In order to meet the minimum set-aside, if owners select the new Income Average test, at least 40% of the units in the project must have rents and incomes at the various designated unit income limits selected by the owner and the average of the designated unit income limits may not exceed 60%.
The test must be met for each building (BIN), unless the owner makes the 8609, Line 8b multiple building election.
Example 1
Unit Designation
1 20%
2 80%
3 80%
4 60%
5 60%
6 60%
7 60%
8 60%
9 60%
10 60%
The average is 60% and all units are LIHTC eligible.
Example 2
Unit Designation
1 20%
2 70%
3 70%
4 70%
5 70%
6 60%
7 60%
8 60%
9 60%
10 60%
The average is 60% and all units are LIHTC eligible.
But, make unit 1 a 30% unit and one of the 60% units would have to be designated a 50% unit.
Determining the Applicable Fraction
Units designated at 70% or 80% will count toward the low-income units for purposes of the applicable fraction.
Example
1 80%
2 80%
3 60%
4 60%
5 60%
6 60%
7 60%
8 60%
9 40%
10 40%
In this example, the average income of the designated units is 60%; therefore, all ten units may be included in the applicable fraction. This is the case even if the 80% units are larger units.
Available Unit Rule (AUR)
- If the designated income for an over-income unit (over 140%), is 60% or less, the available unit rule is triggered when the income of the household exceeds 140% of the 60% income limit.
- If the designated income for an over-income unit exceeds 60% (i.e. either a 70% or 80% unit), the AUR is triggered when the income of the household exceeds 140% of the designated income limit.
- If a unit that is comparable or smaller in the BIN becomes vacant:
- If it is a LIHTC unit, it must be rented at the designated income limit it had immediately prior to becoming vacant;
- If it is a market unit, the unit must be rented to a household that meets the income designation for the over-income unit.
Before we fully understand how to implement the AUR for projects with the Income Average Minimum Set-aside, we need additional guidance from the IRS. For example,
- What if multiple units at different income designations are over-income and one market unit becomes vacant? To what income designation must it be rented? Will it be based on the lowest income designation of the over-income units or will it be based on the first unit that became over-income?
Potential Issue with the “30%” Units
One of the permitted unit income designations is 30% of Area Median Gross Income. Many LIHTC professionals believe that the term “Extremely Low-Income” is synonymous with the 30% income limit. This was the case until FY 2014 when the Continuing Appropriations Act changed the definition of Extremely Low-Income Families to the greater of 30% of the median family income or the federal poverty guidelines as published by the Department of Health and Human Services (HHS). For this reason, the HUD published Extremely Low-Income limit may in fact exceed 30% of the median income – sometimes by substantial amounts. In fact, in more than half the country, the extremely low-income limit as published by HUD exceeds the 40% income limit. In other words, owners selecting the Income Average set-aside will have to determine the 30% level based on the HUD published 50% level for the LIHTC program using the MTSP published income limits.
Hopefully, additional guidance will be forthcoming from the IRS so that owners will more fully understand the circumstances under which this new minimum set-aside election should be made.