U.S. Department of Housing and Urban Development

H O U S I N G

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Special Attention of: Notice H 92 - 97 (HUD)

All Regional Administrators,

All Regional Directors, Office of Housing Issued:12/8/92

All Managers of Category A and B Offices Expires: 12/31/93

All Directors of Housing Development
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All Delegated Processors Cross References:

All State Housing Finance Agencies (HFAs)

All Coinsuring Lenders

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Subject: Processing HUD Insured Projects Involving

Low Income Housing Tax Credits Using Form

HUD-92264-T

A. Purpose. This Notice provides modified underwriting

instructions for processing projects where owners will

receive Low Income Housing Tax Credits (LIHTC) and

revises portions of the instructions in the memorandum,

dated February 2, 1988, from former Assistant Secretary

Thomas T. Demery.

B. Background. The Tax Reform Act of 1986 amended the

Internal Revenue Code to create new Federal Tax Credits

for owners of low income rental housing. In Public Law

101-239, dated December 19, 1989, the applicable maximum

affordable monthly rents for most apartment sizes are to

be based on the program income limits by household size

assuming an occupancy of 1.5 persons per bedroom and

efficiency units without a separate bedroom would have

income limits based on occupancy by one person. In

order for a household to qualify as tax credit assisted

they must have an income at or below the program income

limit for their respective household size.

The calculation of the maximum affordable monthly rents

for tax credit units is based on tenants paying at least

30 percent of income for rent. Analysis of program

participation has shown that few households in tax

credit projects spend more than 40 percent of income for

rent. This means that, if rents are set at the maximum,

the potential market is restricted to income-eligible

households with incomes between 75 and 100 percent of

the respective income limit. Most households with

incomes lower than this would be unable to afford the

statutory maximum rents. As a result, when the proposed

rents are set at the statutory maximums, the market for

a tax credit assisted project is comprised of a

relatively narrow band of income eligible renters, which

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HMIT: Distribution: W-3-1,W-2(H),W-3(A)(OGC)(ZAS),W-4(H),R-1,R-2,R-3,

R-3-1,R-3-2,R-3-3,R-6,R-6-1,R-6-2,R-7,R-7-1,R-7-2,R-8

Previous Editions Are Obsolete HUD 21B(3-80)

GPO 871 902

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can result in a problem with the market feasibility of

the project. Therefore, depending on the particular

market area and the rental market conditions in that

area, there may be an insufficient number of potential

renters that meet the income limit criteria and who are

also willing and able to pay the maximum allowable rent.

Program data show that this potential marketability

problem has been dealt with either by charging lower

rents or obtaining other subsidies to lower the rent.

The available information on tax credit assisted units

shows that most projects have established rents below

the maximum permitted by the statute. In addition, over

80 percent of projects funded had some other form of

assistance to further reduce tenant rents.

The extent to which there is an adequate supply of units

with rents at or below those proposed would also limit

the market. An analysis of the market prospects of a

proposed project, therefore, requires information on the

current market conditions for this type of project, and

information on the marketability of the proposed project

relative to other options available to those income-eligible

households.

Thus, market demand for tax credit units depends on

several factors: the number of income qualified

households and the willingness of those same households

to pay the proposed rents; the supply of comparable

units at rents equal to or less than the proposed rents;

and, the marketability of the proposed units in

comparison to the existing supply.

Therefore, if the Field Office determines that there is

insufficient demand for the units at the proposed rents

the Field Office should set the rents at lower amounts,

as necessary to broaden the market band sufficiently to

attract the potential tenants needed to ensure market

feasibility. This determination should take into

consideration the current and anticipated supply/demand

conditions in the overall rental market, and potential

depth of the market of income eligible households in

comparison to the number of units at the proposed rents,

and the marketability of the proposed units taking into

account the project\'s amenities, rents and location

relative to comparable and competitive projects and

other options available to those income eligible

households.

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C. Special Processing Instructions. In order to make the

rent estimates based on income limits as close as

possible to the income limits described in the

legislation, the following instructions for processing

HUD-insured projects involving LIHTCs using revised Form

HUD-92264-T shall be used. Using this form and the

following directions, the Department will determine the

appropriate processing rents for the low income units

required by the Tax Credits. (In the case of projects

with \"deep skewed\" rental units, it may be necessary to

complete two separate revised Forms HUD-92264-T, since

two different qualifying income limits may apply to

lower income units of the same size.)

1\. Line 1 of Form HUD-92264-T for each affected unit

size, enter the market rental estimates from Form

HUD-92273.

2\. Line 2 - If utility costs are to be paid by the

tenant, enter an estimated Personal Benefit Expense

(PBE) for services or utilities not included in the

market rental estimate.

3\. Line 3 - Enter the applicable income limit. For

purposes of this rent estimation exercise, the

applicable income limits by unit size are as

follows:

Column A\* Column B\* Column C\*

Applicable Limit if Applicable Limit if Applicable Limit if

20%/50% Restriction 40%/60% Restriction 15%/40% Restriction

Applies Applies Applies

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Eff. 1 Person Section 8 120% of Column 80% of Column

Very Low Income Limit A Limit A Limit

1-BR 1.5-Person Section 8 120% of Column 80% of Column

Very Low Income Limit\*\* A Limit A Limit

2-BR 3-Person Section 8 120% of Column 80% of Column

Very Low Income Limit A Limit A Limit

3-BR 4.5-Person Section 8 120% of Column 80% of Column

Very Low Income Limit\*\* A Limit A Limit

4-BR 6-Person Section 8 120% of Column 80% of Column

Very Low Income Limit A Limit A Limit

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\*The use of these limits by HUD for underwriting purposes is

not meant to imply that the Internal Revenue Service will

necessarily use the same limits in determining whether

tenants will qualify as low income for purposes of the Tax

Credit.

\*\*The one and one-half-person Section 8 very low income

limit is computed by adding the one person Section 8 very

low income limit to the two-person limit, then dividing the

sum by 2. Likewise, the four and-one-half-person Section 8

very low income limit is the sum of the four-person limit

and the five-person limit, divided by 2.

4\. Line 4 - Compute and enter the estimated maximum

affordable monthly rent for each affected unit size.

Compute that rental estimate as follows:

a\. Multiply the income limit on line 3 of the form

by 30 percent (.30);

b\. Divide the product obtained in step a by 12;

c\. Subtract the monthly PBE (if any) on Line 2 from

the quotient obtained in step b.

5\. Line 5 - Where the Valuation staff has evidence that

the project\'s tax credit assisted units would not be

marketable to income eligible households at the

lesser of the maximum affordable monthly rents (Line

4\) or the rent by market comparison (Line 1), based

on the market analysis review by the EMAS, enter the

recommended estimated monthly rent obtainable for

the restricted units, as approved by the Director,

Housing Development Division. For Section 223(f)

cases involving projects with existing Section 8 HAP

contracts, use this line to enter the processing

rents calculated in accordance with the outstanding

instructions involving the refinancing or purchase

of Section 8 projects with outstanding project based

contracts.

6\. Line 6 - Monthly Rent Estimate for Restricted Units.

Enter the least of lines 1, 4, or 5.

7\. Line 7 - Enter the number of each unit type with

income limits shown on line 3.

8\. Line 8 - Enter the number of each unit type shown on

another Form HUD-92264-T with other income limits.

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9\. Line 9 - Enter the number of each unit type with no

income limits using unsubsidized market rents from

line 1.

D. For Further Information - Any questions concerning this

attachment and completion of revised Form HUD-92264-T

which follows should be directed to the Office of

Insured Multifamily Housing Development, Technical

Support Division, Valuation Branch, (ETS 8-202-708-0624).

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Arthur J. Hill

Assistant Secretary

Attachment

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FORM HUD-92264-T

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\*U.S. Government Printing Office: 1992 \-- 342-362/60360