LIHTC income limits: A brief history

In early 2022, the United States Department of Housing and Urban Development (HUD) made a change to the way it calculates Area Median Income (AMI). The change went largely unnoticed at the time it was made, but its wide-ranging impacts for owners, developers, operators, residents, and investors in low income housing are becoming clear after the 2023 limit’s release.

Understanding this shift necessitates a basic grasp of the U.S. government's history of involvement in the development of affordable housing.

A brief overview of the Low-Income Housing Tax Credit (LIHTC) Program

The Low-Income Housing Tax Credit program was established in 1986 and made permanent in 1993. The key component of the program is a federal mechanism designed to provide a powerful incentive for private developers to create new or renovate existing affordable housing for the nation’s residents.

Though complex in design, the program's essence is a dollar-for-dollar reduction in tax liability for investors contributing equity capital to LIHTC properties. This enables developers and operators to construct or renovate properties, and rent some units at below-market rates, thereby providing affordable accommodation for those who may otherwise struggle to secure such housing.

How the LIHTC program works

The LIHTC program allocates tax credits to state housing agencies based on population size. At the program’s origination, the tax credit amount was $1.25 per resident, but this was eventually raised to $1.50 in 2001, $1.75 in 2002, and adjusted for inflation thereafter. So, for example, if the state of Florida has ~22 million residents and the state is awarded a credit of $1.75 per person, Florida funding in a year would be $38,500,000.

States' housing agencies award these tax credits to developers or operators via a competitive application process (though certain small allocations of credits are made on a non-competitive basis). Developers can then sell these credits to obtain equity for their project, which they pair with taxable or tax-exempt debt. Navigating each of these processes can be complex and can often involve third-party partners and participants.

Eligibility for low income housing tax credits

Project eligibility requirements are complex, but they are generally based, in part, on the relationship between a resident’s household income and the area median income (AMI) of the project’s location.

A project is eligible for tax credits if the developer/operator designates a certain number of units as “affordable” and the average income of the households that occupy those units is no more than 60 percent of the AMI for that location.

Here’s a hypothetical scenario of how it works: XYZ Developer plans to build a 100-unit apartment complex in Dallas, Texas, and wants to utilize tax credits. The company designates all of the units as affordable, agreeing to restrict these units for residents earning not more than 60 percent of AMI. The AMI in Dallas is $105,600, so to meet the LIHTC conditions, the average income of households in these affordable units can't exceed 60 percent of the AMI, or $63,360. XYZ Developer advertises these units to households earning $63,360 or less. Most developers are obligated to even deeper income skewing than 60 percent restrictions.

Post-completion compliance

Once a project is complete, it must comply with LIHTC eligibility requirements for a period of not fewer than 15 years or risk a “recapture” of the tax credits (NOTE: Exact requirements may vary by state). This necessitates ongoing compliance, certifying that units are occupied by income-eligible households, and that the rents align with AMI requirements. As these rental amounts are tied to the AMI, a limit set by HUD, they must be closely monitored.

Income limit calculation changes

Eligibility for an affordable property unit depends on household income relative to the AMI. In the last few years, household income has grown quickly, but market rate rents have grown faster. To ensure continued affordability for vulnerable residents, in 2022, HUD amended its AMI calculation method, electing to move from data that intentionally reflects inflation to a dataset that does not reflect inflation as fully.

As a result, the change in the median income calculation methodology meant that low-income housing operators became capped in how quickly they could raise rents. To demonstrate this point, consider that prior to 2022 and 2023, only about 10 percent of the Metropolitan Statistical Areas (MSAs) in the US were subject to median income caps in any given year. With the change in calculation methodology, this figure jumped to 87 percent.

(Part Two of our series on this calculation change delves deeper into implications for investors, owners, and residents in affordable housing.)

Work with an LIHTC expert

This methodological change appears minor but carries significant implications for the future of low-income housing, which adds more complexity to the development and financing of LIHTC projects. A trusted advisor experienced in LIHTC project development and financing can help you navigate this complex landscape.

Walker & Dunlop has a long, successful history in the LIHTC space both as a debt provider, investment sales advisor, and tax credit syndicator. If you have any questions about the changes to HUD’s median income calculation methodology or are in need of debt or syndication advice, we are here to help. Contact our affordable housing experts today.