"KHC's underwriting model wants a DCR, a vacancy rate, and a utility allowance before I've even locked my minimum set-aside election — what are my actual set-aside options, where do the rent and income limits come from, and which operating assumptions does KHC actually enforce versus leave to my own market study?"
Minimum set-aside election: 20/50, 40/60, or Average Income — and Bond deals clear it twice
When completing IRS Form 8609, "project owners must ensure that they elect the same income set-aside (20/50, 40/60, or Average Income) as is noted in the LURA" (2027 Multifamily Guidelines, Chapter 4). The Average Income Test (AIT) "allows a property to serve households up to 80% AMI, as long as at least 40% of the total units are rent and income restricted and the average income limit for all tax credit units in the project is at or below 60% AMI" (Chapter 6, Average Income Test). Designations are locked at 10% increments (20%, 30%, 40%, 50%, 60%, 70%, or 80% of AMI), KHC will not allow more than four of those tiers on a single property, all units must be designated a specific AMI percentage at application, and "skewing of unit designations is not allowed" — bedroom sizes must show reasonable parity within each income band. Owners may later change unit percentage designations ("float") but may never raise a household's rent purely because its unit floated to a higher tier.
The election is irrevocable once made on Form 8609: "existing developments already placed in service with a recorded LIHTC extended use agreement are not eligible to change their minimum set-aside/income election to average income." Before 8609 issuance, an owner may still change the election by submitting an administrative waiver and the applicable fee, updating the underwriting model and equity agreement accordingly. AIT is unavailable if any residential unit is unrestricted or market-rate (manager units are exempt from this restriction), and properties with project-based Housing Assistance Payments (HAP) contracts may only elect AIT if the original contract predates 1981.
Tax-Exempt Bond deals face a dual test: "Tax-Exempt Bond projects must still meet a 20/50 or 40/60 minimum set-aside; however, for purposes of the 4% credit allocation, the project can elect the average income set-aside... as long as the unit mix selected would also meet either a 20/50 or 40/60 minimum set-aside test for purposes of bond compliance." A bond deal cannot simply elect AIT and ignore the traditional set-aside math — it has to work under both tests simultaneously.
| Election | Threshold | Ceiling AMI served | Notes |
|---|---|---|---|
| 20/50 | ≥20% of units at ≤50% AMI | 50% AMI | Traditional federal minimum set-aside |
| 40/60 | ≥40% of units at ≤60% AMI | 60% AMI | Traditional federal minimum set-aside |
| Average Income Test | ≥40% of units restricted; average of all restricted units ≤60% AMI | 80% AMI | 10%-increment tiers only (20/30/40/50/60/70/80%); max. 4 tiers per property; no market-rate units allowed; Bond deals must also independently clear 20/50 or 40/60 |
2027 Multifamily Guidelines, Chapter 6, "Average Income Test (AIT)"; Chapter 4 (Form 8609 election).
Rent and income limits: no KHC-published table — the Novogradac calculator is the official document
This research found no KHC-published, Kentucky-specific LIHTC rent-and-income-limit schedule in the QAP or Guidelines. Instead, the Guidelines list among the required Underwriting Documents: "Print and submit the completed Novogradac Rent and Income Calculator. To obtain the applicable limits for the Tax-Exempt Bond program, applicants should select 'IRS Section 142 Tax-Exempt Bond' and change the imputed persons per bedroom to 1.5 persons" (Chapter 3, Underwriting Documents). That instruction is specific to the Tax-Exempt Bond program's IRS Section 142 rent-and-income-limit methodology, distinct from the standard Housing Credit limits used on 9% deals.
Other KHC funding sources carry their own separate limits: HOME's maximum rent and income limits are posted on KHC's website (Chapter 5), the National Housing Trust Fund (NHTF) "utilizes separate income and rent limits which are available on KHC's website" with incomes capped at 30% AMI for the targeted population (Chapter 5), and Risk-Sharing has no published limits of its own — "Because the Risk-Sharing Program does not have published rent and income limits, the Housing Credit rent and income limits are used" (Chapter 5).
Utility allowance: nine options, a 60/90-day compliance clock, and a fallback that can bite HOME/NHTF deals
KHC's Utility Allowance Policy lists nine ways to establish a project's utility allowance. Options 1-4 are mandatory whenever they apply: buildings assisted by the Rural Housing Service (RHS), buildings with RHS-assisted tenants, buildings regulated by HUD, and tenants receiving HUD rental assistance (using the Section 8 Existing Housing Program's Public Housing Authority allowance). If none of those apply, an owner chooses among Options 5-9: the applicable PHA utility chart, a local utility company estimate, the HUD Utility Schedule Model, an energy consumption model, or a KHC-calculated estimate based on actual usage (Options 9(a)/9(b), for projects with or without 12 months of occupancy history).
Option 5 (the PHA chart) is unavailable for HOME and/or NHTF-funded projects funded on or after August 22, 2013 — those projects must use Options 6-9 instead and submit updated utility allowance requests annually. Options 6-9 each require a $150 administrative-review fee per option per project (cumulative if combining options) and run on a fixed 150-day cycle: up to 60 days of data compilation, a notification date on which the proposal and tenant notice go out, then a 90-day KHC review period. The new allowance cannot be implemented before day 91 of that review — and if KHC cannot issue a satisfactory review in time, the allowance defaults to the applicable PHA chart, except that this PHA-chart fallback is not available to HOME/NHTF projects funded on or after August 13, 2013, which have no such safety net if their Option 6-9 request runs late.
| Option | Basis | Mandatory or elective |
|---|---|---|
| 1 | RHS-assisted building | Mandatory if applicable |
| 2 | RHS rental-assistance tenants in the building | Mandatory if applicable |
| 3 | HUD-regulated building | Mandatory if applicable |
| 4 | HUD rental-assistance tenants (Section 8 Existing Housing PHA allowance) | Mandatory if applicable |
| 5 | PHA utility chart | Elective if 1-4 don't apply; unavailable to HOME/NHTF projects funded on/after 8/22/2013 |
| 6 | Local utility company written estimate | Elective; $150 fee |
| 7 | HUD Utility Schedule Model | Elective; $150 fee |
| 8 | Energy consumption model (licensed engineer/architect) | Elective; $150 fee; re-verification every 10 years |
| 9(a)/9(b) | KHC estimate from actual usage (9a: 12+ months occupancy; 9b: newer projects) | Elective; $150 fee |
KHC Utility Allowance Policy, "The nine utility allowance options."
Underwriting the pro forma: DCR, vacancy, the operating-expense band, and the management fee cap
KHC states its debt coverage and vacancy floors directly rather than leaving them purely to the market study. "The DCR in year one must be at least 1.20, or 1.25 for Risk-Sharing projects. All projects must maintain a DCR of at least 1.10 through year 15. Housing Credit only projects must adhere to the DCR requirements established by an investor or governmental entity if the investor or governmental entity accepts a lower DCR" — but only if that's documented in the syndication agreement or the investor's own 15-year pro forma. Every project with KHC funds must otherwise maintain positive cash flow (1.0 or greater) through the full affordability term (Chapter 6, Requirements for Underwriting, item 11).
Vacancy is likewise a stated assumption, not left open: "For projects of 11 units or less, a vacancy rate of 10% should be projected, and for projects of 12 units or more, a 7% vacancy rate should be projected" — the same figures recur across HOME, AHTF, NHTF-style, SMAL, and Risk-Sharing financial requirements throughout the Guidelines.
Operating expenses must be justified against KHC's own historical data: "The proposed operating expenses must be supported and fall within $1,000 +/- of KHC's most current historical per unit, per year calculation (excluding utilities) for the project county. Applicants must submit a justification for expenses outside either of these ranges. If the county does not have historical data, applicants should use the data of a similar neighboring county" — sourced from KHC's operating expense database on kyhousing.org. Management fees are capped at market-comparable levels: "Management fees should be comparable to market fees and should not exceed 8.5% of effective gross income," with smaller or special-needs projects able to request a higher percentage with justification.
Reserve sizing: Reserve for Replacement and Operating Deficit Reserve
All projects must fund a Reserve for Replacement (R4R), typically held by KHC, with an annual deposit that "will increase at 3% annually or as prescribed by KHC." The minimum required deposit is the greatest of $400 per unit per year, the amount required by the Physical Capital Needs Assessment (PCNA)/Capital Reserve Replacement Schedule (CRRS), or an amount required by an equity provider or other lender. KHC may require an upfront R4R deposit at closing and requires the CRRS's projected account balance to be positive by the start of year 15; a subsequent PCNA is required in year 15 itself, potentially triggering a revised deposit schedule.
The Operating Deficit Reserve (ODR) is sized independently: "The minimum ODR is six (6) months of debt service payments + six (6) months of projected operating expenses." Projects with KHC loans must fully fund it no later than the first of the month following placed-in-service. If KHC holds the escrow, the balance must stay at or above 75% of the original amount for the first two years; HOME and NHTF funds may not be used to fund an ODR at all.
A new line item for the years-16-30 pro forma: prepaid compliance monitoring fees
KHC charges an annual compliance monitoring fee for the full 30-year compliance period, but the payment structure changed starting with this cycle: "The fee for Years 1-15 will be paid annually from operating income. Beginning with 2027 LIHTC awards, the cumulative fee for Years 16-30 must be paid in advance at placed in service and prior to KHC's issuance of IRS Form(s) 8609." That means a 2027-award deal's sources-and-uses budget — not just its year-16-30 operating pro forma — needs to absorb 15 years of compliance fees as a single upfront cost at placed-in-service.
Property tax: a statutory income-approach valuation for restricted units
Kentucky sets the property-tax valuation method for LIHTC-restricted multifamily housing by statute. KRS 132.191 authorizes valuing such property "through an annual net operating income approach to value that uses actual income and stabilized operating expenses that are based on the actual history of the property, when available, and a capitalization rate," where that capitalization rate must be "equal to or greater than the capitalization rate used for valuing multi-unit rental housing that is not subject to government restriction on use" and "in the range of fifty (50) to one hundred fifty (150) basis points above the most recent quarterly survey of the national average cap rates of multifamily properties published by realtyrates.com or a successor organization." The Kentucky Department of Revenue must publish that capitalization rate range for property valuation administrators (PVAs) each year.
Two underwriting-relevant details from the same statute: Section 42 tax credits and other state/federal income tax credits are excluded from the income figure used in this valuation method (KRS 132.191(5)(b)), and an owner must proactively notify the local PVA in writing within 60 days of a property becoming (or ceasing to be) subject to a government-use restriction, or of a foreclosure action — failure to do so risks a penalty of up to $200 (KRS 132.191(5)(c)). This statutory method gives Kentucky deals a real-estate-tax underwriting assumption most states leave to case-by-case appeal, but it depends on the owner making a timely, affirmative filing with the PVA.
Where this goes wrong
- Treating Average Income as a single test on a Tax-Exempt Bond deal — bond deals must independently clear a traditional 20/50 or 40/60 set-aside for bond compliance even while electing AIT for 4% credit compliance.
- Assuming KHC publishes its own LIHTC rent-and-income-limit chart — it directs applicants to the Novogradac Rent and Income Calculator instead, with a distinct IRS Section 142 methodology required specifically for the Tax-Exempt Bond program.
- Forgetting that Risk-Sharing has no published rent/income limits of its own — it defaults silently to the Housing Credit limits.
- Assuming the PHA utility chart is always available as a fallback if a KHC utility-allowance review runs past its 90-day window — that fallback does not apply to HOME/NHTF projects funded on or after August 13, 2013.
- Underwriting to a DCR below 1.20 in year one, or below 1.10 in years 2-15, without documented investor/lender acceptance of a lower figure in the syndication agreement and the investor's own 15-year pro forma.
- Using a single vacancy assumption across a portfolio without checking unit count per property — KHC's own 10%/7% split applies at the individual-project level (≤11 units vs. ≥12 units).
- Setting proposed operating expenses without checking KHC's own historical per-unit, per-county figures first — expenses outside the ±$1,000 band require an explicit justification.
- Modeling the years-16-30 compliance monitoring fee as a future operating expense rather than an upfront, placed-in-service cost — for 2027 awards, KHC requires that cumulative fee prepaid before Form(s) 8609 issuance.
- Assuming the minimum set-aside election can be freely changed after Form(s) 8609 is issued — it is irrevocable at that point; changes are only possible pre-8609 through KHC's administrative waiver process.
- Overlooking KRS 132.191's 60-day PVA notification requirement — failing to notify the property valuation administrator of a property's restricted status (or its removal) risks a penalty and can jeopardize the statutory income-approach valuation the pro forma is counting on.
- HUD
- LIHTC
- State QAPs
- IRS § 42
- Housing Finance Agencies