Working with the 2010 Income Limits

By Elizabeth L. Moreland, NCP-E, SCS, HCCP, SHCM, FHC

After a long wait, the month of May turned out to be a busy one in regards to the 2010 income limits! First, on May 12, HUD announced it would eliminate their hold-harmless policy when calculating Section 8 income limits starting with the 2010 income limits. And then, two short days later, they released the 2010 income limits with a May 14, 2010 effective date. Unfortunately, with the passage of the Housing and Economic Recovery Act of 2008 (HERA) and the elimination of HUD’s hold harmless policy, implementing the income limits has gone from being a once simple process to a stressful venture. In an attempt to help relieve this stress, I have put together this article to help walk you through this process.

HERA & HUD’s Policy Elimination in Review

Before we examine the 2010 income limits, let’s review the HERA provisions and the effect of HUD’s policy elimination to ensure we are all on the same page.

As discussed in the October 3, 2008 issue (Volume 13, Issue 6) of The Compliance Monitor, HERA provided three important income limit changes. First it provided Tax Credit and Tax-exempt Bond projects with its own hold harmless rule by stating a project’s income limits will not be lower than the preceding year’s income limits. Second, it provided a special income limit for Tax Credit and Tax Exempt Bond properties affected by HUD’s Hold Harmless Policy which was implement in 2007 and 2008. These projects have become known as HUD Hold Harmless Impacted properties and are those that are located in counties or metropolitan statistical areas (MSAs) that were held harmless under HUD’s policy and that were placed in service on or before December 31, 2008. And third, it provided a special set of income limits for 9% Tax Credit properties located in rural areas (as defined in Section 520 of the Housing Act of 1949), specifically stating such properties may use the greater of the Area Median Gross Income (AMGI) or the National Non-Metropolitan Median Gross Income (NNMGI) on any income eligibility determinations made after July 30, 2008. (It should also be noted that the NNMGI is used to determine the income limits for projects placed in service in 2006 through 2008 that are located in a nonmetropolitan area or county within the GO Zone.)

To implement these changes, HUD published a separate income limit data set for Tax Credit and Tax-exempt Bond projects in 2009 known as the Multifamily Tax Subsidy Projects (MTSP) income limit data set. Within this set of income limits, HUD published the regular MTSP 50% and 60% income limits for non-Hold Harmless Impacted properties and the HERA Special 50% and 60% income limits for impacted properties. They also publish the NNMGI.

Because of the HERA changes, HUD was unsure if they should continue their hold harmless policy and, while contemplating this decision, held the 2009 Section 8 income limits at previous year’s levels in areas where median family income estimates were lower in 2009 than in 2008. However, as stated previously, they have now eliminated their hold harmless policy starting with the 2010 income limits. As part of this elimination, however, they have limited decreases to a 5% maximum and increases will be limited to the greater of 5% or twice the change in national median family income increase or decrease.

Six Important Facts About the MTSB 2010 Income Limits

First, because HUD is no longer holding their income limits harmless, 127 counties experienced a decrease in their limits. However, despite the decreases experienced by these counties, Tax Credit and Bond projects located within them will be able to apply the HERA hold harmless policy. This ultimately means the MTSP income limits will always be equal to or greater than the HUD limits.

Second, despite the fact there has been and continues to be an industry push to have the HERA hold-harmless rule apply on a county basis rather than a project basis, HUD has taken a strict reading of the rule and applied it project by project. This means you can have different income limits for different properties located within the same county. And remember, the IRS clarified that as long as one building in the project was placed in service on or before December 31, 2008, the entire project will be considered a Hold Harmless Impacted project. It is assumed, but not yet clarified, that this will also hold true for non-Hold Harmless Impacted properties that have buildings with straddling placed in service dates.

Third, the 2010 NNMGI is $51,600. Once again, the same states from 2009 have a state non-metro AMGI lower than the national non-metro AMGI in 2010. These states are Alabama, Arkansas, Arizona, Florida, Georgia, Idaho, Kentucky, Louisiana, Mississippi, Missouri, New Mexico, North Carolina, Oklahoma, Oregon, South Carolina, Tennessee, Texas, and West Virginia. Therefore, for affected rural properties, the 2010 50% income limit chart will look as follows:

Fourth, HUD applied the increase and decrease caps as laid out in their elimination policy resulting in the 2010 increase and decrease caps both being limited to 5%. As stated previously, the decrease cap is always 5% and the increase cap is the higher of 5% or twice the National Median Family Income (NMFI) limit change from the previous year to the next year. To determine the income limit increase cap, it was determined that the NMFI increased 0.6% from 2009 to 2010 which meant the 5% cap was greater than twice this change in the NMFI. There were 15 MSAs that were affected by the cap on decreases and 7 areas where the increase was capped at 5%.

Fifth, starting in 2010, the MTSP 50% limit is equal to the HUD 50% or very low-income (VLI) limit. The HERA Special 50% limit was calculated for each affected county with the actual limit being the greater of the 2010 MTPS 50% income limit and the 2009 MTPS 50% limit multiplied by the growth in median incomes between the current year and 2009. It should be noted that once again HUD used the update factor to determine the change in the income limits from last year to this year. The update factor is arrived by dividing the current year AMGI by the previous year’s AMGI. The 2009 MTPS 50% figure is then multiplied by the resulting update factor and the higher of this figure and the actual 2010 MTPS 50% figure becomes the HERA Special 50% limit. Many in the industry believe HERA indicates the change between the limits should be calculated by taking the 2010 median family income limit minus 2008 median family income limit and adding that difference to the 2008 MTPS 50% figure resulting in a slightly lower limit. However, as HUD is charged with the responsibility of determining the income limits, their methodology must be used.

And finally, as income limits must be implemented no later than the effective date or 45 days from the published date, whichever is later, the 2010 income limits must be implemented no later than June 28, 2010.

Implementing the New Limits

Okay, so now that we have reviewed HERA’s income limit provisions, HUD’s hold harmless elimination policy and the relevant facts about the 2010 income limits, I can walk you through the process of implementing the new limits on your project. Before I walk you through these steps, however, it is important you understand the actual income limits implemented will be based on BOTH the county or MSA the project is located in AND the project’s placed in service date which means you can have different income limits for projects within the same county.

To start this process, first determine the county or MSA your project is located in and whether that area was impacted by HUD’s Hold Harmless Policy in 2007 & 2008 as this will possibly make the project a Hold Harmless Impacted project eligible to use the HERA Special income limits. And easy way to determine if the area was impacted by HUD’s Hold Harmless Policy in 2007 & 2008 is to look at the MTSP income limit chart produced by HUD. If the chart lists HERA Special 50% and 60% limits for the area or county the project is located in, the area was impacted.

Then determine the placed in service date of the project’s first building.

And finally, determine if the project is eligible to use the NNMGI-based income limits. Projects are eligible to use the NNMGI-based income limits if they are 9% Tax Credit deals located in an eligible rural area that is in a state that has a state non-metro limit lower than the NNMGI or the project is located in a nonmetropolitan area or county within the GO Zone and the project was placed in service in 2006, 2007 or 2008. To determine if a project is in an eligible rural area, go to the United States Department of Agriculture’s (USDA) Rural Development Program’s website located at http://eligibility.sc.egov.usda.gov/eligibility/welcomeAction.do. Once at this website, click on the Property Eligibility link for Multi-Family Housing and follow the simple online instructions. If the project address you enter is not found, you will need to contact your State Monitoring Agency or the Rural Housing Service to ascertain whether the project is indeed located in an eligible rural area. The GO Zone is comprised of specific areas affected by Hurricanes Katrina, Rita and Wilma which are outlined in the Gulf Zone Opportunity Act of 2005 and Publication 4492 – Information for Taxpayers Affected by Hurricanes Katrina, Rita and Wilma.

Once these determinations are made, you can apply the 2010 income limits to the project. Use the chart below to then apply the correct income limits to your project:

Project Is In an Eligible Rural Area Within a State That Has a State Non-Metro Income Limit Lower Than the National Non-Metro Median Income: Use the 2010 NNMGI-Based Income Limits.

Project Is In the GO Zone and Was Placed In Service in 2006, 2007 or 2008: Use the 2010 NNMGI-Based Income Limits.

Project Is In a Hold Harmless Impacted Area and Contains At Least 1 Building Placed In Service ON or BEFORE 12/31/08: Use 2010 HERA Special Limits.

Project Contains At Least 1 Building Placed In Service AFTER 12/31/08* BUT BEFORE 5/14/10: Use HIGHER of the 2009 and 2010 MTSP Regular Limits

All Buildings In Project Were Placed In Service ON or AFTER 5/14/10: Use the 2010 Regular Limits

*(The IRS clarified that as long as one building in the project was placed in service on or before December 31, 2008, the entire project will be considered a Hold Harmless Impacted project. It is assumed, but not yet clarified, that this will hold true for non-Hold Harmless Impacted properties that have buildings with straddling placed in service dates.)

Once the project’s 50% income limits are determined, the remaining set-aside limits applicable to the property must be calculated. This is done by multiplying the 50% figures by 2 and then again by the set-aside percentage. So for example, if you also need the 40% income limit figures, multiple the 50% figures by 2 and then again by 40%. Do not round these calculated figures.

Properties or specific units with layered financing will have to determine the income limits applicable to each program and then apply the most restrictive limit.

Maximum Allowable Rents and Rent Floors

Once you have your income limits determined for each of your properties, you will then need to calculate your Maximum Allowable Rents as normal and apply your elected rent floor. For the most part, your project’s elected rent floor will not impact your 2010 Maximum Allowable Rent as the income limits, in which the rents are based, are not allowed to decrease from the previous year. However, if you have a new project that was or will be placed in service after May 14, 2010, you could potentially have a rent floor higher than the calculated Maximum Allowable Rent. This is because properties placed in service after May 14, 2010 are subject to the 2010 MTSP limits but owners are allowed to lock into their rent floor either when their carryover allocation is made effective or when the project is placed in service. If the owner elected to lock in the rent floor when the carryover allocation was made effective, the rent floor will be set using the 2009 income limits which were held harmless and which were possibly higher than the 2010 income limits which were not. If this was done, the project’s Maximum Allowable Rents never have to go below this rent floor.