AMI: Area Median Income in Relation to HUD 223(f) Loans
HUD 223(f) Loans and Area Median Income (AMI)
Area Median Income, or AMI, is a statistic calculated by HUD that estimates the median annual income of households in a certain area. If you're a multifamily investor interested in using a HUD 223(f) loan to acquire or refinance an affordable property-- or you want to take advantage of LIHTC credits or the HUD Section 8 program, it's essential to know the AMI for the area in which your property is located. Doing so will help you calculate the maximum amount of rent that you can charge tenants, allowing you to make accurate financial projections regarding your potential investment.
Area Median Income and Low-Income Housing Tax Credits
Low-Income Housing Tax Credits, or LIHTCs, are one of the major financial incentives used to induce investors to create and maintain affordable properties. LIHTCs come in two varieties, 4% LIHTC credits and 9% LIHTC credits. Both types permit investors in low-income properties to claim a tax credit on their federal income taxes over a 10-year period. Since 9% LIHTC credits are usually only allotted for new construction properties, or properties undergoing substantial rehabilitation, HUD 223(f) borrowers typically only take advantage of 4% credits.
The LIHTC program usually requires investors to set aside at least 40% of the units in a development for tenants earning no more than 60% of AMI, (the 40/60 test). Or, alternatively, they must set aside at least 20% of the project units for tenants earning no more than 50% of the AMI (the 20/50 test).
Area Median Income and HUD's Section 8 Program
The HUD Section 8 program, which pays rental assistance subsidies to landlords, is another program used to encourage investors to keep their properties affordable. In many cases, maximum rents under the Section 8 program are based on a certain percentage of AMI. In other cases, they might be based on fair market rents (FMRs), another statistic calculated by HUD to help guide rent prices for affordable properties. While Section 8 landlords do enjoy getting payments from the government, the Section 8 program does require a significant amount of documentation and regular inspections. As a result, it might not right be for everyone.