The amount of rent that is payable by a low income housing tax credit (Section 42 LIHTC) tenant is referred to as “net rent.” The maximum net rent that is allowed under the tax credit program is derived from a “gross rent” amount; therefore, it is necessary to first calculate the gross rent prior to determining the net rent.
(Please note that LIHTC maximum rents are not based upon comparable market rent surveys or other conventional market data, so the maximum rents that are allowed under the Section 42 tax credit program may be at or above market.)
LIHTC GROSS RENT
In order to calculate the maximum gross rent of a low income housing tax credit (LIHTC) unit, the following information is required:
- The unit’s tax credit set aside
- The unit’s number of bedrooms
- The correct Area Median Income (AMI) schedule
The set aside
LIHTC rents are not determined by individual household incomes. Instead, income set asides (brackets) that are selected during the credit application and allocation process are used to determine the rents that can be charged and the households who are eligible for Section 42 housing.
In addition to the minimum federal set-aside requirements, state housing credit agencies and various subsidy programs may encourage or require “deep skewing” by having some units with set asides that are below the level required by the minimum set aside. Accordingly, some properties may include more than one set aside, including set asides that are below the federal levels.
Deep skewing can also occur at the federal level: LIHTC projects that have taken the federal 15-40 election will have 15% of their units restricted to 40% of AMI. (The 15-40 election is taken in addition to, and not in place of, the 20-50, 25-60 or 40-60 tests.)
Operators of mixed-income properties (i.e. those properties that include both market-rate and Section 42 units) that use more than one set aside should also verify that the set aside complies with the Next Available Unit Rule when determining the appropriate set aside.
Avoid the high cost of LIHTC compliance violations. TheoPRO can train your team members throughout the US to earn their HCCP (Housing Credit Certified Professional) and SHCM (Specialist in Housing Credit Management) accreditations. TheoPRO offers compliance training programs designed specifically for asset managers and property managers. Click here to learn more.
Affordable housing becomes easier to understand once you have learned its lexicon. For a guide to common industry terminology, click here for our Affordable Housing – LIHTC glossary.
The number of bedrooms
LIHTC rents are not based upon the actual number of members of a household. Instead, the LIHTC program uses hypothetical household sizes based upon bedroom count in order to select the income figure that is used to set rents. Irrespective of the actual size of the household, LIHTC maximum gross rents are limited based upon a presumed household size of 1.5 occupants per bedroom, or one occupant for studio/bachelor units. Accordingly:
- Studio/bachelor rents are based upon the AMI of a 1-person household
- 1-bedroom rents are based upon the AMI of a 1.5-person household (i.e. the average AMI of 1- and 2-person households)
- 2-bedroom rents are based upon the AMI of a 3-person household
- 3-bedroom rents are based upon the AMI of a 4.5-person household (i.e. the average AMI of 4- and 5-person households)
- 4-bedroom rents are based upon the AMI of a 6-person household
(Please note that some LIHTC projects developed with 1987, 1988 and 1989 allocations use household size instead of bedroom count to set maximum rents. All projects developed since 1990 use the bedroom count method as described above, not actual household size.)
Area Median Income (AMI)
Area Median Income is calculated by HUD each year and varies by locality. In urban areas, AMI varies based upon individual metro areas (MSAs, or Metropolitan Statistical Areas); in rural areas, AMI varies by county. Since 2008, AMI schedules may also vary depending upon the property’s placed in service date, so LIHTC practitioners must be especially careful to use the appropriate AMI figures.
Westmont Advisors is proud to partner with LIHTC compliance experts TheoPRO to offer development compliance services and Section 42 training programs for LIHTC professionals, including property managers, developers, asset managers, syndicators and government agencies. Training and other services are available throughout the United States. Click here to learn more.
For a complete listing of LIHTC income limits, Section 8 income limits, Fair Market Rents and other affordable housing data for every MSA and county in the United States, please click here to access Westmont’s LIHTC Affordable Housing Data Center.
LIHTC GROSS RENT: DOING THE MATH
The theory of LIHTC maximum gross rent is that a household’s combined rent and utilities expense should be limited to 30% of a given “set aside” (income bracket, as a percentage of Area Median Income.) Accordingly, the maximum gross rent will equal 30% of the income for the household size that is derived from the bedroom count for the AMI that matches the unit’s set aside.
(a) The maximum gross rent for a studio unit with a 50% set aside will be equal to 30% of the income of a one-person household with an income equal to 50% of AMI.
(b) The maximum gross rent for a one-bedroom unit with a 60% set aside will be equal to 30% of the income of a 1.5-person household with an income equal to 60% of AMI.
(c) The maximum gross rent for a two-bedroom unit with a 30% set aside will be equal to 30% of the income of a 3-person household with an income equal to 30% of AMI.
(d) The maximum gross rent for a three-bedroom unit with a 40% set aside will be equal to 30% of the income of a 4.5-person household with an income equal to 40% of AMI.
Applying the four previous examples to this sample Area Median Income (AMI) table above results in the following maximum gross rent calculations:
(a) Studio unit with a 50% set aside:
$19,950 (annual income for one person at 50% of AMI) X 30% = $5,985
$5,985 / 12 = $498.75
Round down to the nearest dollar = $498 per month
(b) One-bedroom unit with a 60% set aside:
$25,650* (annual income for 1.5 persons at 60% of AMI) X 30% = $7,695
$7,695 / 12 = $641.25
Round down to the nearest dollar = $641 per month
*Equal to the average income of one- and two-person households: ($23,940+$27,360)/ 2
(c) Two-bedroom unit with a 30% set aside:
$15,390 (annual income for 3 persons at 30% of AMI) X 30% = $4,617
$4,617 / 12 = $384.75
Round down to the nearest dollar = $384 per month
(d) Three-bedroom unit with a 40% set aside:
$23,680* (annual income for 4.5 persons at 40% of AMI) X 30% = $7,104
$7,104 / 12 = $592.00
Round down to the nearest dollar = $592 per month
*Equal to the average income of four- and five-person households: ($22,760+$24,600)/ 2
Annually, HUD reports income limits for 50% of AMI (Very Low Income or VLI) and 60% of AMI (Low Income) that are used to calculate LIHTC income limits and rents. Due to statutory definitions, the 50% of AMI (VLI) income level may not be equal to half of the area median family income, in spite of the similarity of its name. Because of this discrepancy, the overall area median family income figure should not be used as a basis for calculating income limits and rents for Section 42 properties.
Combining LIHTC Section 42 tax credits with Section 8 rental contracts (both project-based HAP and PBV project-based vouchers) for acquisition-rehab properties can create complications. Click here to learn more.
LIHTC maximum net rents (i.e. the maximum rent that tenants can be required to pay out of pocket) are equal to the gross rent, less the tenant’s imputed (budgeted) cost of utilities. This utility expense budget, which is referred to as a “utility allowance,” includes only the budgeted expense for utilities that are to be paid by the tenant. Accordingly:
Net rent = Gross rent – Utility allowance
The tenant’s anticipated utility costs reduce the maximum amount of rent that a tenant can be required to pay. Utility costs that are paid by the property owner and the costs of telephone and subscription television service are not included in the utility allowance.
Utility allowances for LIHTC units are imputed based upon generalized cost estimates, which are usually prepared by local housing authorities. The utility allowance is not based upon a given property’s budgeted or actual expenses. Utility allowances vary by bedroom count, and may account for other factors such as the type of construction.
Utility allowances do not include those utility categories that are paid for by the landlord. Accordingly, a Section 42 unit that provides all utilities at no charge to the tenant will have a utility allowance of zero, and the gross and net rent amounts will be equal.
The maximum gross and net rents apply to the amounts paid by the tenant directly. Accordingly, it is possible for an LIHTC unit to generate rents that exceed the maximums if the overages are not being paid by the tenant.
If you are a resident or prospective resident of a LIHTC property, please click here for our FAQ for tax credit residents.
Property managers require specialized training in order to ensure compliance and reduce errors. Westmont Advisors has teamed up with LIHTC compliance experts TheoPRO to offer development compliance services and Section 42 training programs for LIHTC professionals, including property managers, developers, asset managers, syndicators and government agencies. Click here to learn more.
TheoPRO is led by founder Vivian Probst, one of the nation’s leading experts in Section 42 LIHTC compliance. Let TheoPRO and Westmont customize a program for you.
We offer training and other services throughout the United States. Contact us to learn more.
Westmont and our partners at TheoPRO can serve your needs throughout the United States. Please do not hesitate to contact us for more information about our consulting and advisory services for real estate acquisition, asset management and tax credits, including the Low Income Housing Tax Credit (LIHTC) and Historic Tax Credit (HTC), as well as other real estate matters. Click here to learn more about our team.
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