Several housing organizations have raised concerns about the Department of Housing and Urban Development’s annual income determination for low-income housing tax credit (LIHTC) properties, saying the new calculations make it tougher for some residents and investors.

“Unfortunately, the methodology changes announced today pick winners and losers among individuals receiving federal rental assistance,” say the groups. “While the changes may result in potentially smaller rent increases for some tenants, it will also mean fewer tenants will qualify for LIHTC-funded and other federally supported housing.

The April 2 statement is signed by 10 organizations, including the National Multifamily Housing Council, Council for Affordable and Rural Housing, National Leased Housing Association, and the National Association of Home Builders.

The income determination changes the methodology for calculating year-over-year increases in income limits for LIHTC and other HUD programs. Since fiscal 2010, HUD has limited the increase from year to year in its income limits as the higher of 5% or twice the percentage change in national median family income.

Under the recent changes, that formula still exists, but there’s now an absolute cap of 10% on income limit increases for LIHTC housing as well as housing financed by other HUD programs, including Section 8. Income limits are the maximum that a household can earn and still qualify for the housing.

Since 2010, there have been three years when the calculation has been greater than 10%, so the ceiling may not be a huge issue. However, those three times have been in the last five years, notes Thomas Stagg, a partner in the Novogradac accounting and consulting firm.

Historically, the cap has been closer to 5% to 7%, he says.

It would have likely been more this year though. Under the previous formula without a cap, the increase would have been around 14.78% this year, estimates Novogradac.

The changes are also important because they also mean a 10% cap on yearly rent increases for LIHTC properties. This could mean smaller rent hikes for residents but tighter budgets for property owners who may see lower rental income.

Tenant protection is seen as the reason that HUD is making the change. The National Low Income Housing Coalition applauded the move to limit rent increases at LIHTC developments, calling it “an important win for the millions of renters living in tax credit-financed properties.”

Going back to 2022, the cap was the highest seen at 11.89%, says Stagg.

“Most developers though didn’t actually increase rents on their tenants at 12%,” he says. “Most took a reasoned approach.”

Vacant or new construction units may have been increased to near the maximum, but most of the people Novogradac talked with were phasing increases in over time, according to Stagg.

Going forward, the biggest impact will likely be on projects that are under development. If they were in line to set their rents at a higher rate, the cap may mean larger financing gaps.

The housing groups raise concerns that the changes could harm the development of affordable housing.

“We strongly urge HUD to consider the impacts of this change that could limit the number of people served by the program and be a deterrent to more affordable housing production,” say the groups.

The new income limits are effective April 1 and, in the case of decreasing income limits, must be implemented by May 16.