What You Need to Know about 2017 HOME Rents

Published by Thomas Stagg on Monday, June 26, 2017 - 12:00am

On June 2, the U.S. Department of Housing and Urban Development (HUD) published fiscal year (FY) 2017 HOME rent limits.  The limits are effective June 15 for all units financed by HOME funds.

Background
Properties constructed with HOME funds are required to charge rents that are affordable to low- and very low-income households. The maximum HOME rent limits are established in Section 215 of the Cranston-Gonzalez National Affordable Housing Act of 1990 (NAHA), as amended. There are two limits used in the HOME program: High HOME and Low HOME. High HOME rents are the lesser of the HUD published fair market rent (FMR) or a rent that does not exceed 30 percent of the adjusted income of a family whose annual income equals 65 percent of the median income for the area as determined by HUD, adjusted for bedroom size. The Low HOME rent limit for an area is 30 percent of the annual income of a family whose income equals 50 percent of the area median income, adjusted for bedroom size. In addition, the Low HOME rent limit cannot exceed the High HOME rent limit.

In 2010, when HUD discontinued holding income limits harmless, there was concern that HOME income limits would decrease with changes in the income limits.  In the May 17, 2010 Federal Register, HUD stated that: “(f)or its HOME program … HUD determined that rents will be held harmless, but that income limits will be allowed to fluctuate with the market.” From 2010 to 2013 HUD held rents harmless in all circumstances.  However, on May 2, 2013 HUD issued a memorandum on the 2013 HOME program rent limits and changes in how HUD calculates the HOME program rent limits.  The memo clarified that the intent was to only hold rent limits that were based on income limits harmless and allow rent limits that were based on FMR to fluctuate with changes in FMR.

This change in policy had a correction period that spanned three years (2013, 2014 and 2015) while rents in areas that had decreases under the new policy were reset to the new hold harmless benchmark.  After this correction period HOME rent limits will only decrease for changes in FMR and not for changes in income limits.  For more information about the implementation of the hold harmless policy, see “New HOME Program Rent Limits For 2013,” in the July 2013 Novogradac Journal of Tax Credits.

Analysis of FY 2017 HOME Rents
Although HOME rent limits are held harmless for changes in income limits, there were still many areas that had decrease in their 2017 rent limits due to decreases in FMR. 

 

Blog Chart Changes in FY 2017 HOME Rents
Click to Enlarge

 

HOME rents generally trended up for FY 2017, however, there were still many areas that had decreases.  Astute observers will quickly notice that there are a lot more areas with decrease on the high HOME limits than the Low HOME limits.  This is due to the impact of FMR on limits.  Because HOME rent limits only decrease due to changes in FMR generally low HOME rents should not have decreases.  However, because the Low HOME limits cannot exceed high HOME limits if the FMR decreases below the Low HOME limits, Low HOME limits will also decrease.  There are 757 areas in 2017 where the low HOME and High HOME equal each other. In 109 of these areas FMR decreased from 2016 to 2017 causing the Low HOME rents to decrease. 

FMR has a much larger impact on the High HOME rent limits.  Of 2,599 areas, 2,436 areas have High HOME rents that are equal to the FMR at the two-bedroom level (93 percent of areas).  This means that High HOME limits are very susceptible to changes in FMR.  This is what led to 573 areas having decreases in High HOME limits.

Impact to LIHTC Properties
Many LIHTC properties use HOME funds as a gap funding source.  Although a property’s LIHTC rents are held harmless, properties are not held harmless for decreases in HOME rents.  For units that are restricted by both HOME and LIHTC an owner would need to use the lesser of the two rents.   Decreasing HOME rents may cause issues for the property being able to pay debt service and operating expenses. 

Conclusion
Owners of HOME funded properties should closely monitor the HOME limits and be aware that they may have to lower rents to tenants due to changes in the limits.  This may impact a property’s ability to pay debt service and cover operating expenses.