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Understanding the 2010 Income Limits

Published by James R. Kroger on Tuesday, June 1, 2010

Journal cover June 2010   Download PDF

The U.S. Department of Housing and Urban Development (HUD) on May 14 released income limits for 2010. HUD also announced on May 12 that it would eliminate the hold-harmless policy in estimating Section 8 income limits. These two developments could mean significant changes for owners and managers of affordable housing.

MTSPs and HERA
Projects that receive tax-exempt bonds or low-income housing tax credits (LIHTCs) are referred to by HUD as Multifamily Tax Subsidy Projects (MTSPs) and are eligible to use a set of income limits released specifically for MTSPs. For HUD fiscal year 2010, the MTSP 50 percent limit is equal to the traditional HUD very low-income (VLI) limit. Because HUD is no longer holding VLI harmless for tax credit or Section 8 purposes, a county’s VLI could potentially be less than the year before. In fact, there are 127 counties whose income limits decreased before applying any hold-harmless provisions. However, the 2008 Housing Economic Recovery Act (HERA) established a general hold-harmless rule that says: “Any determination of area median gross income under subparagraph (B) with respect to any project for any calendar year after 2008 shall not be less than the area median gross income determined under such subparagraph with respect to such project for the calendar year preceding the calendar year for which such determination is made.”  

There is a push in the affordable housing community to have the HERA hold-harmless rule function in the same way that the HUD hold-harmless rule has worked in the past, in that a county would be held harmless and the income limit for the county would not be less than the year before. However, based on the HUD MTSP briefing material, it appears that HUD is interpreting the hold-harmless to apply on a project-by-project basis.

Because this rule is implemented on a project basis instead of a county basis, LIHTC or tax-exempt bond projects in the same county will, potentially, have different rent and income limits. This disparity will become increasingly evident in 2010 as we see a split between projects in service in 2008 vs. 2009 vs. 2010.

It should be noted that the MTSP income limit will always be greater than or equal to the HUD limits. Properties with layered financing will have to track both sets of income limits and be sure they are following both requirements.

Project vs. County
If the provision applies on a project-by-project basis, an unintended consequence of HERA is that different projects located in the same county will have different rent and income limits. The followingt examples illustrate the difference between the hold-harmless provision on a project-by-project basis and on a county basis

Example 1 – Hold Harmless Applied on a Project-By-Project Basis

    
 20082009201020112012
HUD very low-income limit (VLI)$30,000$32,000$29,000$26,000$27,000
Project 1 (Income determined in 2008)$30,000$32,000$32,000$32,000$32,000
Project 2 (Income determined in 2009)N/A$32,000$32,000$32,000$32,000
Project 3 (Income determined in 2010)N/AN/A$29,000$29,000$29,000
Project 4 (Income determined in 2011)N/AN/AN/A$26,000$27,000


In periods of falling VLI, projects placed in service in later years will be at a financial disadvantage to projects that were placed in service in earlier years, in both the amount of rent they can charge and in the number of tenants that can qualify to live in the project. Furthermore, this will create an administrative burden on tax credit participants such as the Internal Revenue Service (IRS), LIHTC allocating agencies, developers, investors and property management companies that are responsible for tracking the rent and income limits. Defining the hold-harmless policy on a county basis would solve many of these problems.

Example 2 – Hold Harmless Applied on a County Basis

 20082009201020112012
HUD very low-income limit (VLI)$30,000$32,000$29,000$26,000$27,000
Project 1 (Income determined in 2008)$30,000$32,000$32,000$32,000$32,000
Project 2 (Income determined in 2009)N/A$32,000$32,000$32,000$32,000
Project 3 (Income determined in 2010)N/AN/A$32,000$32,000$32,000
Project 4 (Income determined in 2011)N/AN/AN/A$32,000$32,000

Adopting a hold-harmless policy that applies on a project-by-project basis creates anomalies among projects located within the same area and creates uncertainty for industry stakeholders who are trying to determine the feasibility of future projects.

Placed in Service Date
Projects’ rent and income limits are held harmless under HERA and/or qualify for a special income limit under HERA (HERA Special), depending on when the project has been placed in service:

  1. Projects placed in service before January 1, 2009 – these projects are eligible for the HERA Special income limits if they are within a county in which the HERA Special income limits are published by HUD. They are also eligible for the hold-harmless provisions.
  2. Projects placed in service after December 31, 2008 and before May 14, 2010 (the effective date of the 2010 income limits) – these projects are not eligible to use the HERA Special income limits, but their rent and income limits are still eligible for the hold-harmless provisions, and can therefore use 2009 income and rent limits if they are higher than the published 2010 limits.
  3. Projects placed in service after May 14, 2010 – these projects must use the current income limits published by HUD. These projects are eligible for hold-harmless provisions under HERA as well, but the floor for their rent and income limits in future years will be the 2010 limits instead of 2009 like projects placed in service earlier.

Also, for projects that are placed in service after May 14, 2010, depending on the project’s rent floor election effective date, rents could be higher than the rent limits derived from the HUD income limits. LIHTC project owners can elect to have their rent floor effective on the date of their carryover allocation or the date the project is placed in service. If the project is placed in service after May 14, 2010, but owners elected to have the rent floor effective prior to that date, the project’s rents will never be allowed to go below that level.  

Project owners need to pay attention to when their rent election is effective and when the project is placed in service in order to use the correct income and rent limits, especially because HUD is currently publishing only the HERA Special limits and the MTSP income limits, without the hold-harmless provisions. So owners whose projects either aren’t in a county where there are HERA Special limits or don’t qualify to use HERA Special because they were placed in service after December 31, 2008 will have to keep track of their own income limits by comparing the current year HUD published income limits to the highest income limits that were applicable to the project in prior years.

HUD also added a new adjustment to its income numbers this year. In announcing its termination of the hold-harmless policy for Section 8 income limits, HUD said it will allow Section 8 income limits to decrease beginning with the fiscal year 2010 income limits, but will limit all annual decreases to no more than 5 percent and limit all annual increases to 5 percent or twice the change in national median family income, whichever is greater. And in the published 2010 income limits, HUD did just that. Between 2009 and 2010, the published national median family income had an increase of 0.6 percent, so twice the increase would be 1.2 percent. Therefore, since 5 percent is higher than twice the increase in the national median family income, the 2010 increases and decreases to the very low-income limit were limited to 5 percent.  There were 15 metropolitan areas that were affected by the cap on decreases and seven areas where the increase was capped at 5 percent. Some projects might see increases in the overall income limit greater than 5 percent if they qualify for the HERA Special limits, because the HERA Special limit is calculated separate from the MTSP very low-income limit.

More About the HERA Special
HUD is calculating the HERA Special income limit by determining a growth rate from the base year (2008) to the current in median family income and multiplying that growth rate by the 2008 VLI to get the current HERA Special income limit.

Example 1 - Multiplication Method

Etowah County, Ala.

2008 MFI$44,300
2009 MFI $47,600
Dollar growth1.0745 = (47,600/44,300)
2008 VLI$23,700
2009 VLI$25,450 = (23,700*1.0745, rounded to the nearest $50)

Percentage Increase vs. Dollar Increase
The language used in HERA would seem to indicate that the amounts should be added and not multiplied (emphasis has been added):

  1. the area median gross income determined under the HUD hold harmless policy with respect to such project for calendar year 2008, plus
  2. any increase in the area median gross income determined under subparagraph (B) (determined without regard to the HUD hold harmless policy and this subparagraph) with respect to such project for the current calendar year over the area median gross income (as so determined) with respect to such project for calendar year 2008

HERA clearly states that the two should be added; however, the language in the second part appears to indicate taking the 2010 figure over the 2008 figure, which would result in a growth rate. So adding these two together would result in an incorrect answer. Many people in the industry are under the impression that the increase would be calculated by taking the 2010 MFI minus 2008 MFI and adding that to the 2008 VLI. Using HUD’s method of multiplying, the end result is a slightly higher amount than would be reached under the addition method. Let’s look at Etowah County again, as an example:

Example 2 - Addition Method

Etowah County, Ala.

  
2008 MFI$44,300
2009 MFI $47,600
Dollar growth$3,300 = (47,600-44,300)
2008 VLI$23,700
2009 VLI$25,350 = (23,700+ (3,300*.5 (for 50%) rounded to the nearest 50)

Though there has been some discrepancy in the industry over how these income limits are to be calculated, the amounts published by HUD using the percentage increase method should be used, as HUD is the recognized source for income limits.

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