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HUD's Change in Formula for Income Limits Cap Means Lower Maximums for 2024

Published by Thomas Stagg on Tuesday, March 5, 2024

Journal Cover March 2024   Download PDF

Year-over-year increases to income limits and maximum rents for affordable multifamily rental housing financed by low-income housing tax credit (LIHTC) equity will be capped at 10% for 2024 and beyond.

HUD announced Jan. 10 a new methodology for determining the annual cap for year-over-year increases in income limits for LIHTC- or tax-exempt-bond-financed properties (and for housing other HUD programs such as Section 8). That means that when HUD announces new limits April 1, the cap will be 10%, rather than an estimated 14.78% under the previous formula. The portion of areas at the cap under the 2024 limits is expected to increase from 10% under the old formula to 30%.

Income limits are the maximum amount a household can earn and still qualify for income-restricted housing, Since rent limits in LIHTC projects are based on income limits, that cap limits rent increases to the same figure. The lower 2024 cap compared to the previous formula will result in smaller potential rent increases for some tenants, but also will mean fewer tenants qualify for LIHTC-funded housing and means tighter financial margins for many property owners.

Before January's announcement, HUD's formula set the annual year-over-year cap at the greater of 5% or double the change in national median income, without a hard ceiling. Since the change in national median income for the most recent data was 7.39%, the 2024 cap would have been 14.78% under the previous formula. Now, due to the ceiling it's 10%.

History and the Changes

HUD established the previous cap methodology after discontinuing its hold-harmless policy in 2010. That change led to the possibility of dramatic swings in income limits, so HUD instituted a floor and a cap to minimize those swings, using the aforementioned formula.

Before 2024, the most recent years that exceeded the new 10% maximum increase were 2018 (an 11.5% cap) and 2022 (an 11.9% increase).

The 10% maximum increase in the cap wasn't the only change from January's announcement. The cap calculation finds the change in national median income and trends it forward using consumer price index (CPI) data. Before 2022, HUD calculated the change in national median income using the HUD published national median income, which was based on historic American Community Survey (ACS) data trended forward to the income year using CPI. However, in 2022 HUD began looking at the change in national median income from the most recent ACS year, a change made permanent with the new formula.

That means for 2024, the national median income change portion of HUD's formula is the change from 2021 ACS to 2022 ACS, without any sort of trend factors, with the 10% cap.

Effects on Properties

The 10% hard ceiling on increases means any increase in the national median income of greater than 5% won't further change the income limits cap (since double that figure hits the hard overall cap). The means tenants in existing LIHTC developments will never see their rent limits increase by more than 10% in any year. Note, tenant rents may increase by more than 10% if property owners were charging less than the maximum rent.

However, the new cap also may exclude potential tenants whose income would otherwise qualify them for LIHTC housing. The cap also will likely result in lower rental income for LIHTC developments that charge maximum rents in markets where the increase would otherwise surpass 10%.

Properties under development will see the change affect future rents and therefore supportable debt. If an area would have had an increase greater than 10%, then the 10% cap will likely lead to a larger financing gaps, resulting in properties needing more bonds, LIHTCs or soft financing.

Housing and Economic Reform Act special income limits are exempt from the cap, meaning income limits at those properties can increase at greater than 10% if the underlying income data allows.

What's Next

After publishing the new formula, HUD sought comments by Feb. 8 and received 18 public comments. At the time of this publication, there had been no update from HUD on the updated regulations.

HUD expects to publish the 2024 income limits around April 1 and the Novogradac Rent and Income Limit Estimator estimates an average increase of 6.7% nationally, with about 95% of areas having some increase.

Novogradac's Income Limits Working Group submitted a comment to the IRS on the change and will continue to follow the issue. Visit www.novoco.com/resource-centers/affordable-housing-tax-credits/income-limits-working-group for more information on the group. 

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