In addition to increasing the amount of low-income housing tax credits (LIHTCs), theAffordable Housing Credit Improvement Act of 2016 (S. 2962) proposes a significant change to a fundamental aspect of Internal Revenue Code Section 42. The idea, if enacted, would allow LIHTC properties to better meet the need for affordable rental housing.
What is Income Averaging?
Currently, household incomes in LIHTC properties cannot exceed 60 percent of the area median (AMI) at move-in. The maximum housing expense (rent, utilities and required fees) is correspondingly restricted.
S. 2962 would alter these two limits to allow some units at 80 percent, offset by those at lower levels, such that the overall property-wide average equals 60 percent. This is known as income averaging.
While many affordable housing professionals are excited about the possibilities income averaging presents, others question how it will work. Fortunately the concerns of the latter group are largely resolved upon learning more.
A Few of the Opportunities
Income averaging would be beneficial in a number of circumstances. The examples discussed below are just a few of the opportunities where the change could help the LIHTC meet affordable housing need.
In high cost jurisdictions many people at 80 percent AMI have difficulty affording any kind of market-rate housing. The result is an unusual circumstance where there are options for those who have very low and very high incomes, but not those in between.
In low-population rural areas it can be difficult to identify sufficient income-eligible renters because the AMIs are so low; families with two minimum-wage incomes sometimes earn more than 60 percent of AMI. An increased limit would help LIHTC properties in these areas maintain full occupancy.
Over-income residents can pose a challenge for certain LIHTC preservation transactions; increasing to 80 percent AMI would mean this is less often an issue.
An objective of some community revitalization plans is to bring in higher-income households.
Having LIHTC units serve those at lower end of the spectrum is at least as important as the goals above. Examples include integrated supportive housing and the Housing Trust Fund. However, doing so means reduced rental income. Income averaging would allow LIHTC properties to offset the revenue reduction and make more affordable rental housing developments financially feasible.
How it Might Work
It’s important to note that the existing “40/60” and “20/50” minimum set-asides are not going away. Income averaging would be a new, third option.
In theory LIHTC property owners/managers could either:
- keep a running average of incomes among residents and compare it to those applying for occupancy, or
- designate units accordingly (as occurs now).
The main objection to income averaging cited by skeptics is that the first approach would be hugely challenging to implement. But such difficulty was never the intent. The bill language clearly and deliberately states “income limitation designated by the taxpayer.” (As suggested above, the different limits also apply to rents.)
To help simplify the math and compliance, the AMI choices are limited to 20, 30, 40, 50, 60, 70 or 80 percent. The first four of these levels are not new; LIHTC allocating agencies have provided incentives to reach lower income households for years. What would change is this deeper targeting would become a federal requirement. Currently, enforcement and interpretation of these lower levels is handled by states.
A minimum of 40 percent of units have to be restricted, meaning properties could have up to 60 percent “market-rate” apartments.
As mentioned above, income averaging could help LIHTC properties receive awards under the new Housing Trust Fund, which requires serving those at 30 percent AMI, or extremely low-income households. Having 80 percent AMI units could allow what otherwise might be financially impossible. A property maintains a 60 percent average by using a 2:3 ratio of 30 and 80 percent AMI units.
The income averaging provision is not retroactive; it would only apply to allocations made after enactment. All past, current and future tenants are third-party beneficiaries of the prior-recorded extended-use agreement, meaning there is a limit to the extent agencies and property owners can terminate or even make amendments. The terms of all these 30-year agreements include a 60 percent limit on incomes and rents (other than when the owner opted for 20/50).
The bill text is brief, which leaves room for questions such as whether and how the next-available-unit rule applies. Reports indicate this issue may be addressed in a future, revised version of the bill.
S. 2962 is also silent on the same unit and floor space fraction test now used in mixed-income properties. In other words, as the bill is currently drafted, an LIHTC property owner could designate the smaller units as serving lower-income households. Such an omission makes sense because of what would be an increase in complication. Also, persons with disabilities usually need one-bedroom apartments, which helps with integrated supportive housing because such households tend to qualify for 30 percent AMI units.
Housing programs must adapt to remain relevant and income averaging is an exciting step in that direction.
The bill’s future, including income averaging, will be discussed at the Novogradac 2016 Affordable Housing Conference in San Francisco. The June issue of the Novogradac Journal of Tax Credits will also feature coverage of the legislation.