household for subletting if the household has paid its rent on time and has otherwise complied with your lease. Consult your attorney about these issues when deciding whether to evict a household that’s endangering the owner’s tax credits.

If you decide not to evict a household or your eviction attempt doesn’t succeed, you still have a compliance problem to resolve. If you manage a mixed-income site, consider renting your next unoccupied market-rate unit to a qualified, low-income household and start counting that unit as low-income. You can treat the subletting household’s unit as a market-rate unit and tell the household you’ll raise its rent to market-rate if it renews the lease.