HUD Advances Opportunity and Fair Housing for Low-Income Renters With Small Difficult Development Areas

HUD Advances Opportunity and Fair Housing for Low-Income Renters With Small Difficult Development Areas

Kurt Usowski, Deputy Assistant Secretary for Economic Affairs

On November 24, 2015, HUD published its annual notice designating Difficult Development Areas (DDAs) and Qualified Census Tracts (QCTs) for the Low-Income Housing Tax Credit (LIHTC) program. (LIHTC is not a HUD program, but HUD designates the areas that qualify as DDAs.) This year’s notice includes a notable methodological change in how we designate DDAs — we are moving from designating DDAs at the metropolitan level to designating them at the ZIP Code level.

DDAs are HUD-designated areas that have relatively high construction, land, and utility costs. LIHTC projects in DDAs are eligible for 30 percent more tax credits to allow developers to create affordable housing in these high-cost, typically high-rent areas. There is a national cap on the designation of metropolitan DDAs; they can cover no more than 20 percent of the population living in all metropolitan areas. (Nonmetropolitan DDAs are subject to a similar limit.) Before the designation change, metropolitan DDAs were measured for entire metropolitan areas, meaning that all neighborhoods in a metropolitan statistical area (MSA) received the DDA designation regardless of costs or rent.

HUD changed metropolitan DDA designations from entire metropolitan areas to ZIP Codes to better target incentives for LIHTC development in higher-opportunity areas throughout the country. Through this change to small DDAs (SDDAs), the average poverty rate in DDAs would drop 25 percent, from 14.6 percent to 10.9 percent. Under 2015 Metro-DDAs, only 36 metropolitan areas benefited (in only 11 states and Puerto Rico). Entire regions — such as the Midwest — missed out. SDDAs will cover parts of 300 metropolitan areas. Now, 46 states, the District of Columbia, and Puerto Rico have at least one SDDA, which means better targeting of LIHTC development in higher-opportunity areas.

The DDA designation is intended to provide the additional subsidy where the relative costs are highest compared with revenues available by law to LIHTC properties. With the ability to now calculate Fair Market Rents at the ZIP Code level (via Small Area FMRs), HUD could not continue to use metropolitan-level DDA designations, thereby providing an additional subsidy and lower costs to some ZIP Codes at the expense of much higher-cost ZIP Codes elsewhere. Providing this additional subsidy to high-cost areas across all MSAs supports HUD’s fair housing goals nationally by encouraging the construction of rental units affordable to lower-income households in areas with robust economic activity and greater employment opportunities. HUD has been signaling its intent to make this change since 2011 and incorporated public comments, so there has been considerable time for public and stakeholder input.

The 2016 DDA designations reflect the change to the ZIP Code level as well as three key implementation adjustments.

• 6-month delay. HUD is delaying the effective date of SDDAs by 6 months and retaining the existing 2015 DDAs until then. New 2016 SDDAs will not be effective until July 1, 2016. Given the timing of application cycles, this adjustment effectively gives areas that currently have metropolitan-level DDAs a year’s reprieve from SDDAs. This also gives metropolitan DDAs that gain SDDAs through this change the ability to apply in the latter half of the year and allows all areas to have more advance notice of the changes in designation. It also gives all areas time to provide HUD with rent control data about their areas before they are impacted by SDDAs in January 2017.

• Three Data/Methodological Changes. The notice describes several methodological changes that better capture data from neighborhoods with particularly high rents. HUD also now eliminates overlap between QCTs and SDDAs, which allows an increase in the combined designated population of DDAs and QCTs. HUD encourages jurisdictions with rent control laws that might affect the accuracy of SDDAs in their area to contact us and discuss whether they can submit additional local rent control data to verify accuracy.

• Timing extension that protects in-progress deals for 2 years instead of one. Projects in areas that lose DDA status but whose applications are completed before SDDAs are effective will retain the additional subsidy after the effective date as long as the projects are completed within 2 years, giving developers a larger window to complete their projects successfully.