Income Averaging Trends

7 min read

Two State HFAs Think Through Their Policy Choices 

State housing finance agencies are still feeling their way into the new Income Averaging (IA) authority, with no clear consensus yet on standard practices for how it will be implemented. For instance, a checklist of 21 states claims that more than a dozen of them are limiting IA to nine percent tax credit deals. Yet the largest state, California, thinks IA may be better suited to its four percent tax credits, and Wisconsin is allowing it only on four percent deals.

A number of states are actually waiting for the dust to settle by not allowing IA for their 2018 allocations, according to an analysis by A.J. Johnson Consulting Services, Williamsburg, VA. These include Georgia, New Jersey, Minnesota, Pennsylvania and South Carolina. Alaska is not allowing IA at all, according to the analysis.

The situation is in some flux.

What isn’t in doubt is the general perception that allowing incomes at area median incomes of up to 80 percent, as long as the average of all incomes is 60 percent, will help extend the number of people who can benefit from LIHTC financing up into the workforce housing arena. But even those levels are not set in stone. California, for instance, has set its own AMI requirements, and they are stricter than the national standard.

California and Ohio choices
“The average affordability under federal law has to be 60 percent of AMI for all the affordable units,” says Mark Stivers, executive director of the California Tax Credit Allocation Committee. “Here in California, we have a stricter requirement. For a four percent tax credit project, the average has to be 59 percent of AMI and for a nine percent tax credit project it has to be 50 percent of AMI.”

The California agency director feels IA works better for rehabilitation projects, “because they have existing tenants earning more than 60 percent of AMI. The owner’s choice is to relocate those folks and pay for their relocation or lose tax credits on the unit. IA allows them to keep those tenants and get tax credits, as long as tenant income is less than 80 percent of AMI. So it has been very popular with rehab projects that happen to have a few over-income tenants.”

And in California, rehab projects generally work better with the four percent credit, he feels.

“In many states, there aren’t many four percent projects, so that may be why other states are limiting IA to the nine percent program,” says Stivers.

Ohio is also allowing IA election on both nine and four percent deals, according to Kelan Craig, director of planning, preservation and development at the Ohio Housing Finance Agency.

Only a small percentage of deals have opted for IA right out of the starting gate in those two large states. In California, “Through our October meeting we will have approved ten new projects with IA out of 91,” Stivers notes. “We also allowed some projects that had reservations in the past that have not yet been placed in service to convert to IA, only if they were accommodating over-income tenants or increasing the number of low-income units. We have done seven of those to date.”

In Ohio, about a third of projects have opted in. “Of the 34 to 35 applications we received, 11 of those opted to pursue IA,” Craig says. “Seventy-five percent of those were in urban areas, 64 percent were very high opportunity areas, according to our opportunity index, and 55 percent are using our multifamily lending product as their permanent debt source.”

First results point to a net plus in Ohio. “Based on our initial analysis we lost only two percent of extremely low-income units,” says Craig. “And what was accomplished was expanding the income bracket. One hundred fifty-eight units, rather than being in the traditional 60 percent AMI or below, were at 70 or 80 percent, workforce housing range.”

Another trend in future years might be for all projects to ask for IA execution.

“We expected it to be kind of a new default election, that people would do it automatically even if they intended to do the majority of their units at 60 AMI,” says Craig.

In some cases, the projects are already prequalified for IA because of different AMIs already in their structure. “A lot of projects already have some units targeted at less than 60 percent AMI to begin with, so having some units at 70 percent or 80 percent doesn’t cause them to exceed the average income requirement. They can do that and meet the average pretty easily,” Stivers points out. “They’re just structuring projects to have both deeper targeted units and units at 70 or 80 percent AMI to make it work.”

“IA may not work for rural projects in California,” Stivers says. “To date, we’ve had no rural projects do IA, probably because market-rate rents often are less than 80 percent of AMI.

“To say you’re going to charge 80 percent rent when you can’t get that rent, then have to offset that rent with a 40 percent rent you can’t go above, is a net negative. It really only works in areas where market-rate rents are above 80 percent of AMI.”

Older projects
Can projects awarded credits in previous years now elect IA?  Again, the two states are handling that a little differently. In California, “We also allowed some projects that had reservations in the past that have not yet been placed in service to convert to IA, only if they were accommodating over-income tenants or increasing the number of low-income units,” says Stivers.

In Ohio, “Those projects that have 8609 issues, by statute they’re not allowed to go forward. For those that have a recorded restrictive covenant, we’re allowing them to make the election but we’re not allowing them to change the RC and change the mix,” says Craig.

And this will require a new market study and commitment letters from syndicators and lenders.

Craig says Ohio is taking somewhat of a conservative approach to IAs. “We are not allowing IA for projects that are not 100 percent tax credits. So those deals that have market-rate units, we’re either not allowing it or they would have to condominium-out the market-rate portion of the project. That would have to be a separate LLC, a separate business.”

The National Council of State Housing Agencies (NCSHA) has done an analysis of IA, in the form of frequently asked questions on the subject. NCSHA in its FAQs says that despite the fact that IAs have been in the works for several years, there are still many questions about how it will work.

For instance, “Contrary to the understandable concerns of some practitioners, the IA is not based on individual households’ incomes. Instead, developers designate unit income limits, and compliance with the IA provision is based on the designation for the unit and not the household’s actual income.”

Another wrinkle comes with projects that have multiple buildings. “Another area that owners will have to consider is how the IA is affected by the multiple-building election,” says NCSHA. “The minimum set-aside test is applied on a building basis unless the owner elects to have a multi-building property counted as one development.”

And another consideration comes from, “thinking IA will be an option for existing LIHTC properties not undergoing resyndication.” But, “once a minimum set-aside election is made, it is irrevocable and therefore properties that have already made their minimum set-aside election on IRS Form 8609 would not generally be able to change to the IA minimum set-aside.”

Story Contacts:
Mark Stivers, Executive Director
California Tax Credit Allocation Committee

Kelan Craig, Director of Planning, Preservation and Development
Ohio Housing Finance Agency

Mark Fogarty has covered housing and mortgages for more than 30 years. A former editor at National Mortgage News, he has written extensively about tax credits.