The income limits HUD publishes each year thus have a strong impact on the businesses of multifamily developers and property owners who use (or anticipate using) any such program.¹

This year, HUD introduced several changes to its published set of income limits—some induced by recent legislation. HUD introduced a totally new section on its website devoted to a separate set of income limits for a newly-defined category of subsidized projects and switched to using a new type of data. Going beyond the numbers published by HUD, the law also has established a new rule that can result in somewhat higher income limits for tax credit projects in rural areas. This article summarizes these changes and discusses other changes that were not implemented this year, but which are likely to have significant impacts on multifamily projects in 2010.

New Web Site

For the first time, the Housing and Economic Recovery Act of 2008 (HERA) carved out special rules for income limits in projects financed by Low-Income Housing Tax Credits and tax-exempt multifamily bonds. First, HERA wrote the “hold harmless” provision into the law for these two programs. “Hold harmless” is the name of a policy HUD has applied consistently since 1993 — a policy that freezes income limits at current levels rather than allow them to drop from one year to the next when the underlying data suggests incomes have declined in an area. HERA also defined a “special rule” that establishes higher income limits for some projects that were held harmless in 2007 or 2008.

To handle these changes in the law, HUD defined the Low-Income Housing Tax Credit and tax-exempt multifamily bonds as Multifamily Tax Subsidy (MFTS) programs and created a new section of its website devoted to income limits for these programs: www.huduser.org/datasets/mtsp.html (Figure 1). This new section of the HUDUser website provides a separate set of income limits, along with briefing materials and on-line documentation, for MFTS projects. 

For the first time, the new section of website publishes “60% income limits” (i.e., a set of income limits 20% higher than the very low limits based on 60% of area median family income) for use in the tax-credit and tax-exempt multifamily bond programs. Multifamily developers and property owners who use these programs should be familiar with the basic aspects of the new website. 

New Data

An aspect of the new income limits that may be going largely unnoticed while attention is focused on other changes is the new data HUD is using to estimate area median family income. HUD is still relying on data from the Census Bureau’s American Community Survey (ACS), but has switched from using one-year ACS median income estimates to the newly-available three-year estimates.

Designed as a replacement to the decennial Census long form, the ACS collects roughly as much data as the Census long form, but over a five-year period instead of all at once. Hence, in order to obtain median income estimates that have similar margins of error and provide the same level of geographic detail as a decennial Census, the ACS has to accumulate data over a period of five years. The ACS was first fully implemented in 2005, so five years of data are not yet available, but in the past year the Census Bureau was able to publish a new type of ACS summary table based on three years of accumulated data. HUD made the decision to switch to these three-year ACS estimates in 2009.

Although the smaller margins of error and ability to obtain summary data for smaller counties were factors, HUD’s primary stated reason for adopting the three-year estimates was to smooth out year-to-year fluctuations in median income estimates.  Because only one-third of the data underlying a three-year ACS estimate will be replaced every year (with the remaining two-thirds brought forward by a simple inflation adjustment based on the Consumer Price Index),  it should mitigate large year-to-year changes in median family income estimates. Within the multifamily industry, large up and down movements in program limits are generally seen as disruptive, so the use of a smoother data series is likely to prove a positive development—provided that the transition from one-year to three-year estimates in itself was not disruptive.

The aggregate numbers don’t reveal a major problem with the transition to three-year estimates. For the U.S. as a whole, the most recent one-year ACS estimates showed an increase of about 4.5%.  HUD’s estimate of median family income went up by a little less than this in 2009, but still by more than 4%. The three-year ACS numbers produced 2009 income estimates with very low limits that were held harmless in 58 metro areas and 142 non-metro counties. This is roughly in line with NAHB’s projection of the areas that would have been held harmless using one-year ACS income estimates.

New, Higher Limits for Certain Projects

As mentioned above, HERA put the hold-harmless policy specifically into the law for the MFTS programs. Some MFTS projects also benefit from newly introduced  “HERA special” income limits. These are additional, higher income limits in 199 metro areas and 858 non-metro counties for MFTS projects that were “held harmless” in 2007 or 2008,  as specified in a provision of  the 2008 Housing and Economic Recovery Act (HERA) that NAHB lobbied hard to achieve. For these places, the boost in income limits is based on actual income increase in estimated median family income between 2008 and the current year.

Figure 2 provides an example to illustrate how this works in a hypothetic metro area where median family income went from $64,000 in 2007 down to $60,000 in 2008, then back up to $66,000 in 2009. The last column of the figure is the “very low” income limit (which uses 50% of area median income as a starting point). Because this area would have been held harmless in 2008 (with its income limit frozen in place rather than allowed to decline), an existing tax credit or multifamily tax-exempt bond project in this area qualifies for a higher HERA special income limit. The HERA special limit starts with the effective hold-harmless income in 2008 ($64,000), but then adds onto this a change based on the 2008-2009 change in median family income ($6,000). For projects that qualify for the HERA special rule in this area, income limits are calculated as though median family income in 2009 was $70,000.

Because the law is written so that the HERA special rule applies to projects that had income limits frozen in either 2007 or 2008, a question has arisen as to why HUD did not publish HERA special limits for some areas where income limits were held harmless in 2007. The reason is that the HERA special boost factor is based on the increase in median income after 2008. So, in cases where the very low income limit was exactly 50% of median family income in 2008, the ordinary and HERA special income limits in subsequent years would be the same. An area held harmless in 2007 but not 2008 may still receive higher HERA special income limits, but only if the very low income limit in 2008 had an adjustment (for instance, a housing cost adjustment) that made it different from 50% of median family income in 2008.

A notable feature of the HERA special rule is the way it locks in the dollar-value boost in income limits for qualified projects in subsequent years. In Figure 2, for example, the very low income limit in 2009 is $2,000 higher than it would be without the HERA special rule. Figure 3 shows how the $2,000 boost persists in subsequent years. This occurs because the HERA special rule uses the 2008 “held harmless” effective income of $64,000 as a starting point, but then keeps adding the increases above the “actual” 2008 median family income of $60,000.

New Rule for Rural Areas

Very low income limits have routinely been adjusted upward so they are at least as high as 50% of median family income for the entire state. The 2008 HERA also allowed higher income limits for certain tax credit projects in rural areas. Essentially, the law established a new, very low income limit floor based on 50% of median family income computed for the non-metropolitan portion of the U.S. Because floors based on statewide non-metropolitan incomes existed previously, this new rule generates higher income limits only in places where state non-metropolitan median family income is lower than the $51,300 for the U.S. overall. These relatively low non-metro income states lie primarily in a region across the southern part of the U.S. (Figure 4).

In a few cases, projects in states adjacent to one of the lower-income states may qualify for the higher limits, because HUD treats a metropolitan county as if it is in the primary state of the metropolitan area. Thus, every county in the Kansas City, MO-KS  Metropolitan Statistical Area is treated as if it were in Missouri for income limit purposes. Similarly, all counties in the Huntington-Ashland, WV-KY-OH and Parkersburg-Marietta-Vienna, WV-OH metropolitan areas are treated as if in West Virginia, even though some of these counties are in relatively high-income Ohio.

It’s important to understand two important caveats concerning this rule. The first is that the U.S. non-metropolitan floor applies only to projects in areas that are rural, as this has been defined in section 520 of the Housing Act of 1949. There has been some disagreement about how to identify these areas, but most industry stakeholders believe that this definition of rural is perfectly equivalent to the one used by the Rural Housing and Community Development Service for its multifamily programs, which is maintained on its website: http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do?pageAction=sfp&NavKey=property@12.
 
The second caveat is that the U.S. non-metropolitan floor applies only to the Low-Income Housing Tax Credit program—not even to tax-exempt multifamily bonds, as was the case with the HERA special rule. These limitations are largely a function of the way the new rural rule was introduced into the legislation—late in the process by one industry stakeholder, with limited opportunities for NAHB or other stakeholders to work on broadening or otherwise refining the proposal.  

What Wasn’t New in 2009, But Will Be in 2010

HUD has often stated that the reason it has continued to apply a hold-harmless policy to income limits is to avoid disruptions that declining income limits cause for the Low-Income Housing Tax Credit program. Now that HERA has written the hold-harmless policy into the law for MFTS program, HUD is free discontinue  its hold-harmless policy for the Section 8 income limits. Although HUD could have abandoned its hold-harmless policy in 2009, it decided to wait until next year. In its FY 2009 Income Limits Briefing Material, HUD stated very clearly that it no longer intends to apply the hold-harmless policy in future years.

This means that industry stakeholders have one more year to plan for situations in which income limits decline in some housing  programs while remaining held-harmless in others. In previous discussions on this topic, NAHB’s Housing Finance Committee identified HOME and Federal Home Loan Bank programs as programs where declining income limits are likely to cause particular problems.

NAHB is making plans to inform its members and other stakeholders—including government agencies—about the impending change, and to develop strategies for dealing with it. Income limits in some multifamily housing programs do not appear to be tied tightly and specifically by law to Section 8, and may be amenable to adjustment  through regulatory action.


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¹ These programs include Low-Income Housing Tax Credits, HOME, Section 8, Section 202 and 811 grants for properties with supportive services for the elderly or disabled, tax-exempt multifamily bonds, public housing,  rental assistance programs administered by the Department of Agriculture’s Rural Housing and Community Development Service, and rental programs funded by Federal Home Loan Banks. [ return to top ]