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AMI: Area Median Income
Area Median Income, or AMI, is the median income in a defined region, calculated each year by the Department of Housing and Urban Development. This metric is provided on the basis of household size for every metropolitan area and region in the U.S.
What is Area Median Income?
Area Median Income, or AMI, is the median income in a defined region, calculated each year by the Department of Housing and Urban Development. This metric is provided on the basis of household size for every metropolitan area and region in the U.S. This metric is also referred to as MFI, or Median Family Income, when provided for a four-person household. The most recent MFI calculations can be found on the HUD User web portal.
SEE ALSO: How Do Wage Requirements Impact HUD Projects?
AMI is used extensively for assessing affordable housing eligibility. For instance, most affordable housing properties require that the income of a prospective resident falls under a specified percentage of AMI to lease a unit. These AMI requirements are generally mandatory to take advantage of low-income housing tax credits, or LIHTC.
This metric is also essential for forecasting rental income. Typically, affordable housing rents are locked to a maximum of 30% of a household’s monthly income, though in some cases this may be higher.
What Can I Calculate?
To illustrate with an example, the 2020 Area Median Income in Dallas was $86,200 for a household of four people, according to HUD calculations. See the table below:
View fullsize
Table provided by the City of Dallas.
Let’s say an affordable housing investor in the area must ensure all units are reserved for households earning no more than, say, 70% of AMI to benefit from LIHTC. In this example, a family of three earning $54,306 or less would be eligible to rent at the property, according to the above table. You could also project rental income by calculating 30% of the household’s income. In this case, $54,306 x 30% = $16,291.80 per year, or $1,357.65 per month.
The Importance of AMI for Section 8 Housing
In relation to designated Section 8 housing, public housing authorities require a rigorous adherence to three specific tiers of renters by income:
Low Income (calculated as a maximum 80% of AMI)
Very Low Income (at or below 50% of AMI)
Extremely Low Income (at or below 30% of AMI)
What is the definition of Area Median Income (AMI)?
Area Median Income (AMI) is defined as the midpoint of a specific area’s income distribution and is calculated on an annual basis by the Department of Housing and Urban Development (HUD). HUD refers to the figure as MFI, or median family income, based on a four-person household.
AMI is used extensively for assessing affordable housing eligibility. For instance, most affordable housing properties require that the income of a prospective resident falls under a specified percentage of AMI to lease a unit. These AMI requirements are generally mandatory to take advantage of low-income housing tax credits, or LIHTC.
This metric is also essential for forecasting rental income. Typically, affordable housing rents are locked to a maximum of 30% of a household’s monthly income, though in some cases this may be higher.
The most recent MFI calculations can be found on the HUD User web portal.
How is AMI used in commercial real estate financing?
AMI (Area Median Income) is used in commercial real estate financing to determine who qualifies for federal housing programs. HUD collects statistics of income limits for families within a specified region and compiles the data. This data can be used to determine Median Family Income (MFI) for any area in the country. The statistics garnered from this research help the housing department decide which areas qualify for certain federal housing programs.
The USDA provides a chart listing the AMIs across America, which lists the AMI for all major cities and urban areas througout the U.S.
In relation to HUD 223(f) loans, AMI is used to calculate the maximum amount of rent that can be charged to tenants, allowing investors to make accurate financial projections regarding their potential investment.
What are the benefits of using AMI in commercial real estate financing?
AMI (Area Median Income) is a statistic published by HUD that can be used to determine Median Family Income (MFI) for any area in the country. The benefits of using AMI in commercial real estate financing include:
- It helps lenders determine who qualifies for federal housing programs.
- It provides a reliable source of data to help lenders make informed decisions.
- It helps lenders assess the risk of a loan.
- It helps lenders determine the maximum loan amount they can offer.
The USDA provides a chart listing the AMIs across America, which lists the AMI for all major cities and urban areas througout the U.S.
What are the drawbacks of using AMI in commercial real estate financing?
The drawbacks of using AMI in commercial real estate financing include:
- Less autonomy in the operation of the property and limited flexibility to deviate from the terms of the loan documents. Source
- Difficulty in releasing collateral. Source
- Expensive to exit. Source
- Lock outs often prevent prepayment or up to two years. Source
- Reserves required. Source
- Secondary financing (i.e. mezzanine debt or preferred equity) not always allowed. Source
- Not serviced by initial CMBS lender. Source
- Strict enforcement of prepayment penalties. Source
- Higher closing costs. Source
- Dishonest tranche ratings can have serious negative effects for borrowers and investors. Source
How does AMI affect the cost of commercial real estate financing?
AMI (Area Median Income) affects the cost of commercial real estate financing in that it helps to determine who qualifies for federal housing programs. HUD collects statistics of income limits for families within a specified region and compiles the data. This data can be used to determine Median Family Income (MFI) for any area in the country. The statistics garnered from this research help the housing department decide which areas qualify for certain federal housing programs.
The USDA provides a chart listing the AMIs across America, which lists the AMI for all major cities and urban areas througout the U.S.
Owners of Section 8 housing properties are provided with either voucher-based or project-based assistance from the Department of Housing and Urban Development.