LIHTC Income Limits Could See 3.5% Reduction in Fiscal Year 2023, According to Novogradac Research
Due to limitations in data collection, the Census Bureau announced in October it would not release a one-year American Community Survey (ACS) for 2020.
The impact of the announcement is expected to ripple out to countless affordable housing properties, which are likely to see a change in the way income and rent limits are calculated for fiscal year (FY) 2023 as a result.
According to research done by Novogradac’s Income Limits Working Group, more than 80% of metropolitan statistical areas (MSAs) could see area median income (AMI) limits that are 3.5% lower than previously anticipated.
The possible outcome is the result of the way income and rent limits are calculated. In the absence of the one-year ACS for 2020, the U.S. Department of Housing and Urban Development (HUD) could switch to using data collected during a five-year period, as it typically does for incidences when there is not a reliable one-year ACS estimate.
The challenges in collecting data in 2020 won’t be felt until FY 2023 due to the timing of the collection and release of the information. HUD applies ACS figures from three years before the income-limit year and combines it with data from the consumer price index (CPI) to calculate income limits.
The reason for the change is due to difficulties collecting data in 2020. The Census Bureau stated its staff members had a high nonresponse rate from people of lower income, lower education attainment and who are less likely to own their own home. Due to the lack of data, the Census Bureau will not release a one-year ACS. However, it stated it anticipates having sufficient data to release a five-year ACS.
When generating a five-year ACS, the Census Bureau finds the median income of all responses obtained in the five-year period and does not inflate or adjust data collected in earlier years. This means that in areas with increasing income limits, the five-year ACS will be lower than the one-year ACS.
Summary of Findings
Novogradac’s working group sought a window into how the change might affect rent and income limits. Novogradac examined the historical variance between the one-year and five-year ACS for all MSAs in the country for ACS years ending in 2017 to 2019, the most recent years available. The initial analysis focused on MSAs as this covers more than 75% of the population of the United States and smaller counties are more likely to not have a reliable one-year ACS estimate.
There were 330 MSAs in Novogradac’s working group sample. Across all years, on average, the one-year ACS was 3.71% higher than the five-year ACS for MSAs. In 82% of areas, the one-year ACS data is higher than the five-year ACS data.
All eight areas with a population of more than 5 million had a one-year ACS higher than the five-year ACS for all three years. In the 10 largest MSAs, the AMI would have decreased by 5% on average if the five-year ACS data was used.
The effect of the five-year average is felt more heavily in larger areas. Of the 30 largest areas, which include all MSAs with a population of more than 2.1 million, no areas had a one-year ACS that was lower than the five-year ACS. For these areas with population greater than 2.1 million, the one-year ACS, across the three sample years, was on average 4.92% higher than the five-year ACS (5.44% higher in 2019).
This analysis does not mean that incomes will be 3.5% lower on average than they were in 2022. It means that limits will grow 3.5% slower than they otherwise would have. If an area was projected to have a 5% increase in 2023 based on the one-year ACS, this area would still have an increase over 2022 but the increase would only be 1.5% (down from 5% to 3.5%) because of the use of the five-year ACS. For an area that was projecting a 2% increase, this change would result in a decline in median income over 2022 of minus-1.5%.
To examine what this might mean for rent, consider an area that has a median income of $100,000 based on the one-year ACS. Under the five-year ACS, median income would be $96,500. A two-bedroom home with a $1,350 rent limit and a 3.5% reduction applied would fall by $47 to $1,303.
MSAs With the Largest Changes
A positive variance denotes the one-year was greater than the five-year and negative denotes the five-year was greater than the one-year. If an area has a positive variance of 5%, the limit using the one-year ACS was 5% higher than the limit using the five-year ACS. If the five-year ACS was used instead in this example, the income limit would have decreased by 5%.
Among the MSAs with the largest positive variance using the 2019 ACS were Redding, California (21%); Laredo, Texas (19%); Corvallis, Oregon (17%); and Jackson, Michigan (16%).
The five areas with the largest negative variance for 2019 ACS were Farmington, New Mexico (minus 15%); Grand Island, Nebraska (minus 7%); Hot Springs, Arkansas (minus 7%); Gadsden, Alabama (minus 6%); and Lawton, Oklahoma (minus 6%).
It’s not a given that all MSAs will use the five-year data, although HUD has adapted income calculations to fit specific circumstances in the past. One example is a period in the early 2000s known as
“re-benchmarking,” which spawned the use of ACS data.
Properties in Service vs. Properties in Development
For properties in service, if rent limits decrease, those owners are “held harmless,” meaning that they can continue to use the higher income limit from the prior year. Therefore, if the income and rent limit decreased, existing projects in this area would have flat rents for this period and flat income limits. Although the rent limit may remain flat, the net rent may decrease due to increases in utility allowances. This means net income may decrease even though the rent limit stays flat.
The hold harmless rule for LIHTC developments begins when a property is placed in service. Developers who anticipate placing a property in service in 2023 would need to pay attention to when they will place in service and how this will impact their gross rent and lease up. A lower income limit would not only impact the rent that can be charged, but also who can qualify for housing. In areas with large decreases in AMI, it could be difficult to find qualifying tenants. Typically, income limits are released by HUD on April 1 of each year.
Rents and incomes are area-specific and project-specific. Developers should revisit rent projections, purchase Novogradac’s Rent and Income Limit Estimates for 2023 once available and plan for the worst-case scenario.
At some future point, the Census Bureau will have sufficient ACS data to release a one-year ACS survey. When that happens the income limits should snap back to where they should have been under the one-year ACS. However, at this point, we do not when that will happen or if all areas will rebound at the same time.
There’s a possibility given the circumstances of COVID-19 that the Census Bureau ran into the same difficulties collecting ACS data again this year, which means FY 2024 may also rely on five-year averages.
For 2020, the Census Bureau stated it will not release any official one-year ACS figures. However, in the future, if the Census Bureau determines that some MSAs have sufficient data for one-year ACS and some areas do not, there could be a period of adjustment as different MSAs are able to provide one-year surveys on variable timetables, creating a schism between areas relying on single-year data sets while others still use five-year averages.
If all MSAs snap back at same time, the national median income should do the same. The timing of this could be important. Income limits cannot increase by more than the greater of 5% or two times the change in AMI. Therefore, if all areas snap back in the same year, the national median income should have a similar snapback and the cap on increases will reflect this snapback. For example, if all areas snap back in the same year, there would be 3.5% increase to the national median income, on top of any other expected increase. Therefore, if the national median income was expected to grow by 2%, then the snapback would result in a 5.5% increase in national median income and a cap of 11%. However, if the one-year ACS is phased in over time, the impact to national median income may not align with when an individual area starts using the one-year ACS and, therefore, income and rent limits could be impacted by the cap.
Income Limits for Other Programs
It is important to note that all state and local programs have a hold harmless component. If a project is subject to a regulatory agreement with a state or local agency, income and rent limits may not be held harmless and property managers may have to decrease the rent they charge tenants. Additionally, MSAs could still face local rent-control limits in the year of snapback.
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