LIHTC Set-Asides: Looking Beyond the Minimum

When you attend a Low-Income Housing Tax Credit training, one of the first things you usually learn about is set-asides. These are the figurative lines that your project must color inside throughout not only the credit period but extended use period, as well. The main set-asides offered by the IRS are 20-50, 40-60, and Average Income, although you may occasionally run into a 25-60 election in New York City.

Establishing Set-Asides

Because these elections are taught early in most trainings, they can seem pretty straightforward. For example, if a project elects the 40-60 set-aside, it is easy to assume that 40% of the units in a 100-unit LIHTC project simply need to be rented at 60% AMI.

But then you open the rent roll and see something very different… and suddenly the math doesn’t seem to work anymore. Instead of 40 units at 60% AMI, the project may show 20 units at 20% AMI, 60 units at 50% AMI, and 20 units at 60% AMI. At first glance, this can be confusing. How does that still qualify as a 40-60 election?

The key is understanding what the set-aside actually means.

One easy way to think about the 40-60 election is to replace the dash with words. Instead of reading 40-60, read it as: 40% of units must be rented at 60% AMI or below; that last part — “or below” — is where the flexibility comes in. Any income limit lower than 60% AMI still fits within the 40-60 election. Units targeted at 50% AMI, 30% AMI, or even 20% AMI all satisfy the requirement because they are below the 60% AMI threshold.

So, why do many projects include these deeper restrictions in the first place? The answer usually goes back to the development application process.

Reasons for Deep Targeting

LIHTC projects are typically competing for a limited allocation of credits from the state housing agencies. Because credits are scarce, projects can be awarded points based on how well they address housing needs identified in the state’s Qualified Allocation Plan (QAP). One way developers may earn additional points is by committing to deeper income targeting.

In practice, using the example of 100 units above, this might look like:

• 20% of units at 20% AMI
• 60% of units at 50% AMI
• 20% of units at 60% AMI

This deeper targeting helps the project score additional points and improves its chances of receiving an allocation of tax credits. At the same time, the project may still elect the 40-60 minimum set-aside, because all units remain at 60% AMI or below.

These deeper commitments do not disappear once the project is funded. The income limits proposed during the development process are typically memorialized in the project’s governing documents. Depending on the state or agency, this may be called an Indenture of Restrictive Covenants, Land Use Restrictive Agreement (LURA), Regulatory Agreement, Declaration of Land Use Restrictive Covenants, or Extended Use Agreement. Regardless of the name, these documents outline the long-term restrictions the owner agreed to when accepting tax credits.

Because of this, the elected set-aside shown on the Form 8609 (Part II, Question 10c) is often only the starting point for understanding a project’s compliance requirements. It’s easy to assume that the Form 8609 tells you everything you need to know about a project’s income restrictions. In reality, it usually only tells part of the story.

Average Income Set-Aside

The Average Income election works a little differently. While the traditional 20-50 and 40-60 elections establish a clear maximum income limit, the Average Income test allows projects to designate multiple AMI levels that must average out to a required threshold. Depending on the state’s requirements, projects may need to select a specific mix of AMI levels, and some states require the average to remain below 60% AMI to help protect ongoing compliance. Investors may also limit the AMI tiers used in a project in order to ensure financial feasibility. For property managers and compliance staff, the important takeaway is that the Form 8609 alone does not tell the full story.

Managing Income Targeting Requirements

If you’re trying to understand the real income targeting requirements for a LIHTC project, there are three places you should always check:

1. Form 8609
   This shows the minimum set-aside election made for the building.
2. Governing Documents
   Documents such as the LURA or Regulatory Agreement often contain the deeper targeting commitments made during the development process.
3. State and Investor Requirements
   State housing agencies may impose additional requirements through the QAP or allocation conditions, and investors or syndicators may also require stricter targeting.

Keeping the Form 8609 and governing documents readily available in the management office is one of the simplest ways to stay on top of these requirements. Reviewing the applicable state QAP for the year of allocation and confirming expectations with the investor or syndicator can also help avoid misunderstandings before units are leased.

Understanding how these layers interact is critical. The elected set-aside may define the minimum requirement, but the real compliance obligations for a project are often shaped by commitments made long before the first tenant ever moves in.

Owners and Management Agents should be well trained in understanding the rules and regulations of the affordable housing programs pertaining to their properties as they relate to maintaining compliance. MLCM offers consulting services and training regarding various affordable housing programs. For more information on these services, don’t hesitate to contact us.

The information presented in this article is intended solely for informational purposes and should not be construed as consulting advice from M&L Compliance Management LLC.

About the Author