"DSHA's QAP just restates the plain federal 20/50 and 40/60 tests without a menu the way some states lay it out -- so what do we actually elect, what rent and income limits govern, and what debt-coverage, vacancy, and reserve numbers does DSHA expect the pro forma to hit before it will underwrite us?"
Minimum set-aside: the plain federal election, restated verbatim
DSHA's QAP does not build out a state-specific set-aside menu; it restates the two ordinary federal tests almost word for word: "Twenty percent (20%) of the residential units in a project shall be both rent-restricted and occupied by individuals whose income is fifty percent (50%) or less of the area median gross income; or...Forty percent (40%) of the residential units in a project shall be both rent-restricted and occupied by individuals whose income is sixty percent (60%) or less of the area median gross income." The owner elects 20/50 or 40/60 (or a higher percentage, up to 100%) at application, and "the election is made at the time of application and must be maintained throughout the compliance and extended use periods." As with every state, this election becomes irrevocable once made on IRS Form 8609.
Income averaging: DSHA's own Average Income Policy, and a bond-compliance trap
DSHA has adopted the post-March 23, 2018 federal Average Income election (IRC Section 42(g)(1)(C)) through its own "DSHA Average Income Policy." Under this election, at least 40% of units must be rent-restricted and occupied at designated imputed income limits of 30%, 40%, 50%, 60%, or 80% of AMI, with the development-wide average of those designations at or below 60% AMI -- DSHA's own text notes it "may require a lower percentage for purposes of underwriting." Unit designations are permitted to "float": a project committed to a 30/50/60/80 mix at application may later re-mix those same bands (30/40/50/60/80) at any point during the affordability period as long as the overall average stays at or below 60% AMI. DSHA does require owners to "disperse 30%, 40%, 50%, 60%, and 80% units across unit types and sizes in a manner that does not violate Fair Housing," and separately reserves the right to "disallow any clear skewing of unit designations" and to require "reasonable parity between different bedroom sizes at each targeted income band."
The trap is specific to bond deals: "Projects using 4% tax credits/tax-exempt bond financing IRC Section 142 remains unchanged under the Act. A project subject to IRC Section 142 must still meet either the 20/50 or 40/60 minimum set-aside test. The project may elect average income for LIHTC as long as the unit mix selected will also meet the minimum set-aside test for bond compliance purposes." In practice, a 4%/bond deal that wants income averaging for its LIHTC election has to design a unit mix that independently clears 20/50 or 40/60 for the separate federal bond-compliance test -- the two elections are not automatically compatible just because one project can technically make both.
A second, less obvious rule governs re-syndication: a property re-syndicating with a new income-averaging election does not get released from its original restrictive covenant's rent and income terms. Both covenants stay in effect until the original extended-use period ends, and "during the period in which both restrictive covenants are in effect, the owner will have to comply with the more stringent rules applicable to each particular unit" -- meaning the tighter of the two overlapping restrictions controls on a unit-by-unit basis, not a blended average. Electing income averaging also carries a real, distinct fee: DSHA's compliance monitoring fee is $750 per unit generally, rising to $1,000 per unit specifically "for projects utilizing Income Averaging" -- the QAP separately describes this as "an additional $250 per unit for electing the income averaging option."
Income and rent limits: no confirmed Delaware-specific chart
The QAP's own Rent Limitations and Income Requirement sections are brief and general: "The maximum rent that can be charged for a low-income unit cannot exceed thirty percent (30%) of the imputed income limitation applicable to such unit," and income eligibility runs off "the county gross median income based on family size" at the owner's elected percentage. For the specific figures, the QAP directs applicants to "the Income Limits chart" without stating, in the text this research reviewed, whether DSHA maintains and republishes its own Delaware-specific mirror of that chart or simply points applicants to HUD's own published Multifamily Tax Subsidy Project (MTSP) income limits. This research could not confirm which is the case from DSHA's own QAP and Guidelines text alone -- a developer should confirm directly with DSHA which document is controlling for a given application cycle rather than assume either way.
The operating pro forma: DSHA's own numeric underwriting floors
| Scenario | Minimum coverage |
|---|---|
| Loan-to-value ratio of 50% or less | 1.15:1 debt service coverage |
| Loan-to-value ratio of 51%-80% | 1.20:1 debt service coverage |
| No amortizing debt | 1.10:1, based on operating income to operating expenses |
| FHA Risk Sharing Insurance program | 1.176:1, per the risk-sharing regulation |
| FHA 221(d)(4) loans | 1.15 loan-to-value ratio |
| At least 90% of units subsidized (USDA, Section 8, RAD, PBV, etc.) | DSHA may allow, at its sole discretion, 1.15:1 DSC at 51%-80% LTV |
DSHA 2025-2026 LIHTC Guidelines, "Debt Coverage Ratio" section. Negative cash flow within the first 20 years of the loan is not accepted; first mortgages must run 20 years or more, amortized over 30 or 35 years unless DSHA approves otherwise. "Value" is defined as Rent Restricted Value, not market value.
Excess cash flow distributions are capped, and the cap structure genuinely differs by credit type. For 9% competitive DSHA-financed developments with DSHA-approved coverage ratios and amortization periods, the annual distribution is capped at 1% of initial equity investment, and accumulated (catch-up) distributions cannot exceed five years. For 4% tax-exempt-bond DSHA-financed developments, the annual distribution is capped at 2% of initial equity investment up to $200,000, for up to ten years or until the required "cash flow fee" is repaid per the construction-closing pro forma projections -- whichever comes first (the "Cash Flow Fee Repayment Period"). After that period ends, the distribution stays capped at the lesser of 2% or $200,000 but splits 50% to the development and 50% to DSHA, to repay DSHA's own deferred debt; cumulative (catch-up) distribution is not permitted on the 4% side at all. Non-DSHA-financed developments are not subject to any of these distribution caps.
Reserves and escrows DSHA requires funded by closing
| Reserve/escrow | Amount | When funded |
|---|---|---|
| Operating reserve, federally subsidized projects | 4 months of operating expenses (including debt service and replacement reserves) | Construction closing (acq/rehab) or permanent closing (new construction) |
| Operating reserve, non-subsidized projects | 6 months of operating expenses (including debt service and replacement reserves) | Construction closing (acq/rehab) or permanent closing (new construction) |
| Initial replacement reserve | $1,500/unit ($1,650/unit if carpet is installed) | Permanent closing |
| Annual replacement reserve (after initial balance met) | $500/unit/year ($550/unit if carpet) | Ongoing |
| Tax escrow | Equal to estimated annual tax liability per the underwritten budget | Permanent closing |
| Insurance escrow | Equal to estimated annual insurance premium per the underwritten budget | Permanent closing |
| Cash working capital reserve | 2.5% of combined construction mortgages | Construction closing; released at permanent closing if no outstanding issues |
DSHA 2025-2026 LIHTC Guidelines, "Operating Reserve," "Replacement Reserves," "Tax Escrow," "Insurance Escrow," and "Cash Working Capital Reserve" sections. The operating reserve, other reserves, and operating income may not be used to guarantee any other lender's or syndicator's obligations. A Letter of Credit may substitute for the cash working capital reserve; no portion of the development may secure that LOC.
Utility allowances: five federal methods, mapped by funding source
Delaware does not publish its own statewide default utility-allowance schedule; instead, the Guidelines walk through the five methods IRS/HUD regulations already permit -- the PHA Utility Allowance Schedule, the HUD Actual Consumption Method (per HUD Notice H-2015-04), an Energy Consumption Model built by a licensed engineer or qualified professional under IRS Reg. Section 1.42-10, a written Utility Provider Estimate, and the HUD Utility Schedule Model -- and then mandates which method applies by funding source rather than leaving every LIHTC applicant a free choice.
| Program type | Required method | Review frequency |
|---|---|---|
| Rural Development (RD) Section 515/RA | RD Utility Method/Schedule | As required by RD |
| RD Section 515 with Section 8 | HUD Actual Consumption Method | Every 3 years |
| Section 8, project-based; Section 202 PRAC/SPRAC; HOME; Section 811 | HUD Actual Consumption Method | Every 3 years |
| Section 8 Housing Choice Voucher units, or HOPWA vouchers | PHA Utility Allowance Schedule | Annually |
| State Rental Assistance Vouchers (SRAP) | PHA Utility Allowance Schedule | Annually |
| LIHTC only (no subsidies) | Applicant's choice of any method except HUD Actual Consumption | Annually |
DSHA 2025-2026 LIHTC Guidelines, "Utility Allowance" section. A building owner using the Utility Provider Estimate, HUD Utility Schedule Model, or Energy Consumption Model must submit the estimate to DSHA and make it available to all tenants at the start of the 90-day notice period before it can be used to set gross rent; a changed utility allowance takes effect in gross rent 90 days after the change.
Where this goes wrong
- Assuming DSHA publishes its own Delaware-specific income and rent limit chart the way some states do -- the QAP's own text points to "the Income Limits chart" without confirming whether that is a DSHA-produced document or a pass-through to HUD's MTSP figures; confirm directly with DSHA before underwriting to it.
- Electing income averaging for LIHTC on a tax-exempt bond (IRC Section 142) deal without independently checking that the same unit mix also clears the ordinary 20/50 or 40/60 test -- bond compliance is a separate test that income averaging does not substitute for.
- Assuming a re-syndication's new income-averaging election releases the property from its original restrictive covenant -- both covenants run concurrently until the original extended-use period ends, with the more stringent rule controlling per unit.
- Underestimating the income-averaging fee -- DSHA's compliance monitoring fee rises from $750/unit to $1,000/unit specifically for projects electing income averaging.
- Using the same debt-coverage ratio regardless of loan-to-value -- DSHA's own floor moves from 1.15:1 to 1.20:1 once LTV crosses 50%, with separate, different ratios for FHA Risk Sharing and FHA 221(d)(4) deals.
- Applying the 9% cash-flow distribution cap structure to a 4%/bond deal or vice versa -- the two credit types have genuinely different caps, timeframes, and (for 4% deals) a 50/50 DSHA repayment split once the Cash Flow Fee Repayment Period ends.
- Assuming distribution caps apply universally -- they only bind DSHA-financed developments; a development with no DSHA financing is not subject to DSHA's distribution caps at all.
- Choosing a utility allowance method by applicant preference rather than checking DSHA's program-type table first -- several federal funding sources (Section 8 PBRA, HOME, Section 202, Section 811) mandate the HUD Actual Consumption Method regardless of what an owner would otherwise prefer.
- Treating the operating reserve as available to backstop another lender's or syndicator's obligations -- DSHA's Guidelines explicitly bar that use.
- Forgetting that Section 8 income/expense trending assumptions need the Contract Administrator's approval before application submission, separate from DSHA's own underwriting review.
- HUD
- LIHTC
- State QAPs
- IRS § 42
- Housing Finance Agencies