"IHDA lets me elect the 20-50 test, the 40-60 test, or Income Averaging, and publishes its own rent and income limit tables every year — but what debt-coverage ratio, vacancy rate, and reserve minimums does the Authority actually underwrite to, and does Illinois restrict Income Averaging the way some states restrict utility allowance sources?"
Minimum set-aside: all three federal elections are available, made once, for the whole project
IHDA's LIHTC & HOME Compliance Manual (April 2026 edition — the current version, per IHDA's own Management Bulletin #627 dated May 28, 2026) confirms Illinois offers the full federal menu: the 20-50 test (at least 20% of units at or below 50% AMI), the 40-60 test (at least 40% of units at or below 60% AMI), and the Average Income Test (at least 40% of units rent-restricted, with an average income limit of 60% AMI and a maximum unit designation no higher than 80% AMI). The owner makes this election when filing IRS Form 8609 for the first tax credit year, and "once a minimum set-aside election has been made, it is irrevocable throughout the compliance and extended use periods." The Compliance Manual is explicit that the election governs more than the minimum fraction: "The minimum set-aside determines the maximum income limit applied to ALL affordable housing units at the project including those units covered by the applicable fraction, which may be larger than the 20% or 40% of units required to meet the minimum set aside."
Multi-building projects carry a specific compliance trap the Compliance Manual calls out directly: an owner elects on Form 8609, line 8b, whether to treat each building as part of a multi-building project. Electing "no" for a building means it must independently meet the minimum set-aside test on its own, and tenants cannot transfer into it from other buildings without being requalified as new move-ins. For any project using the Average Income Test specifically, the Manual states owners "are strongly encouraged" to elect multi-building treatment, because treating buildings separately "could mean a greater risk of a minimum set-aside violation if a unit goes out of compliance, because there are fewer units to maintain the 60% average income."
Income Averaging in Illinois: available only at IHDA's discretion, and only for a 100%-affordable deal
IHDA's Underwriting Standards Guide treats Income Averaging as something the Authority approves case by case, not an election a sponsor can simply make: "the Authority will consider, at its sole discretion, allowing the use of the average income test for the minimum income set-aside." The Guide lists examples of when IHDA will consider it — preventing displacement of existing tenants, reducing a subordinate resource request, or otherwise benefiting the property — but frames these as illustrative, not exhaustive.
The real overlay is in the "Applicable Fraction" condition: "All units must be restricted to tenants earning at a Low-Income level. The development may not contain unrestricted or market rate residential units." This is materially narrower than the bare federal statute, which permits an Average Income project to include market-rate units outside its applicable fraction — IHDA requires the entire project to be affordable if it wants to use Income Averaging at all. IHDA also caps the number of income designations at four, where the federal statute (in 10-percentage-point bands from 20% to 80% AMI) permits as many as eight. Sponsors must declare the intended use of Income Averaging, and the unit-by-unit income distribution, at the Preliminary Project Assessment stage — not left open until the Full Application.
| Federal Section 42(g)(1)(C) baseline | IHDA's Underwriting Standards Guide overlay |
|---|---|
| Election available as of right once a sponsor chooses it on Form 8609 | Available only "at the Authority's sole discretion" — must be declared and approved starting at the PPA stage |
| Project may include market-rate units outside the applicable fraction | "The development may not contain unrestricted or market rate residential units" — 100% affordable only |
| Up to 8 income designations (20% through 80% AMI, in 10-point bands) | "The Authority will limit the number of income designations to four (4)" |
| No express even-distribution rule | "Applicants must demonstrate that income restrictions are applied evenly across units by unit size and other features" — larger units cannot be skewed toward higher income targets to maximize rent |
IHDA also states that, absent contrary IRS guidance, it will not report a property as failing the Average Income Test for minimum set-aside purposes as long as 40% of total project units remain qualified — but sponsors should read the Guide's full compliance discussion before relying on that administrative position.
Where the rent and income numbers come from: IHDA publishes its own tables, including HERA special limits
Unlike states that send developers to a third-party calculator, IHDA publishes its own annual income limits directly: "Each year, IHDA publishes the updated maximum income limits for counties and regions in Illinois and makes them available on the IHDA website ... IHDA publishes both MTSP and HERA special limit schedules when it publishes annual Rent and Income Limits. MTSP limits are referred to as LIHTC limits on the IHDA tables." The Compliance Manual is explicit that these Authority-calculated figures, not a self-run calculator, are what should be entered into the Common Application's "Monthly Rent Limit" column.
Illinois LIHTC projects benefit from HERA's hold-harmless protection like every other state's — a project already in service does not have to drop its rents and income limits in a year when area median income falls; only newly placed-in-service projects must use the current, lower figures. HERA special limits apply more narrowly: only to projects placed in service before January 1, 2009, in specific counties where a hold-harmless policy had previously kept 2009 limits from dropping, and that eligibility is permanently lost once a property is refinanced with a new round of tax credits, because its placed-in-service date resets. For any blended HOME/LIHTC project, the Compliance Manual requires comparing HOME's own income and rent limits against whichever LIHTC limit applies (ordinary MTSP or HERA special) and using the more restrictive of the two for any unit carrying both designations.
Residential unit rents in the Common Application, inclusive of the utility allowance, generally may not exceed 95% of the current rent limit imposed by any applicable financing source — a built-in cushion below the maximum, unless the unit carries project-based rental assistance. For mixed-income projects with market-rate units, IHDA "will generally require that rents on these units be set at a 10% discount to area market rents," reviewed case by case.
The pro forma IHDA actually underwrites to: DSCR, vacancy, and trending
IHDA's Underwriting Standards Guide requires every Application to demonstrate compliance with the Authority's underwriting standards for a minimum of the first 15 years of operations, calculated in the Common Application's "Cash Flow" tab. For deals with "must-pay" hard debt, the standard is a 1.15 minimum annual Debt Service Coverage Ratio for the first 15 years — except that projects with 90% or more of units under rental assistance subsidy with more than 15 years remaining on the contract, involving new construction or substantial rehabilitation, get a lower 1.11 minimum. A project with no must-pay hard debt is instead held to an Expense-to-Income Ratio below 0.85 in year one. Critically, "Project reserves cannot be used to maintain minimum Debt Service Coverage Ratios during the initial fifteen (15) years of the Project operating period" for any LIHTC deal — the DSCR has to work on operations alone, not with a reserve draw propping it up. A separate, additional standard requires Cash Flow after Debt Service of at least $100 per unit per year, with the same reserve-draw prohibition.
| Factor | IHDA standard |
|---|---|
| Real estate tax escalation | 4% annually |
| All other operating expense escalation | 3% annually |
| Residential income escalation | 2% annually |
| Reserve contribution escalation | 3% annually |
| Vacancy — Elderly projects | 6% |
| Vacancy — Non-elderly projects | 8% |
| Vacancy — Permanent Supportive Housing | 10% |
| Vacancy — Supportive Living Facility (residential and service income) | 10% |
IHDA may allow, at its sole discretion, a lower vacancy rate on units receiving project-based rental assistance — as low as 3% for those specific units, blended into an overall weighted-average vacancy rate — on a case-by-case showing of demand. Any deviation from these standards requires supporting documentation such as historic audited operations.
Per-unit operating expenses are benchmarked against a published reasonableness range that varies by both project type and geographic Set-Aside — a materially more granular structure than a single statewide range:
| Project type | City of Chicago | Chicago Metro | Other Metro | Non-Metro |
|---|---|---|---|---|
| Elderly | $7,300 - $10,300 | $5,300 - $8,300 | $4,800 - $7,800 | $3,900 - $6,900 |
| Non-Elderly | $7,700 - $10,700 | $6,100 - $9,100 | $5,200 - $8,200 | $4,500 - $7,500 |
A proposed budget outside these ranges requires two years of audited financials from at least two comparable properties in the sponsor's own portfolio, plus a written variance explanation, before IHDA will consider it.
Two further expense-line caps round out the pro forma: the property management fee may not exceed 6% of Effective Gross Income (7% for Permanent Supportive Housing competitive-round projects), and "Other Residential Income" is limited to laundry, vending, parking, and resident-service income — late fees, pet fees, security deposits, and damages collection are explicitly not permitted income sources for underwriting purposes.
Reserves: five separate components, each independently sized
Two more reserves round out the development budget: a Real Estate Tax Reserve capitalized at 60% of the estimated first-year annual real estate tax bill, and an Insurance Reserve capitalized at 110% of the estimated first-year annual insurance expense — both funded going forward from operating cash flow sufficient to cover the following year's actual bill. Where an Authority debt source is generated via bond issuance at a market interest rate, a Bond Reserve is also required, funded at six months of principal and interest at the bond rate plus one additional month of principal and interest at the loan rate. For any LIHTC deal, reserve account balances must stay with the project through investor exit — IHDA reviews partnership agreements specifically to confirm this.
Where this goes wrong
- Assuming Income Averaging is available on request the way the federal statute allows. IHDA's Underwriting Standards Guide makes the election discretionary and requires the entire project to be affordable — "the development may not contain unrestricted or market rate residential units" — a materially narrower rule than the bare federal test.
- Modeling up to eight Income Averaging designations. IHDA caps the number of income designations at four, not the eight the federal 10-point bands would otherwise allow.
- Treating each building in a multi-building Average Income Test project as independently safe from a set-aside violation. IHDA's Compliance Manual specifically flags that electing separate-building treatment (Form 8609, line 8b) increases the risk of a minimum set-aside violation and reduces flexibility to transfer qualified tenants.
- Looking for a third-party rent/income calculator as Illinois's source of truth. IHDA publishes its own annual Rent and Income Limits, including HERA special limits for eligible pre-2009 projects — the Common Application should use IHDA's own posted tables, not an independently run calculator.
- Assuming HERA special limits survive a refinancing. Eligibility for HERA special limits is tied to a pre-2009 placed-in-service date, and that eligibility is lost once a property is refinanced with a new LIHTC allocation, because the placed-in-service date resets.
- Using a single statewide per-unit operating expense assumption. IHDA's reasonableness ranges vary by both project type (elderly vs. non-elderly) and geographic Set-Aside — a City of Chicago elderly deal and a Non-Metro elderly deal are underwritten to different expense ranges entirely.
- Drawing on Project reserves to prop up the minimum DSCR or Cash Flow after Debt Service during the first 15 years. The Underwriting Standards Guide expressly prohibits this for any LIHTC deal.
- Assuming all methods for documenting a utility allowance are interchangeable between compliance and underwriting. The LIHTC & HOME Compliance Manual's list (for ongoing annual compliance) and the Underwriting Standards Guide's list (for what to submit at Application) are framed differently — check the document matching the stage of the deal.
- Underwriting a mixed-income project's market-rate units at full area market rent. IHDA generally requires a 10% discount to area market rents on market-rate units in a mixed-income deal, reviewed case-by-case.
- Including late fees, pet fees, security deposits, or damages collection as Other Residential Income in the operating pro forma. IHDA's Underwriting Standards Guide explicitly excludes these from permissible Other Residential Income sources.
- HUD
- LIHTC
- State QAPs
- IRS § 42
- Housing Finance Agencies