According to HUD's annual analyses, many areas have experienced no income growth for several years, so rents have not risen. Of course, expenses such as insurance, real estate taxes, and especially the portion of utility costs for each unit--which the property owner must give back to the renter as an allowance--have risen sharply. Property owners cannot continue to absorb these rising costs indefinitely. And recent changes in HUD's methodology used to compute area median income has made the situation even more serious.

A recent study by the National Association of Home Builders Housing Policy department found nearly 200 metropolitan areas and counties across the country where flat income limits have frozen rents at tax credit properties every year since 2003. Over that time period, utility costs nationwide have risen about 27%. In the most extreme cases, some areas may face flat income limits--and therefore flat tax credit rents--for the next decade. The recently published 2007 Income Limits illustrate the problem all too well; HUD's analysis shows that incomes have stagnated or fallen for 75% of the country while the underlying data show a 4% increase in incomes nationwide. The result constitutes a complete disconnect between the statistical methodology and the real world. In short, income is being held artificially flat and expenses are continually rising, which, as anyone in business surely knows, is a recipe for disaster. This is jeopardizing the existing affordable housing stock, and could at the same time put the brakes on new development.

The members of NAHB's Housing Credit Group--the developers, owners, managers, and lenders who work with the LIHTC--are in a Catch-22 situation: The very income restrictions meant to ensure that these properties are available to serve people in need of affordable housing are actually threatening the long-term sustainability of many of these projects. It's a very serious issue because affordable housing is already in short supply--and we can't afford to lose more of it.

Just this month, after a multi-year effort by NAHB economists and a coalition of other industry partners, HUD made available a new model to compute utility allowances. That addresses NAHB concerns that allowances for newer, more energy-efficient buildings are too high. The new HUD model calculates different allowances depending on when the project was built. If adopted by local Public Housing Authorities, it should produce lower allowances for many newer LIHTC properties.

That announcement was followed by proposed new regulations from the Internal Revenue Service governing utility allowances. The IRS proposal included several changes recommended by NAHB, including:

Allowing property owners to use the new HUD model to calculate utility allowances even if the local Public Housing Authority doesn't offer that option;
allowing property owners to use a utility allowance estimate that the state Housing Finance Agency provides;
not requiring changes in utility allowances while occupancy in a new project is becoming stabilized;
allowing more flexibility in the timing of rent adjustments, so that they need to be adjusted only once a year;
clarifying the use of allowances estimated by utility companies in cases where charges are paid to more than one company (for example, when electric power generation and transmission payments go to separate entities).

Implementation of these proposed regulations won't solve all the financial viability problems of our nation's LIHTC rental stock. But it will go a long way toward making it possible for committed developers and owners to continue supplying affordable housing for people who need it.

Steve Lawson is president of the Lawson Cos., based in Hampton Roads, VA, and current chairman of NAHB's Housing Credit Group. The views expressed in this article are the author's own.

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HUD's Income Estimates Spur Unintended Consequences

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