States' Preliminary Implementations of the Income-Averaging Option for Minimum Set-Asides
The Consolidated Appropriations Act of 2018 established income averaging as a third minimum set-aside election, and this option happens to be one of the most significant changes to the LIHTC program in recent years. Every tax credit site must meet and maintain a minimum set-aside throughout the 15-year compliance period to qualify for the tax credit program. A minimum set-aside is the federally required minimum level of tax credit units at a site. To meet the set-aside, you must rent a certain percentage of the units in your building or site to qualified low-income households.
All tax credit owners must formally notify the IRS of their minimum set-aside election for their building or site when they file IRS Form 8609. If an owner doesn’t elect a set-aside on this form, all the tax credits the owner was allocated for its site may be lost. The IRS has published a revised Form 8609 that includes the income-averaging option as a minimum set-aside.
Previously, tax credit units were restricted to households earning more than 60 percent of the area median income (AMI). The prior minimum set-asides called for having 20 percent of the units targeted to no more than 50 percent of the AMI or 40 percent of the units at no more than 60 percent of the AMI, and these options remain part of the federal program.
Now, income averaging allows LIHTC-qualified units to serve households earning as much as 80 percent of the AMI as long as the average income limit at the property is no more than 60 percent of the AMI. A site using the income-averaging option must make at least 40 percent of its units affordable to eligible households. Under income averaging, unit designations may only be set at 10 percent increments beginning at 20 percent of the AMI. Thus, the allowable income/rent designation levels are 20 percent, 30 percent, 40 percent, 50 percent, 60 percent, 70 percent, and 80 percent of AMI.
The income-averaging option is intended to expand the program to serve more families. Before, families earning 80 percent of the AMI didn’t qualify for a LIHTC unit and were likely to be living in market-rate housing. Also, income averaging could help a site’s bottom line and allow for deeper income targeting. Higher rents that households at the upper range could pay would have the potential to offset the lower rents for extremely low- and very low-income households.
Leeway in Establishing Income-Averaging Guidelines
Many state LIHTC allocating agencies are working to establish income-averaging procedures. However, according to the National Council of State Housing Agencies (NCSHA), there’s no legal obligation to adopt income averaging as part of state allocating agencies’ programs. Some states may not implement income averaging, some may choose to postpone implementation, and others may implement tailored income-averaging policies and practices customized to meet the needs of individual states.
In a recent letter sent to the IRS, the NCSHA outlined some issues allocating agencies may face in implementing the income-averaging option for the minimum set-aside. The letter identified specific actions and implementation strategies allocating agencies are prepared to perform, such as determining whether or how to:
- Restrict income averaging in developments with market-rate units;
- Establish a process for designating units at various income levels and whether or not to allow units to float;
- Institute procedures that would allow owners to change unit designations over time, so long as the 60 percent average is maintained;
- Determine how many income designation levels any individual project may have; for example, a state may want to limit the number of different income designations it allows for any individual project, even though the IRC provides seven different income designation possibilities (20, 30, 40, 50, 60, 70, and 80 percent of AMI);
- Require owners of multiple building developments that elect income averaging to do so for all buildings in the development rather than making different elections for different buildings;
- Set the testing period for compliance with income-averaging designations; for example, allocating agencies may want to use the end of the year as the end of their testing period and allow for owner certifications of designations;
- Require income recertifications for 100 percent low-income developments if the agency deems it necessary;
- Limit or prohibit income averaging for resyndication deals;
- Require unit parity with regard to bedroom size by income designation to prevent owners from designating larger units at higher income designations and smaller units at lower income designations; and
- Adjust compliance monitoring fees to reflect the additional work agencies may need to do to monitor developments that elect income averaging.
Initial Implementation Actions by State Allocating Agencies
Many LIHTC allocating agencies are working to establish income-averaging procedures as part of their programs. To do so, many are introducing procedures in their qualified allocation plans (QAPs). The QAP is a document your state housing agency publishes that contains the selection criteria it uses to award credits. The QAP describes how a state housing agency awards credits and describes some of the agency’s procedures for monitoring noncompliance.
Several states have begun to make moves to either begin implementing or deny the option, mainly through draft QAPs published for consideration. The following are what some states are doing or proposing:
Alaska. In its June draft of its QAP for the GOAL (Greater Opportunities for Affordable Living) program, the Alaska Housing Finance Corp. said income averaging won’t be allowed for LIHTC sites. Sites must comply with either the 20-50 or 40-60 rule.
California. The California Tax Credit Allocation Committee (TCAC) released a memo soon after the 2018 Consolidated Appropriations bill was enacted and has since adopted emergency regulations, which immediately allows applicants to propose new projects with the income-averaging option. However, unique to California is the implementation of a property-wide average among units of 50 percent AMI, as opposed to the federal 60 percent. TCAC also intends to make approval conditioned on the project electing “yes” on line 8b of Form 8609 so that the income averaging applies to the project as a whole rather than per building.
Georgia. The Department of Community Affairs (DCA) proposed allowing the income-averaging option starting with 2018 awards, although LIHTC resyndications and properties with a commitment of HOME funds from DCA are ineligible.
Owners would provide a legal opinion that income averaging complies with other funding source requirements and make the 8(b) election on Form 8609. The DCA announced that it will limit the number of income-averaging designations. LIHTC units could be set at no more than four percentages—30, 50, 60, and 80 percent.
Indiana. LIHTC site owners with an allocation of 2018 tax credits are allowed to ask the Housing and Community Development Authority to use the income-averaging option unless doing so would reduce either the number of LIHTC units or the application point score. Documentation requirements include an updated market study.
Iowa. In a recent notice, the Iowa Finance Authority said it has determined not to allow income averaging for LIHTC projects awarded credits prior to the 2019 round.
Texas. The Department of Housing and Community Affairs has proposed granting staff the ability to approve income averaging in awarded developments so long as it wouldn’t change any representations made in the application. Otherwise, the board would vote on requests. Owners will need a current market study and confirmation from funding sources.
The statement also specifically says AMI designations “can float” between units: “If at Application the owner committed to a mix of 30%, 60% and 80% units with an overall low income percentage of 55% ... as long as the overall low income percentage remains at or below 55%, the unit designations can change to any combination of 20%, 30%, 40%, 50%, 60%, 70% or 80%.”
Ohio. The Ohio Housing Finance Agency (OHFA) has released a draft 2019 QAP that incorporates the income-averaging option. The draft includes the following:
All units are designated low income. Sites cannot also contain unrestricted, market-rate units;
- 100 percent of units must be occupied by persons earning 80 percent of AMI or less, and at least 50 percent of all units must be occupied by persons earning 60 percent of AMI or less;
- Applicants may need a legal opinion on compliance with other subsidies;
- Resyndication cannot increase rents or occupancy limits for any LIHTC unit; and
- Owners will need to make the 8(b) election absent demonstrating a compelling need.
The draft also adjusts scoring criteria and revises the developer fee calculation and basis boost eligibility.
Wisconsin. The Wisconsin Housing and Economic Development Authority (WHEDA) recently amended its 2018 QAP to incorporate a new state housing credit. At the same time, it incorporated the use of income averaging in 100 percent affordable 4 percent deals into its qualified allocation plan.
WHEDA has also included the changes in its draft 2019-2020 QAP.
Request for IRS Clarification
In its letter to the IRS, NCSHA identified areas in which IRS action or guidance would clarify income-averaging requirements in practice.
Over-income in multiple units at different designations at same time. Complying with the next available unit rule looks straightforward when sites are 100 percent affordable. But complications could arise at sites using the new income-averaging option.
In general, the rule has allowed a family to remain in its LIHTC home even when its income increases beyond 140 percent of the maximum allowable limits. However, the next available market-rate unit at the development must be converted to a LIHTC unit.
Allocating agencies are seeking guidance on how the next available unit rule would apply at an income-averaging site, including what happens when tenants in multiple LIHTC units at different designations go over-income at the same time. If the next available unit is a market-rate unit, what designation is filled first?
Establish a procedure for HUD to use in calculating area-specific income limits at the various designations allowable under income averaging. IRS Revenue Ruling 89-24 sets the 50 percent of AMI income limit for LIHTC sites as equal to HUD’s “very low-income” limit and provides direction to HUD to calculate the LIHTC 60 percent of AMI income limit at 120 percent of the HUD very low-income limit.
Without HUD calculating income limits at the 20, 30, 40, 70, and 80 percent of AMI levels allowed under the income-averaging option and publishing them, NCHSA believes there’s a risk of owners and managers making mathematical mistakes when they set income limits, which could have serious repercussions for owners, investors, and low-income residents alike.
Update Form 8823. Although the IRS has revised Form 8609 to reflect income averaging as a new minimum set-aside election, the IRS hasn’t revised Form 8823 line 11f, which refers to the 20 at 50 and 40 at 60 minimum set-asides, to also reference income averaging. Until the IRS is able to make this revision, the allocating agency will continue to use the existing Form 8823 for compliance monitoring.