Horizons Fall/Winter 2019

It is important to note that a project may be one or more buildings, depending on other elections made in regards to claiming LIHTC and that rent restriction for either test is defined as rent that does not exceed 30% of the AMI limit. The 20-50 test is a similar test in that at least 20% of the units of the project must be rent- restricted and occupied by households with income levels at or below 50% of AMI. Prior to IA, each project had to choose and meet one of these two tests before any LIHTC could be claimed. If never met, credits can never be claimed, and if failed in any year subsequent to the initial year of credits where credits have been previously claimed, a portion of the credits may be required to be recaptured. It is important to note that once a set-aside option is chosen, it is irrevocable. Both of these tests offer little flexibility in designing a unit mix that will be both appropriate in addressing the housing needs of a particular community while being financially feasible for real estate developers and investors. In an example where the project is one building that is electing the 40-60 test and has 10 units, at least four of the units must be considered low-income (rent-restricted and reserved for 60% AMI households). If the remaining six units were not rent-restricted, the project would qualify under the 40-60 test and potentially receive an award of LIHTC, but costs attributable to the market rate units would not be eligible for LIHTC. To increase the credits awarded to the project, the developer and investor may decide to have all or some of the market units rent-restricted. Under either test, every unit would need to be at or below the AMI threshold in order for them to qualify for credits. Using the same example above, if credits are desired for nine units, all nine units must meet the AMI threshold elected (either 50% or 60%). There are other funds available to affordable housing projects that often require a stricter set-aside.

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For example, a lender may require a number of units at 20% AMI. Since this is below both the 50% and 60% thresholds, the units would potentially qualify for LIHTC, but the increased rent restriction would potentially make the deal unfeasible financially. Income Averaging is a New Third Option Income Averaging is generally available for projects completed after March 2018 and was designed to offer flexibility to offset some of this challenge. The IA test, if chosen, has a few requirements: ∙ At least 40% of the units have to be both rent-restricted and occupied by individuals whose incomes do not exceed designated income limitations ∙ The designated income limitations are available in 10% increments of AMI from 20% to 80% ∙ The average of these designations must be at or below 60% of AMI Rent restriction for each unit is defined as 30% of its AMI designation. For example, a tenant with AMI of 74% could occupy a unit designated at the 80% AMI level and be charged rents equal to 30% of 80% of AMI. The flexibility of IA comes in the form of being able to claim LIHTC for units in the 70% and 80% AMI ranges that were previously limited to 60% and below. Therefore, having some units designated in the lower AMI ranges of 20% or 30% allows for some units in the higher AMI ranges of 70% or 80% and still meet the 60% AMI average.

Fall/Winter 2019

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