How to Resolve Conflicts Between Tax Credit and HOME Program Requirements

In April, the Biden administration submitted to Congress the president’s priorities for fiscal year 2022 discretionary spending. The request reveals the administration’s priorities with regard to affordable housing. Along with seeking a significant expansion of rental assistance, the request seeks to address the shortage of affordable housing with a $500 million increase to the HOME Investment Partnerships program, for a total of $1.9 billion, to construct and rehabilitate affordable rental housing, and to support other housing-related needs. If accepted, this would be the highest funding level for HOME since 2009.

The potential boost in funding for HUD’s HOME program affects the LIHTC industry because funds from HUD’s HOME program and LIHTCs are often used together to finance affordable rental housing sites. To establish affordable rents in many markets, a site’s rents may not be enough to pay off a conventional mortgage. As a result, the equity raised from tax credits may not be sufficient to provide all of the additional capital required by the site. Often, HOME funds can be used to finance the remaining gap.

With more LIHTC sites partially financed with HOME funds to increase the supply of affordable housing, it’s important for managers to be able to comply with both the tax credit and the HOME programs. Because the two programs’ requirements conflict, understanding each set of requirements on its own is only half the battle. You must also know how to resolve conflicts between the two programs. Otherwise, you risk losing both the owner’s tax credits and the HOME funding.

Conflicts between the tax credit and HOME programs most often arise when it comes to income and rent requirements. We’ll tell you how best to resolve these conflicts. This way, you and your staff can feel confident if you’re asked to manage a tax credit site that gets HOME funding.

Income Requirements

When your tax credit site gets HOME funding, you must meet each program’s income requirements. On an annual basis, HUD updates and issues the HOME and LIHTC income limits. The HOME income limits are issued for both low-income and very low-income households. Here’s a rundown on each program’s income requirements and how to resolve conflicts.

Tax credit program. The tax credit program’s minimum set-aside requirement requires you to rent a certain percentage of all the units at your building or site to households earning no more than a certain percentage of area median gross income (AMGI).

HOME program. The HOME program’s income requirements apply only to the “HOME-assisted units” at a site. The number of HOME-assisted units at your site is based on the ratio of HOME funding to the total development costs for your site. So, say your site has 10 units. If it cost $400,000 to develop the site, $200,000 of which is HOME funding (half the total cost), this means that you must treat five of your 10 units (that is, half) as HOME-assisted units.

All HOME-assisted units must be occupied by low-income households, whose annual gross incomes do not exceed 80 percent of AMGI. And under the HOME program, you must rent 20 percent of your HOME-assisted units to “very low-income families”—households that earn no more than 50 percent of AMGI.

In two situations, however, you might not be free to rent the remaining 80 percent of your units to households that earn as much as 80 percent of AMGI. First, your site’s regulatory agreement may require you to rent the remaining units to households that earn no more than 60 percent of AMGI, in which case you must comply with the agreement.

Second, if the owner wants to claim a higher tax credit (the “9 percent credit”) for new construction or substantial rehabilitation, you must set aside 40 percent of the total units in each building that gets HOME funding (25 percent for sites in New York City) for households that earn no more than 50 percent of AMGI.

How to resolve conflicts. Find the lowest common denominator to resolve conflicts between the tax credit and HOME programs’ income requirements. For example, say you manage a single-building tax credit site that has a minimum set-aside of “40-60.” Five of the building’s 10 units are HOME-assisted units.

To comply with the tax credit program’s minimum set-aside requirement, you must rent at least four units (that is, 40 percent of all the units in the building) to households that earn no more than 60 percent of AMGI.

To comply with the HOME program’s income requirements, you must rent at least one of your five HOME-assisted units (that is, 20 percent) to a household that earns no more than 50 percent of AMGI. And you must rent the remaining four HOME-assisted units (80 percent) to households that earn no more than 80 percent of AMGI.

To comply with both sets of requirements, you would indeed need to limit household income to 50 percent of AMGI for one HOME-assisted unit—even though the tax credit program lets you limit the income to 60 percent. And you would need to further limit household income to 60 percent of AMGI for your remaining four HOME-assisted units—even though the HOME program lets you limit the income to as high as 80 percent.

Now, what about the remaining units? By renting your five HOME-assisted units as described above, you’ve automatically met your minimum set-aside with one unit to spare. So you’re free to rent the remaining five units to market-rate households. However, keep in mind that you may need to rent more or even all the units at your building to low-income households to meet your building’s applicable fraction.

Rent Requirements

You must also know how to resolve conflicts between the tax credit and HOME programs’ rent requirements. Here’s a rundown.

Tax credit program. Under the tax credit program, the rent you must charge for your low-income units can’t exceed 30 percent of the appropriate income limit (60 percent of AMGI in the above example), minus the household’s utility allowance. And you must base each unit’s rent either on the household’s actual size, on the number of bedrooms in the unit, or both, depending on when the site’s credits were allocated.

HOME program. The HOME program has two maximum rent levels, which are known as the “low HOME rent” and the “high HOME rent.” You must charge no more than your site’s low HOME rent for the 20 percent of your HOME-assisted units that you must rent to very low-income households, and you must charge no more than your site’s high HOME rent for the remaining 80 percent of your HOME-assisted units that you must rent to low-income households.

The low HOME rent:

• Mustn’t exceed 30 percent of the household’s actual monthly adjusted income (minus the utility allowance); and
• Mustn’t exceed 30 percent of the gross income of a household earning 50 percent of AMGI, adjusted for household size (minus the utility allowance).

The high HOME rent:

• Mustn’t exceed the Section 8 fair market rent (adjusted for resident-paid utility allowances); and
• Mustn’t exceed 30 percent of the adjusted income of a household whose gross income is 65 percent of AMGI, adjusted for bedroom size (minus the utility allowance).

How to resolve conflicts. To comply with both the tax credit and HOME programs’ rent requirements, calculate both the tax credit rent and the low or high HOME rents, as applicable, for each HOME-assisted unit. If the tax credit rent is too high for a unit, find the highest rent that will satisfy both programs’ requirements by lowering the tax credit rent until it also fits within the appropriate HOME rent level. As for your remaining low-income units (that is, the units that aren’t HOME-assisted), you can simply charge the tax credit rent for these units.

Keep in mind that HUD updates and issues the HOME income and rent limits on an annual basis. The HUD-issued rent limits are adjusted for different localities and for each bedroom-size unit from zero (efficiency) to six bedrooms. For LIHTC, state credit agencies compute the rent limits based on the HUD-issued income limits for the jurisdiction. In addition, you must deduct any tenant-paid utility allowance (using the applicable utility allowance) from the rent limits of each program in order to determine the maximum rent that can be charged for the unit.

Compliance Periods

Both the LIHTC and the HOME programs have periods after development during which the above requirements apply.

LIHTC compliance and extended use periods. Generally, the LIHTC program imposes a 30-year period during which LIHTC requirements apply. These 30 years are comprised of a 15-year compliance period and a subsequent 15-year extended use period. It’s important to note that the state allocating agency may make this period longer.

HOME affordability period. The minimum duration of the affordability period for the HOME program is based on the per-unit amount of the HOME investment in the site and the nature of the activity funded. For rehabilitation units, HOME program investments of less than $15,000 per unit require an affordability period of five years; an investment of between $15,000 and $40,000 per unit requires an affordability period of 10 years; and an investment of more than $40,000 per unit requires an affordability period of 15 years. New construction of rental housing with HOME funds requires an affordability period of 20 years, and refinancing of rental housing requires an affordability period of 15 years.

When HOME and LIHTC are combined. When HOME funds and LIHTCs are combined in a property, the site has to comply with the requirements for each program for the duration of that program’s affordability/compliance period. For the time during which these periods overlap, the property must satisfy both sets of requirements. It generally does this by adhering to the most restrictive requirement in any given circumstance.