Rents, income limits, and the operating pro forma — South Dakota

Three minimum set-aside elections, then a separate scored layer for going deeper

The QAP's Deep Income Targeting scoring category (Section V.A.1, 100 points maximum) opens by referencing "the 20/50, 40/60, or Average Income election," confirming South Dakota makes all three federal minimum set-aside options available -- including the Average Income option created by the Consolidated Appropriations Act of 2018. Section II.A ("Average Income") sets the state-specific mechanics for that election: an applicable fraction of 100%; up to 20% of the affordable units may carry an income designation above 60% AMI; rents on any unit designated above 60% AMI are "restricted to the 60% AMI rent limit unless approved by SDHDA"; the market or comparable-market study "must document the marketability of all 70% and 80% AMI units and associated rents"; and designations should be "spread evenly throughout the project and unit types to the fullest extent possible."

Layered on top of whichever minimum set-aside is elected, Deep Income Targeting awards points in four cumulative tiers, each requiring the prior tier's percentage as a floor: 20% of rent-restricted units at 50% AMI with rents capped at the lesser of Fair Market Rent or the 50% AMI rent limit (25 points); 10% of units at 50% AMI or below (25 points); 7% of units at 40% AMI or below (25 points); and 3% of units at 30% AMI or below (25 points) -- a possible 100 points for a project that layers all four. The QAP explicitly allows double-counting for HTF-funded projects: "Applicants may use units to meet both the Average Income Test and point requirements," and HTF units may count toward the 30% AMI scoring tier as long as at least one 30% AMI unit exists beyond what HTF funding itself requires.

The 2018 Income Averaging policy predates the current QAP text -- and is more detailed than what replaced it

SDHDA adopted its first Income Averaging policy on August 1, 2018, by Board Resolution 18-08-N, shortly after the federal option was created. That original policy document is more granular than the language now folded into Section II.A of the current QAP: it required a 40% (not implied elsewhere) minimum floor of units at or below 60% AMI average, capped designations at 10-point AMI increments from 20% to 80%, and -- most notably -- set a specific standard for the higher-income units' rents: "the rents charged must meet the SDHDA standard of 85 percent of the 70 or 80 percent HTC rent limit for Sioux Falls and Rapid City or 80 percent of the 70 or 80 percent HTC rent limit for all other communities." The current 2026-2027 QAP's Section II.A does not repeat that Sioux Falls/Rapid City-specific rent-discount standard; it only states that above-60%-AMI rents are capped at the 60% AMI limit "unless approved by SDHDA." This research could not confirm whether the 2018 policy's city-specific 85%/80% standard remains operative guidance SDHDA still applies administratively, or whether it has been superseded by the simpler language now in the QAP itself. Confirm directly with SDHDA which standard currently governs an Average Income election before pricing 70%/80% AMI units into a pro forma.

Rent and income limits: SDHDA does not publish its own tables -- it follows HUD's, with the standard hold-harmless wrinkle

SDHDA's Housing Tax Credit Compliance Manual (incorporated into the QAP by reference under Section VII.P) does not set South Dakota-specific rent or income figures; it points owners to HUD's own published limits and explains the standard federal mechanics: "Beginning in 2009, HUD provides a separate table of income and rent limits specifically" for the tax credit program (the Multifamily Tax Subsidy Project, or MTSP, limits), and "the placed in-service date determines the correct income limit table that should be utilized." The manual also describes the Housing and Economic Recovery Act of 2008 (HERA) hold-harmless rule in the agency's own words: "If the current income limits decrease, you can use the prior year's income" limits instead. Gross rent for a tax credit unit "includes tenant paid rent, a utility allowance for tenant paid utilities... This amount cannot exceed the maximum applicable published rent limit" -- standard federal mechanics, not a South Dakota-specific rule, and this research found no evidence SDHDA publishes a separate South Dakota-only rent or income chart alongside HUD's.

One currency note on the Compliance Manual itself: the version reviewed for this guide is published on sdhda.org under the filename "2025HTC.pdf" (linked from SDHDA's current Housing Tax Credit program page as "Housing Tax Credit Compliance Manual"), but the document's own cover page is dated "July 2024." This research could not confirm whether a newer edition has since superseded it or whether the 2025-referencing filename simply denotes the monitoring year the July 2024 edition was intended to cover; treat the specific mechanics described above as directionally reliable federal-program background rather than as proof of the single most current SDHDA manual text.

Utility allowances: the standard federal menu, plus an SDHDA worksheet that leans toward an engineering estimate

The Compliance Manual states plainly that "the IRS requires that utility allowances be set according to 26 CFR 1.42-10" and walks through the standard federal options available to a South Dakota owner: the Public Housing Agency (PHA) schedule for the jurisdiction where the building sits; the HUD Utility Schedule Model, an engineering-based estimate an owner can calculate directly, using rate data "no older than the rates in place 60 days prior to beginning of the 90-day period before utility allowances can be used"; an Owner's Average of Actual Consumption procedure; and building-specific rules for properties with USDA Rural Development (RD) or HUD project-based financing, where "if a building has both HUD and RD financing, the RD approved utility allowance should be used." None of these methodologies is South Dakota-specific -- they are the standard menu under Treasury Regulation §1.42-10 available in every state.

What is SDHDA-specific is its own Utility Allowance (UA) Worksheet, required at application (Section VI.A item 5: "Copy of utility allowance calculation and supporting documentation") and again documented at final cost certification. The worksheet does not simply ask for a dollar figure; it collects building envelope and mechanical detail consistent with an energy-consumption-model estimate -- foundation, floor, wall and roof assembly types; window U-factor and SHGC; furnace AFUE and fuel source; heat pump HSPF/SEER; water heater energy factor and recovery efficiency; and appliance-level energy specifications for the refrigerator, dishwasher, range, dryer, and washer -- and asks applicants to "additionally send 50% complete set of plans electronically" to SDHDA's own compliance staff. This strongly suggests SDHDA calculates or verifies utility allowances in-house using an energy-model approach for most HTC properties, but the QAP text itself does not state that this worksheet is the required or exclusive methodology, and this research could not confirm whether a project may instead simply submit a local PHA schedule or a utility-company estimate without completing SDHDA's own worksheet.

Debt coverage ratio: 1.20 for 15 years, then a thin 0.95 for the rest of the Extended Use Period

Section III.K sets South Dakota's underwriting DCR floor at two different levels across the compliance and extended-use timeline: "1.20 in the first year that full expenses are in effect (i.e., after tax abatements have expired) and annually thereafter for the first 15 years or the term of the first mortgage financing, whichever is greater," followed by "0.95 debt coverage ratio for the remainder of the Extended Use Period." SDHDA reserves discretion to vary this standard "based on developer's experience, types of financing utilized and financial strength of the applicant/owner." The 0.95 post-year-15 floor is worth flagging on its own: a ratio below 1.00 means the pro forma is explicitly allowed to show debt service exceeding net operating income for years 16 through the end of the Extended Use Period (30 or 40 years total, depending on whether the Extended Use Commitment scoring election was taken) -- a materially looser standard than the 1.10-1.20 floors many agencies hold for the full compliance and extended-use term.

The same section fixes the pro forma's growth assumptions directly: project income must be trended at 2% annually, while "expenses and replacement reserves" trend at 3% annually, and the underwritten vacancy rate is 7% (acquisition/rehabilitation deals may use a higher rate if the property's actual current vacancy makes 7% unrealistic in year one). The 2%-income-versus-3%-expense spread is a conservative asymmetry built into every South Dakota pro forma by rule, not a modeling choice left to the applicant.

Reserves: a $400/unit replacement reserve, and an operating reserve that covers debt service too

Section III.I requires "a minimum replacement reserve account of $400 per unit per year, trended at 3% annually, for the entire Extended Use Period," usable "only for Capital Improvement expenditures and not ongoing maintenance expenses unless authorized in writing by SDHDA." Section III.J requires a separate operating reserve, funded either through a written agreement with the syndicator/lender or held directly by SDHDA, of "at least six months of operating expenses plus debt service payments." That second clause is worth underlining: many agencies size the operating reserve off operating expenses alone; South Dakota's rule folds a full six months of debt service into the same reserve requirement, which is a meaningfully larger reserve obligation than a same-size deal would carry under an opex-only standard.

Deferred developer fee: a 15-year payback test built into the DCR calculation itself

Section III.B requires that "the submitted pro-forma must evidence sufficient project cash flow after all project debt service is applied to repay any deferred developer fee within the first 15 years of operation," and specifies the mechanics: "the deferred developer fee is not part of debt service and should be removed from pre-tax cash flow after the calculation of the Debt Coverage Ratio (DCR)" -- meaning deferred fee repayment is modeled as a draw against cash flow after DCR is calculated, not as a debt-service line item that would depress the DCR figure itself. A pro forma that cannot show full payoff of the deferred fee inside 15 years does not meet this threshold requirement.

Syndication pricing mechanics and market saturation both feed the same pro forma

Section IV's underwriting standards set safe-harbor and ceiling ranges for syndication expenses (10%/15% of gross proceeds for a private offering, 15%/24% for a public offering) and describe how SDHDA sets equity pricing: "SDHDA will establish a base market rate expressed in cents netted per dollar of credit allocation... adjusted to reflect increased value if higher than typical ownership interests are retained" -- a sponsor retaining 5% to 50% ownership gets the Market Rate plus 10 cents per dollar of credit; retaining over 50% gets Market Rate plus 20 cents. This is a real pro forma input: a deal structured with an unusually high GP/sponsor ownership retention should model a higher equity price per credit dollar than the base Market Rate, not the base rate itself.

Separately, Section V.E ("Local Housing Need," 100 points maximum) folds a market-saturation check directly into the scoring that determines whether a 9% deal gets funded at all: "All communities with two or more low-income housing projects under construction or in the process of rent-up (less than 90% occupied) may receive zero points in this category." A pro forma's lease-up and vacancy assumptions for a site in a community already carrying two or more unstabilized LIHTC projects should be built with that scoring reality -- and the underlying absorption risk it reflects -- in mind, independent of the underwritten 7% stabilized vacancy rate.