"Virginia Housing's manual sets a 1.15 debt coverage ratio as 'preferred' rather than 'required,' its own income-and-rent-limits memo names an exact HUD effective date the QAP itself never mentions, and its 2027 draft QAP would make every applicant elect the Average Income Test whether they want to or not. Which of these numbers can this pro forma actually rely on, and which minimum set-aside should this deal be modeling for a 2027 closing?"
Three minimum set-aside elections today — and a mandatory fourth on the way for 2027
Virginia's 2026 Housing Tax Credit Manual states the federal minimum set-aside test in the standard three-way form: "A minimum of 20% of the units must be occupied by households with incomes at or below 50% of the Area Median Gross Income (AMGI)... OR, a minimum of 40% of the units must be occupied by households, with incomes at or below 60% of the AMGI... OR, under the Average Income Test, forty percent (40%) or more (25% or more in the case of a project described in Section 142(d)(6)) of the residential units in the project must be both rent restricted and occupied by individuals whose income does not exceed the imputed income limitation designated by the taxpayer." The designated imputed income limitation for any unit can only be set at 20%, 30%, 40%, 50%, 60%, 70%, or 80% of AMGI, the average across all designated units cannot exceed 60% AMGI, and the election "must be as designated with Virginia Housing in writing" (Section 5.1.1) — this is commonly referred to in the manual itself as the "20-50," "40-60," or "Average Income" test.
One overlay is genuinely Virginia-specific and easy to miss: "Developments financed with tax-exempt bonds selecting the Average Income test must designate and maintain a minimum of 40% of the total units at or below 60% AMI throughout the extended use agreement." The federal Average Income Test itself imposes no such floor on its own — a project electing it federally only needs its unit-by-unit designations to average 60% AMGI or below, which can be satisfied with a wide range of mixes. Virginia Housing's manual adds this 40%-at-60%-AMI floor as a standalone condition specific to bond-financed (4%) deals electing the Average Income Test, layered on top of, not substituting for, the federal test itself.
That three-way choice is set to disappear for every new award starting January 1, 2027. The "final draft" 2027 QAP text obtained for this research lists, among the commitments "[e]ach applicant shall commit to in the application": "3. Elect the Average Income Test as the applicable minimum set-aside on IRS Form 8609." Virginia Housing's own Summary of Proposed Changes describes this the same way, under "New Provisions": "Mandatory Average Income Set-Aside: All applicants will be required to elect the Average Income Test as their minimum set-aside to promote long-term project feasibility (though applicants may still utilize tenant selection plans that reserve 100% of the units for tenants at 60% AMI and below)." Unlike the combination-development scoring language discussed in Phase 4 — where the summary and the draft text disagree — this mandatory-Average-Income-Test provision appears consistently in both documents, making it a materially more reliable signal of where the 2027 QAP is actually headed. A deal being underwritten now for a 2027 award should model the Average Income Test as the baseline assumption, not one option among three.
Income and rent limits: Virginia Housing names the HUD date the QAP never does, and HERA Special reaches only six localities
Neither the QAP nor the Housing Tax Credit Manual states, in the sections reviewed for this research, which federal dataset governs Virginia's income and rent limits — both simply reference the underlying gross-rent and income-restriction mechanics of IRC § 42 without naming HUD's Multifamily Tax Subsidy Project (MTSP) limits directly. Virginia Housing's own annual program memo does name it, and states an exact effective date and implementation deadline: "The 2026 HUD Published Income Limits were published and effective on May 1, 2026. Project owners must implement the limits within 45 days. The new limits must be implemented and applied to all new move-ins and required annual recertifications by June 15, 2026." The same memo notes that owners "are responsible for ensuring compliance with income and rent limits and must annually review and confirm the published HUD income limits before implementing them," and that the Average Income Test's own income bands (20% through 80% AMI) are published by HUD in a separate table.
| Provision | Detail |
|---|---|
| HERA Special income limits | Available only to developments placed in service before January 1, 2009; the current eligible-area list names exactly six localities statewide: Frederick County, Harrisonburg City, Montgomery County, Radford City, Rockingham County, and Winchester City — each tied to a specific named MSA/FMR area — and the memo notes this list "changed in 2026," i.e., it is not static year to year. |
| National Non-Metropolitan Median Income (HERA-2008) | Rural-area developments may use the greater of area median income or the national non-metro median income, currently stated as $84,700; eligible areas are confirmed against the USDA Eligibility website and can change annually, so the eligibility document must be kept on file and re-verified each year. |
Virginia Housing, "2026 Program Income & Rent Limits" memo (May 2026). The memo also states plainly that "Property owners are not required by HUD, the IRS, or Virginia Housing to raise rents based on updated income limit calculations" — an explicit statement that hitting the ceiling is a right, not an obligation.
The pro forma: real numbers for most assumptions, but a debt coverage ratio that reads as advisory rather than mandatory
| Specification | Virginia Housing's stated figure |
|---|---|
| Vacancy | 7% of gross potential income, or documented market vacancy if lower (market and low-income units both use the same standard if the development is mixed) |
| Operating expenses | At least $4,500 per unit, excluding replacement reserves, assuming tenant-paid utilities; pro forma expense growth of 3% or greater |
| Rent growth | 2% or less per year |
| Replacement reserves | $250/unit/year for new construction and elderly developments; $300/unit/year for all other developments |
| Debt Coverage Ratio | "A minimum of 1.15 in year one is preferred" — no further elaboration found in the manual or QAP |
| Operating reserve | A minimum of 6 months of operating expenses and debt service |
| Deferred developer fee | If 50% or more of the developer fee is deferred, the Application must include evidence the property can repay it within 15 years from the cash-flow analysis provided |
Virginia Housing, Housing Tax Credit Manual (1/1/2026), Section 6.3, "Reservation Specifications." Documentation is required to support any variation from these figures.
The debt coverage ratio line is worth flagging on its own, because Virginia Housing's own word choice — "preferred" — is softer than the binding language this guide has found in other states' current pro forma standards, which typically state a DCR floor as a threshold that must be met or exceeded. Nothing in the 2026 QAP or manual found in this research states what happens to a Development whose pro forma comes in below 1.15x in year one: there is no stated scoring penalty, no stated Threshold failure, and no stated feasibility-determination consequence tied specifically to that number the way there is, for example, for exceeding the cost limits (see Phase 6). Treat 1.15x as the number Virginia Housing's underwriters will expect to see and will ask about if it is missing, not as a documented pass/fail threshold — and confirm directly with Tax Credit Allocation staff how a below-1.15x pro forma is actually treated in practice, since the written record does not resolve that question.
The operating-expense floor ($4,500/unit) and the vacancy standard (7% of gross potential income) both also govern the cost-limit calculation described in Phase 6's total development cost discussion, and the same 6.3 table doubles as the reference Virginia Housing's own reviewers use to flag a submitted pro forma that deviates from these figures without documentation.
Utility allowances: Virginia Housing narrowed its own approved methods in 2020, and RUBS remains permitted
Neither the QAP nor the Housing Tax Credit Manual contains a dedicated utility allowance methodology section; that guidance lives instead in a standalone document, "Virginia Housing Utility Allowance Options and Procedures" (last updated April 2022, and still the current version listed on Virginia Housing's compliance monitoring page as of this research). That document narrowed Virginia's own menu of options in 2020: "Effective March 1, 2020, the following alternative utility allowance options requiring an annual Virginia Housing review and approval will no longer be accepted: 1. Agency Estimate... 2. HUD Utility Schedule Model (HUSM), Option A, which permits the owner to complete the HUSM for a fee paid to Virginia Housing."
| Category | Methods currently available |
|---|---|
| Standard (no Virginia Housing approval needed) | Rural Development (RD) utility allowance for RD-assisted or RD tenant-assisted buildings; HUD utility allowance for HUD Section 8/project-based units; local Public Housing Authority (PHA) utility allowance for Housing Choice Voucher tenant-based units or any other Tax Credit units not governed by RD or HUD |
| Alternative (Virginia Housing review and approval required) | Local Utility Company Estimate; Energy Consumption Model; HUD Utility Schedule Model — each must be prepared by an unrelated, licensed or certified professional meeting Virginia Housing's own minimum requirements |
| Discontinued since March 1, 2020 | Agency Estimate (formerly provided by Viridiant/EarthCraft Virginia); owner-completed HUD Utility Schedule Model, Option A (the fee-based, Virginia Housing-completed version) |
Virginia Housing, "Utility Allowance Options and Procedures" (updated April 2022). Alternative methods require data no more than 60 days old at submission, based on the most recent 12 months of actual consumption (or comparable-building data for new construction with less than 12 months of history).
The federal Ratio Utility Billing System (RUBS) is explicitly permitted: "The federal regulation does not prohibit the use of RUBS for Tax Credit projects. However, any amount paid by the tenant for utilities on a monthly basis must be included in the gross rent" — with the owner responsible for keeping detailed records confirming the tenant's total monthly rent stays within the applicable gross rent limit. Virginia Housing's own Utility Allowance Schedules, published for jurisdictions where the local PHA has adopted them or where the only local PHA is Virginia Housing itself, can also be used directly without separate approval.
Where this goes wrong
- Modeling all three federal minimum set-aside elections as equally live options for a 2027 award — Virginia Housing's own Summary of Proposed Changes and the "final draft" 2027 QAP text agree, consistently, that every applicant will be required to elect the Average Income Test starting January 1, 2027, with only the tenant selection plan (not the set-aside election itself) allowed to concentrate 100% of units at 60% AMI and below.
- Assuming the federal Average Income Test's own rules are all that govern a bond-financed Virginia deal electing it — Virginia Housing layers an additional, deal-specific floor on top: a minimum of 40% of total units at or below 60% AMI, maintained throughout the extended use agreement, not just at initial designation.
- Treating Virginia Housing's stated 1.15x year-one debt coverage ratio as a hard Threshold requirement the way this guide's other state entries have documented elsewhere — the manual's own language, "a minimum of 1.15 in year one is preferred," is advisory phrasing with no stated consequence found in the QAP or manual for falling short; confirm directly with Virginia Housing how a below-1.15x pro forma is actually handled rather than assuming an automatic failure.
- Sourcing Virginia's income and rent limit dataset from the QAP or manual alone — neither document names HUD's Multifamily Tax Subsidy Project limits explicitly in the sections reviewed; Virginia Housing's own annual Program Income & Rent Limits memo is the document that states the specific HUD effective date and the June 15 implementation deadline each year.
- Assuming HERA Special income limits are broadly available across Virginia the way they are in some other states — Virginia Housing's 2026 memo lists exactly six eligible localities, tied to a pre-January-1-2009 placed-in-service date, and notes the list itself "changed in 2026" and is not fixed from year to year.
- Using a discontinued Virginia utility allowance method (Agency Estimate, or owner-paid HUSM Option A) because it appears in older third-party guidance or a prior year's compliance file — both were discontinued effective March 1, 2020, per Virginia Housing's own current policy document.
- Assuming a below-market vacancy rate can be used without documentation — Virginia Housing's manual requires support for any market vacancy assumption below the 7% gross-potential-income standard.
- HUD
- LIHTC
- State QAPs
- IRS § 42
- Housing Finance Agencies