The Promise of Income Averaging

Published by Elizabeth Strojan on Thursday, July 5, 2018
Journal cover thumb July 2018

When Congress passed and President Donald J. Trump signed the Consolidated Appropriations Act of 2018, much of the affordable housing community’s focus was understandably on the increase in funding for public and affordable housing. 

This was perhaps to be expected, given that it was the first increase in resources in many years and came at a time when the need is vast and growing. But an equally important, if less celebrated, provision in the bill allowed for the option of income averaging in the Low-Income Housing Tax Credit (LIHTC) program. This is a game changer for affordable housing, a policy that presents lasting promise for low-income families across our country.

This new option in the LIHTC program means a broader range of families will now have access to federal housing assistance. At the same time, income averaging is a new tool for targeting deeply affordable homes to the neediest Americans. Income averaging can also help increase economic diversity and develop more inclusive communities. This article explores how income averaging works, the important policy goals it can help achieve and the ongoing need for advocacy for federal housing policy. 

How Income Averaging Works

The LIHTC program was designed to serve families with incomes below 60 percent of area median income (AMI). The income averaging option moves the maximum income to an average, allowing the LIHTC to finance homes for households earning up to 80 percent AMI, as long as the average of all LIHTC units stays at 60 percent AMI. 

Let’s take, for example, a 100-unit affordable housing development, where all homes within the property will be financed with housing credits. Without the income-averaging option, each of those units would have to be targeted for households at or below 60 percent AMI. Due to development costs, it can be difficult to create housing for households with much lower incomes without additional subsidy, concentrating resources on a narrow band of affordability. 

Income averaging allows internal cross-subsidization within a property, meaning higher rents paid by households with slightly higher incomes help offset lower rents paid by households with lower incomes. Now, the same 100-unit affordable housing development could include 20 units at 80 percent AMI, which can help provide 20 units at 40 percent AMI, without the need for additional subsidy. 

Important Policy Goals 

Serving a broader range of families in need of affordable housing
Income averaging allows the affordable housing field to leverage federal programs to serve families who are struggling to get by, but were previously ineligible for assistance because they made too much or too little income. HUD defines households earning below 80 percent AMI as low-income. However, before the income averaging option, there were not a lot of options for federally assisted housing for families with incomes between 61 and 80 percent AMI. 

For example, a first year New York City public school teacher who is a single parent with two children earns too much (just over 60 percent AMI) to qualify for traditional LIHTC properties. However, finding an affordable home on the private market is difficult for them, as rents in the city continue to rise and the rental vacancy rate remains low. Using income averaging, this teacher would now qualify for LIHTC units available to households earning up to 80 percent AMI. 

While Section 8 rental assistance and public housing are targeted for extremely low-income and very-low income households, the demand for these programs far outstrips supply. This is another reason cross subsidizing within a project and the use of income averaging is game changing. A teacher’s aide who cares for a son and a grandmother, for example, earns too little to pay LIHTC rents set for families earning 60 percent AMI. In a property using the income averaging option, there would be units affordable to this family without the need for additional rental assistance. Income averaging adds another tool for deeply affordable housing, helping to create more homes for people who could not afford LIHTC housing before.

Building more diverse, inclusive developments 
From a fair housing perspective, income averaging allows for greater economic diversity in both high-income and low-income neighborhoods, which translates to more housing choices for families. Including some higher-income units in a project can help finance more developments in neighborhoods with higher development costs, introducing the kind of economic diversity that helps create more inclusive, integrated buildings and neighborhoods. In low-income neighborhoods, this new policy allows for greater mixing of incomes in specific developments and in neighborhoods that have previously seen mostly very low-income housing development. As we move forward with a yearlong engagement to develop New York City’s plan to affirmatively further fair housing, we expect income averaging will be one of many tools that help us achieve the promise of a fairer, more equitable city.

Additional resources for the preservation of existing affordable housing 
Finally, the preservation of affordable housing can also benefit from the income averaging option. Unlike new-construction tax credit projects, preservation tax credit projects can only include the families in place whose incomes meet tax credit income limits. Therefore, the greater range of AMI levels allows more units to qualify as low-income in preservation transactions, so that more resources are available to preserve existing affordable housing.

Years of Advocacy Pay Off and the Work Continues

The income averaging option is the result of many years of advocacy–from high-cost cities such as New York seeking to expand their set of policies and programs to serve more of the lowest income households, as well as from rural states that need to broaden the range of working families eligible for LIHTC developments. This is a good example of the kinds of innovations our field can achieve when we put together our best thinking and speak with a unified voice.

The need for affordable rental housing across the United States is pressing and individuals and families at a variety of income levels are finding it harder and harder to find a stable home near jobs, good schools and access to transit. While we take a moment to celebrate our recent gains, we must continue to push for solutions to our country’s housing needs–both increasing resources and innovative policy changes that improve our ability to deploy those resources. While HUD funding is up in fiscal year 2018, we still have a long way to go to get to where we need to be. The remaining provisions in the Affordable Housing Credit Improvement Act, especially setting the 4 percent minimum rate, would inject additional equity into developments nationwide, letting us build more housing. 

In New York City, where we believe income averaging will be a game-changer in how we deliver affordable housing to people who need it, we look forward to implementing this option to best benefit our communities. Like housing finance agencies across the country, we are working hard to adjust our program guidelines to allow affordable housing developers to use this new tool to achieve a greater range of affordability for communities and neighborhoods. 

Elizabeth Strojan is director of government affairs for the New York City Housing Development Corporation, the largest municipal housing finance agency in the country.