"Which direction is this deal's cash flow actually trending — because ADOH underwrites a rising DSCR and a falling one to two different bands entirely?"
DSCR branches by trend direction, and vacancy/escalation are simple caps
| Standard | Requirement |
|---|---|
| Vacancy rate | As stated in the market study, but never greater than 10% |
| Rent escalation | 2% per year |
| Expense escalation | 3% per year |
| DSCR, cash flow trending upward | 1.15x–1.35x in the first year of normal operation |
| DSCR, cash flow trending downward | 1.10x–1.50x, sustained across the entire first 15 years of normal operation |
ADOH assesses the DSCR without regard to deferred developer fee or to funds paid out to members or partners — distributions, asset management fees, and member/partner loan payments are all excluded from the test, so a deal can't manufacture coverage by deferring fee or suppressing partner draws on paper. Rural and Tribal projects may be offered DSCR alternatives; this session did not confirm the specific alternative bands ADOH applies. A pro forma modeled only against the upward-trending 1.15x floor without checking whether ADOH's own reviewer will instead classify it as trending downward — and hold it to the wider, longer 1.10x–1.50x test — risks failing underwriting on a technicality of trend classification rather than the deal's actual economics.
Operating expenses run inside a narrow, published per-unit band
For new construction, ADOH's own underwriting standard sets operating expenses at $4,700 to $5,200 per unit per year, excluding real estate taxes and reserve payments — and requires a waiver for any operating budget more than $100 per unit per year above or below that band. An applicant proposing a lower figure can support it with comparable-property documentation; ADOH may, but is not required to, allow a higher figure for supportive services. Rehabilitation applications are underwritten differently: ADOH bases the minimum operating expense on the property's own current operations, adjusted for whatever physical improvements the scope of work actually changes — there is no fixed per-unit band for rehab the way there is for new construction.
Three separate reserve requirements, not one blended number
| Reserve | Requirement |
|---|---|
| Lease-up | Minimum $300/unit, deposited by the owner to fund rent-up expenses; any balance remaining once the property reaches 93% occupancy sweeps to the replacement reserve, the operating reserve, or to pay capital costs (including the deferred developer fee) |
| Operating | At least 4 months of operating expenses and debt service combined, evidenced to ADOH at Form 8609 submission |
| Replacement | At least $250/unit/year (new construction, seniors) or $350/unit/year (new construction, all other project types), increased 3% annually |
The replacement-reserve figures above are the new-construction standard both the Second and Third Drafts state explicitly; this session did not independently confirm whether rehabilitation projects carry a distinct replacement-reserve figure elsewhere in the QAP or underwriting workbook, or use the same new-construction numbers by default — check the current Capital Needs Assessment guidance before assuming either way.
Rent and income limits are federal, with one real Arizona-specific set-aside wrinkle
This session found no Arizona-specific override of the federal HUD Multifamily Tax Subsidy Project rent and income limits, and no Arizona-specific utility allowance schedule beyond the standard federal options (HUD Utility Schedule Model, local public housing authority schedule, or an energy consumption model) — treat both as running on the same federal baseline every other state uses unless a specific local schedule is confirmed for the site's housing authority. Where Arizona does add a real, state-specific mechanic is the Average Income minimum set-aside election: a project electing it may not include any market-rate units, and may not propose an average AMI designation exceeding 60% for any bedroom type, applied as a pro-rata distribution across that bedroom type's units — both real constraints beyond the bare federal Average Income Test. ADOH may waive the 60%-per-bedroom-type ceiling for a rehabilitation application specifically to better fit the incomes of in-place tenants. The minimum set-aside election itself is locked at submission and cannot change afterward, and for multi-building developments the ownership entity must affirmatively elect multiple-building set-aside treatment on IRS Form 8609, Part II, Line 8b.
Equity pricing is ADOH's own published survey, not the applicant's assumption
ADOH surveys federal and state LIHTC equity providers itself and announces a resulting minimum-maximum pricing range no later than one month before the application deadline, which may vary by property type, size, or geography. An applicant must underwrite within that published range, or attach a fully executed letter of intent from an equity investor or syndicator to justify a price above it — there is no path to underwriting below the published range on the strength of an applicant's own market read alone. Permanent-loan commitment letters carry their own real checklist: amount, term and amortization of at least 15 years, a fixed interest rate, fees charged, reserve requirements, anticipated lien position, and — where applicable — written acknowledgment that the Average Income election has been affirmed.
Where this goes wrong
- Underwriting a pro forma to the 1.15x–1.35x upward-trending DSCR band without checking whether ADOH will instead classify the deal's cash flow as trending downward and hold it to the wider, 15-year 1.10x–1.50x test.
- Padding DSCR with deferred developer fee or by assuming member/partner distributions won't be paid — ADOH assesses the ratio with both excluded.
- Setting new-construction operating expenses more than $100/unit/year outside the $4,700–$5,200 band without either a waiver or comparable-property documentation.
- Applying the new-construction operating-expense band to a rehabilitation deal — rehab is underwritten off the property's own current operations instead.
- Treating the three reserves (lease-up, operating, replacement) as one blended cushion — each has its own minimum, timing, and evidentiary requirement, and ADOH will not waive any of them.
- Assuming a rehabilitation project's replacement reserve uses the same $250/$350-per-unit new-construction figures — not independently confirmed this session.
- Exceeding the 60%-of-AMI-per-bedroom-type ceiling on an Average Income election, or including market-rate units in a project that elected it — both are disqualifying for that set-aside, not merely a scoring deduction.
- Underwriting equity pricing outside ADOH's own published range without an executed letter of intent from an investor or syndicator to support a higher price.
- Relying on any specific figure in this phase without checking it against ADOH's currently posted final QAP — this session confirmed every figure identical across the 2026-2027 QAP's Second Draft (Oct. 2025) and Third Draft (Dec. 1, 2025), but housing.az.gov's bot-detection protection blocked verification against a Final (apparently posted Dec. 2025) and a later Amendment (Information Bulletin 46-26, 2026) this session could only confirm exist, not read.
- HUD
- LIHTC
- State QAPs
- IRS § 42
- Housing Finance Agencies