"Which minimum set-aside do we elect, how much of the Deeper Affordability category can we actually reach, and what vacancy and DCR numbers will get this pro forma past KHRC?"
Three layers of income and rent targeting, not one
Every LIHTC property still elects a federal minimum set-aside under 26 U.S.C. § 42(g) — 20% of units at 50% AMI, 40% at 60% AMI, or the Average Income test spreading designations across 20%-80% AMI. QAP Section V(A)(8) requires the market study to specifically confirm the proposed market can sustain rents across that full 20-80% range when Average Income is elected, and properties electing Average Income may not contain market-rate units at all.
On top of the federal floor, QAP Section V(C)(5) adds a Kansas-specific mandatory rent/income targeting rule for new construction — but it applies only to non-bond deals. The QAP states that 4% LIHTC and Bond properties are exempt from that subsection, and may instead elect the identical targeting under Section VII(K)(5) for scoring points rather than as a mandatory obligation. Metro new-construction (9%, or otherwise non-bond) elects either an Average Income minimum set-aside averaging 54% AMI or below, or the 20/50 or 40/60 test plus at least 30% of LIHTC units at 40% AMI or below with those units' rents inside the applicable Public Housing Authority voucher threshold; rural sites use the same structure at 57% average AMI, or 50% AMI depth.
Rehabilitation gets a simpler rule at Section V(B)(5): comply with whichever is more restrictive of the elected LIHTC minimum set-aside or any other affordable-housing program layered onto the deal — HUD Resources, an existing Section 8 HAP contract, and so on. There's no separate metro/rural targeting table for rehab the way there is for new construction.
| Metropolitan | Rural | |
|---|---|---|
| Average Income option | Designations average 54% AMI or less | Designations average 57% AMI or less |
| 20/50 or 40/60 option | ≥30% of LIHTC units at 40% AMI or below, rents within PHA voucher threshold | ≥30% of LIHTC units at 50% AMI or below, rents within PHA voucher threshold |
| 4% LIHTC / Bond deals | Exempt — may elect the same terms under § VII(K)(5) for scoring points instead | Exempt — same election available under § VII(K)(5) |
KHRC's pro forma assumptions are fixed, not modeled
Unlike states that let applicants defend their own vacancy and trending assumptions, QAP Section VIII(A)(1) sets three underwriting inputs by rule: a 7% vacancy rate, rent increases trended at 2% annually, and expenses trended at 3% annually. There's no published waiver for these three — they're the numbers KHRC's own review applies regardless of what an applicant's pro forma assumes.
The debt coverage ratio has a hard floor and a soft ceiling. Minimum DCR is 1.15 for 15 years. There's no formal maximum, but exceeding 1.50 or $600 per unit per year in surplus can trigger a reduction in awarded resources — KHRC treats a thick DCR cushion as evidence a deal is over-asking for credit, not as prudent conservatism, and requires a narrative justification for any DCR outside that band. DCR is assessed without regard to deferred developer fee or funds paid to members/partners — distributions, asset management fees, loan payments — so those can't be used to manufacture coverage.
A project with no hard debt and/or no deferred developer fee is allowed but draws additional scrutiny and needs its own narrative justification; KHRC may reduce the awarded resources to such a project at its discretion. An all-equity or minimal-leverage structure needs a real reason on the record, not just a design preference.
Operating expenses, utility allowance, and reserves
New construction carries a stated minimum operating budget of $3,200 per unit per year, excluding real estate taxes and reserve payments (QAP § VIII(A)(2)) — applicants may propose a lower figure only with comparable-property documentation. Rehabilitation properties are instead underwritten off the property's own current operations, adjusted for whatever the scope of work changes.
Utility allowance must come from an approved method depending on the funding layer: the Rural Housing Service method for RD-regulated or RD-assisted buildings, the HUD utility allowance for HUD-reviewed buildings, or — for everything else — a PHA Section 8 utility allowance, a local utility company estimate, the HUD Utility Schedule Model, an energy consumption model, or KHRC's own Agency Estimate method detailed in its Compliance Policies and Procedures Manual (QAP § VIII(A)(3)).
| Reserve | Requirement |
|---|---|
| Lease-up | New construction minimum $300/unit; surplus above 93% occupancy moves to the replacement/operating reserve or insurance costs |
| Operating | At least 6 months of combined operating expenses and debt service |
| Replacement | Minimum $300/unit/year, increased 3% annually; owner may elect a level 15-year contribution schedule totaling the same sum |
These reserve requirements don't apply to properties carrying USDA Rural Development rent assistance, which follow RD's own reserve rules instead.
What this actually constrains at the rent-roll level
Because the 40%/50% AMI-designated units under the mandatory Section V(C)(5) targeting — or the equivalent VII(K)(5) election — must carry rents inside the applicable PHA voucher threshold, the binding ceiling on those units usually isn't the LIHTC maximum rent calculation at all. It's the local PHA's payment standard, which has to be pulled separately from HUD's Section 8 program and can't be assumed to track the LIHTC rent limit published for the county.
Combined with the fixed 2%/3% escalation and 7% vacancy assumptions, the real modeling task in Kansas is narrower than in states with more negotiable underwriting: the open variables are unit mix, the AMI designations chosen to satisfy Section V/VII(K), and the debt structure — not the operating assumptions, which KHRC has already fixed for every applicant.
Where this goes wrong
- Assuming a 4% Bond deal has to comply with the Section V(C)(5) mandatory income/rent targeting — it's explicitly exempt, and can instead elect the same terms under § VII(K)(5) for points.
- Double-counting the Category K 5-point income-targeting units against the mandatory Section V set-aside — the QAP requires these not overlap.
- Assuming the Category K 5-point metro income-targeting bonus is available in rural counties — it is Metropolitan-only, with no rural equivalent.
- Trying to claim more than one of Category K's four 15-point sub-options on one application — the QAP allows only one, and two of the four are credit-type-gated (Conversion to Homeownership is 9%-only; State Set-Aside is 4%-only).
- Shopping the pro forma's vacancy or trending assumptions as a modeling choice — KHRC mandates 7% vacancy, 2% rent trend, and 3% expense trend regardless of what the applicant's own comps show.
- Treating a DCR above 1.50 (or surplus over $600/unit/year) as harmless conservatism — KHRC reads it as evidence of an oversized credit request and may cut the award.
- Underfunding the replacement reserve below the $300/unit floor escalated 3% annually, including on a level-payment 15-year schedule that still has to sum to the same 15-year total.
- Missing that the 40%/50% AMI-designated units under the mandatory targeting need rents inside the local PHA voucher payment standard — a number pulled separately from the LIHTC max-rent chart, not derived from it.
- HUD
- LIHTC
- State QAPs
- IRS § 42
- Housing Finance Agencies