[Docket
No. FR-4401-N-05]
Statutorily
Mandated Designation of Difficult Development Areas
and Qualified Census Tracts for Section 42 of the
Internal Revenue Code of 1986
AGENCY:Office
of the Secretary, HUD.
ACTION:Notice.
SUMMARY:This
document designates “Difficult Development Areas”
and “Qualified Census Tracts” for purposes of the
Low-Income Housing Tax Credit (“LIHTC”) under section 42 of the Internal
Revenue Code of 1986 (“the Code”).The
United States Department of Housing and Urban Development (“HUD”) makes
new Difficult Development Area designations annually and makes Qualified
Census Tract Designations at this time due to changes in section 42 of
the Code enacted in the Community Renewal Tax Relief Act of 2000 (“CRTRA”).
FOR
FURTHER INFORMATION CONTACT: For
questions on how areas are designated and on geographic definitions: Steven
Ehrlich, Economist, Division of Economic Development and Public Finance,
Office of Policy Development and Research, Department of Housing and Urban
Development, 451 Seventh Street, S.W., Washington, D.C. 20410, telephone
(202) 708-0426, e-mail Steven_R._Ehrlich@hud.gov.For
specific legal questions pertaining to section 42 and this notice: Harold
J. Gross, Senior Tax Attorney, Office of the General Counsel, Department
of Housing and Urban Development, 451 Seventh Street, S.W., Washington,
D.C. 20410, telephone (202) 708-3260, e-mail JERRY_GROSS@hud.gov.
For questions about the "HUBZones" program: Michael P. McHale, Assistant
Administrator for Procurement Policy, Office of Government Contracting,
Suite 8800, Small Business Administration, 409 Third Street, S.W., Washington,
D.C. 20416, telephone (202) 205-6731, fax (202) 205-7324, e-mail michael.mchale@sba.gov.A
text telephone is available for persons with hearing or speech impairments
at (202) 708-9300.(These are not
toll-free telephone numbers.)Additional
copies of this notice are available through HUD User at (800) 245-2691
for a small fee to cover duplication and mailing costs.
COPIES
AVAILABLE ELECTRONICALLY: This
notice and additional information about Difficult Development Areas and
Qualified Census Tracts are available electronically on the Internet (World
Wide Web) at http://www.huduser.org/datasets/qct.html.
SUPPLEMENTARY
INFORMATION:
This
Document
The
designations of Difficult Development Areas in this Notice are based on
FY 2001 Fair Market
Rents (“FMRs”), FY
2001 income limits and 2000
Census population counts as explained below.The
designations of Qualified Census Tracts in this notice are based on 1990
Census data.
2000
Census
Data
from the 2000 Census on total population
of metropolitan areas and nonmetropolitan counties are used in the designation
of Difficult Development Areas.Data
from the 2000 Census necessary to make Qualified Census Tract designations
have not been released in their entirety by the Census Bureau. It is anticipated
that all of the 2000 Census data necessary to make Qualified Census Tract
designations will be released in time to publish new designations in September
2002 for effect in 2003.
Background
The
U.S. Treasury Department and the Internal Revenue Service thereof are authorized
to interpret and enforce the provisions of the Internal Revenue Code of
1986 (the “Code”), including the Low-Income Housing Tax Credit (“LIHTC”)
found at section 42 of the Code (26 U.S.C. 42) as amended.The
Secretary of HUD is required to designate Difficult Development Areas and
Qualified Census Tracts by section 42(d)(5)(C) of the Code.
In order to assist in understanding HUD’s mandated designation of Difficult Development Areas and Qualified Census Tracts for use in administering section 42 of the Code, a summary of section 42 is provided.The following summary does not purport to bind the Treasury or the IRS in any way, nor does it purport to bind HUD, as HUD has no authority to interpret or administer the Code, except in those instances where it has a specific delegation.
Summary
of Low Income Housing Tax Credit
The
LIHTC is a tax incentive intended to increase the availability of low-income
housing.Section 42 provides an
income tax credit to owners of newly constructed or substantially rehabilitated
low-income rental housing projects.The
dollar amount of the LIHTC available for allocation by each state (the
“credit ceiling”) is limited by population.Each
state is allocated credit based on a statutory formula indicated at section
42(h)(3).States may carry forward
unused or returned credit derived from the credit ceiling for one year;
if not used by then, credit goes into a national pool to be allocated to
states as additional credit.State
and local housing agencies allocate the state’s credit ceiling among low-income
housing buildings whose owners have applied for the credit.Besides
section 42 credits derived from the credit ceiling, States may also provide
section 42 credits to owners of buildings based upon the percentage of
certain building costs financed by tax-exempt bond proceeds.Credits
provided under the tax-exempt bond “volume cap” do not reduce the credit
available from the credit ceiling.
The
credit allocated to a building is based on the cost of units placed in
service as low-income units under certain minimum occupancy and maximum
rent criteria.In general, a building
must meet one of two thresholds to be eligible for the LIHTC: either 20
percent of units must be rent-restricted and occupied by tenants with incomes
no higher than 50 percent of the Area Median Gross Income (“AMGI”), or
40 percent of units must be rent restricted and occupied by tenants with
incomes no higher than 60 percent of AMGI.The
term “rent-restricted” means that gross rent, including an allowance for
utilities, cannot exceed 30 percent of the tenant’s imputed income limitation
(i.e., 50 percent or 60 percent of AMGI).The
rent and occupancy thresholds remain in effect for at least 15 years, and
building owners are required to enter into agreements to maintain the low
income character of the building for at least an additional 15 years.
The
LIHTC reduces income tax liability dollar for dollar.It
is taken annually for a term of ten years and is intended to yield a present
value of either (1) 70 percent of the “qualified basis” for new construction
or substantial rehabilitation expenditures that are not federally subsidized
(i.e., financed with tax-exempt bonds or below-market federal loans), or
(2) 30 percent of the qualified basis for the cost of acquiring certain
existing projects or projects that are federally subsidized.The
actual credit rates are adjusted monthly for projects placed in service
after 1987 under procedures specified in section 42.Individuals
can use the credit up to a deduction equivalent of $25,000.This
equals $9,900 at the 39.6 percent maximum marginal tax rate.Individuals
cannot use the credit against the alternative minimum tax.Corporations,
other than S or personal service corporations, can use the credit against
ordinary income tax.They cannot
use the credit against the alternative minimum tax.These
corporations can also deduct the losses from the project.
The
qualified basis represents the product of the “applicable fraction” of
the building and the “eligible basis” of the building.The
applicable fraction is based on the number of low income units in the building
as a percentage of the total number of units, or based on the floor space
of low income units as a percentage of the total floor space of residential
units in the building.The eligible
basis is the adjusted basis attributable to acquisition, rehabilitation,
or new construction costs (depending on the type of LIHTC involved).These
costs include amounts chargeable to capital account incurred prior to the
end of the first taxable year in which the qualified low income building
is placed in service or, at the election of the taxpayer, the end of the
succeeding taxable year.In the case
of buildings located in designated Qualified Census Tracts or designated
Difficult Development Areas, eligible basis can be increased up to 130
percent of what it would otherwise be.This
means that the available credit also can be increased by up to 30 percent.For
example, if the 70 percent credit is available, it effectively could be
increased up to 91 percent.
Section
42 of the Code defines a Difficult Development Area as any area designated
by the Secretary of HUD as an area that has high construction, land, and
utility costs relative to the AMGI.All
designated Difficult Development Areas in MSAs/PMSAs may not contain more
than 20 percent of the aggregate population of all MSAs/PMSAs, and all
designated areas not in metropolitan areas may not contain more than 20
percent of the aggregate population of all non-metropolitan counties.
Under
section 42(d)(5)(C) of the Code, a Qualified Census Tract is any census
tract (or equivalent geographic area defined by the Bureau of the Census)
in which at least 50 percent of households have an income less than 60
percent of the AMGI or, as amended by the Community Renewal Tax Relief
Act of 2000, where the poverty rate is at least 25 percent.There
is a limit on the number of Qualified Census Tracts in any Metropolitan
Statistical Area ("MSA") or Primary Metropolitan Statistical Area ("PMSA")
that may be designated to receive an increase in eligible basis:all
of the designated census tracts within a given MSA/PMSA may not together
contain more than 20 percent of the total population of the MSA/PMSA.For
purposes of HUD designations of Qualified Census Tracts, all non-metropolitan
areas in a state are treated as if they constituted a single metropolitan
area.
Explanation
of HUD Designation Methodology
A.Qualified
Census Tracts
In
developing this list of LIHTC Qualified Census Tracts, HUD used 1990
Census data and the MSA/PMSA
definitions established by the Office of Management and Budget ("OMB")
in OMB Bulletin No. 99-04 on June 30, 1999.Beginning
with the 1990 census, tract-level data are available for the entire country.Generally,
in metropolitan areas these geographic divisions are called census tracts
while in most non-metropolitan areas the equivalent nomenclature is Block
Numbering Area ("BNA").BNAs are
treated as census tracts for the purposes of this Notice.
The
LIHTC Qualified Census Tracts were determined as follows:
1.A
census tract must have 50 percent of its households with incomes below
60 percent of the AMGI or have a poverty rate of 25 percent or more to
be “eligible.”HUD has defined 60
percent of AMGI as 120 percent of HUD's Very Low Income Limits (VLILs)
1990 Census benchmarks, which are based on 50 percent of area median family
income.The 1990 income benchmarks
are used because they match the 1990 Census tract-level income data.
2.For
each census tract, the percentage of households below the 60 percent income
standard (the “income criterion”) was determined by (a) calculating the
average household size of the census tract, (b) applying the income standard
after adjusting it to match the average household size, and (c) calculating
the number of households with incomes below the income standard.
3.For
each census tract, the poverty rate was determined by dividing the population
with incomes below poverty by the population for whom poverty status has
been determined.
4.Qualified
Census Tracts are those in which 50 percent or more of the households meet
the income criterion or 25 percent or more of the population is in poverty
such that the population of all census tracts that satisfy either one or
both of these criteria does not exceed 20 percent of the total population
of the respective area.
5.In
areas where more than 20 percent of the population resides in eligible
census tracts, one of two procedures is followed.
a.If
more than 20 percent of the population resides in census tracts eligible
by the income criterion, eligible census tracts are ordered from the highest
percentage of eligible households to the lowest.Starting
with the highest percentage, census tracts are included until the 20 percent
limit is exceeded.If a census tract
is excluded because it raises the percentage above 20 percent, then subsequent
census tracts are considered to determine if one or more census tract(s)
with smaller population(s) could be included without exceeding the 20 percent
limit.No census tracts eligible
solely by their poverty rates are designated in these areas.
b.If
less than 20 percent of the population resides in census tracts eligible
by the income criterion, census tracts eligible solely by their poverty
rates are ordered from the highest poverty rate to the lowest.Starting
with the highest poverty rate, census tracts are included until the 20
percent limit is exceeded.If a
census tract is excluded because it raises the percentage above 20 percent,
then subsequent census tracts are considered to determine if one or more
census tract(s) with smaller population(s) could be included without exceeding
the 20 percent limit.
B.
Difficult Development Areas
In
developing the list of Difficult Development Areas, HUD compared incomes
with housing costs.HUD used 2000
Census population data and the MSA/PMSA
definitions as published by the Office of Management and Budget in
OMB Bulletin No. 99-04 on June 30, 1999, with the exceptions described
in section D., below.The basis
for these comparisons was the fiscal
year (“FY”) 2001 HUD income limits for Very Low Income households and
Fair Market Rents (“FMRs”)
used for the section 8 Housing Assistance Payments program.The
procedure used in making the Difficult Development Area calculations follows:
1.For
each MSA/PMSA and each non-metropolitan county, a ratio was calculated.This
calculation used the FY 2001 two-bedroom FMR and the FY 2001 four-person
VLIL.
a.The
numerator of the ratio was the area’s FY 2001 FMR. In general the FMR is
based on the 40th percentile rent paid by recent movers for
a two-bedroom apartment.In metropolitan
areas granted a FMR based on the 50th percentile rent for purposes
of improving the administration of HUD’s Housing Choice Voucher program
(see 66 FR 162) the 40th percentile rent is used for nationwide
consistency of comparisons.
b.The
denominator of the ratio was the monthly LIHTC income-based rent limit
calculated as 1/12 of 30 percent of 120 percent of the area’s VLIL (where
120 percent of the VLIL was rounded to the nearest $50 and not allowed
to exceed 80 percent of the AMGI in areas where the VLIL is adjusted upward
from its 50 percent of AMGI base).
2.The
ratios of the FMR to the LIHTC income-based rent limit were arrayed in
descending order, separately, for MSAs/PMSAs and for non-metropolitan counties.
3.The
Difficult Development Areas are those with the highest ratios cumulative
to 20 percent of the 2000 population of all metropolitan areas and of all
non-metropolitan counties.
C.Application
of Population Caps to Difficult Development Area Determinations
In
identifying Difficult Development Areas and Qualified Census Tracts, HUD
applied various caps, or limitations, as noted above.The
cumulative population of metropolitan Difficult Development Areas cannot
exceed 20 percent of the cumulative population of all metropolitan areas
and the cumulative population of nonmetropolitan Difficult Development
Areas cannot exceed 20 percent of the cumulative population of all nonmetropolitan
counties.
In
applying these caps, HUD established procedures to deal with how to treat
small overruns of the caps.The remainder
of this section explains the procedure.In
general, HUD stops selecting areas when it is impossible to choose another
area without exceeding the applicable cap.The
only exceptions to this policy are when the next eligible excluded area
contains either a large absolute population or a large percentage of the
total population, or the next excluded area’s ranking ratio as described
above was identical (to four decimal places) to the last area selected,
and its inclusion resulted in only a minor overrun of the cap.Thus
for both the designated metropolitan and nonmetropolitan Difficult Development
Areas there may be a minimal overrun of the cap.HUD
believes the designation of these additional areas is consistent with the
intent of the legislation.Some latitude
is justifiable because it is impossible to determine whether the 20 percent
cap has been exceeded, as long as the apparent excess is small, due to
measurement error.Despite the care
and effort involved in a decennial census, it is recognized by the Census
Bureau, and all users of the data, that the population counts for a given
area and for the entire country are not precise.The
extent of the measurement error is unknown.Thus,
there can be errors in both the numerator and denominator of the ratio
of populations used in applying a 20 percent cap.In
circumstances where a strict application of a 20 percent cap results in
an anomalous situation, recognition of the unavoidable imprecision in the
census data justifies accepting small variances above the 20 percent
limit.
D.Exceptions
to OMB Definitions of MSAs/PMSAs and Other Geographic Matters
As
stated in OMB Bulletin 99-04 defining metropolitan areas:
“OMB
establishes and maintains the definitions of the [Metropolitan Areas] solely
for statistical purposes...OMB does
not take into account or attempt to anticipate any nonstatistical uses
that may be made of the definitions...We
recognize that some legislation specifies the use of metropolitan areas
for programmatic purposes, including allocating Federal funds.”
HUD
makes exceptions to OMB definitions in calculating FMRs by deleting counties
from metropolitan areas whose OMB definitions are determined by HUD to
be larger than their housing market areas.
The
following counties are assigned their own FMRs and VLILs and evaluated
as if they were separate metropolitan areas for purposes of designating
Difficult Development Areas.
Metropolitan
Area and Counties Deleted
Chicago,
IL:DeKalb, Grundy, and Kendall
Counties.
Cincinnati-Hamilton,
OH-KY-IN:Brown County, Ohio; Gallatin,
Grant, and Pendleton Counties, Kentucky; and Ohio County, Indiana.
Dallas,
TX:Henderson County.
Flagstaff,
AZ-UT:Kane County, Utah.
New
Orleans, LA:St. James Parish.
Washington,
DC-MD-VA-WV:Clarke, Culpeper, King
George, and Warren Counties, Virginia; and Berkely and Jefferson Counties,
West Virginia.
Affected
MSAs/PMSAs are assigned the indicator “(part)” in the list of Metropolitan
Difficult Development Areas.Any
of the excluded counties designated as difficult development areas separately
from their metropolitan areas are designated by the county name.
In
the New England states (Connecticut, Maine, Massachusetts, New Hampshire,
Rhode Island, and Vermont) OMB defines MSAs/PMSAs according to county subdivisions
or Minor Civil Divisions (“MCDs”) rather than county boundaries.Thus,
when a New England county is designated as a Nonmetropolitan Difficult
Development Area, only that part of the county (the group of MCDs) not
included in any MSA/PMSA is the Nonmetropolitan Difficult Development Area.Affected
counties are assigned the indicator “(part)” in the list of Nonmetropolitan
Difficult Development Areas. Also in the New England States, census tracts
may be cut by MSA/PMSA boundaries.Only
those LIHTC projects located in the part of the tract in the listed MSA/PMSA
or nonmetropolitan area may be allowed the increase in basis.Affected
tracts are marked with an asterisk (*) in the list of Qualified Census
Tracts
For
the convenience of readers of this notice, the geographic definitions of
designated Metropolitan Difficult Development Areas and the MCDs included
in Nonmetropolitan Difficult Development Areas in the New England states
are included in the list of Difficult Development Areas.
Certain
nonmetropolitan county equivalent areas in Alaska for which FMRs and VLILs
are calculated and thus form the basis of Difficult Development Area designations
are no longer recognized as geographic entities by the Census Bureau.Therefore,
no 2000 Census population counts are produced for these areas.HUD
estimates the 2000 population of these areas as follows:
1.The
2000 Population of Denali Borough (1,893) was allocated entirely to the
Yukon-Koyukuk Census Area.The part
of Denali Borough created from the Southeast Fairbanks Census Area was
deemed uninhabited after examination of Census Block data for the area
of Denali Borough formerly in the Southeast Fairbanks Census Area.
2.The
population of Yakutat City and Borough (808) was allocated to the former
Skagway-Yakutat-Angoon Census Area (680) and the Valdez-Cordova Census
Area (128).The populations of Yakutat
City and Borough Census Blocks located east of 141° longitude were
allocated to the Skagway-Yakutat-Angoon Census Area.The
populations of Yakutat City and Borough Census Blocks located west of 141°
longitude were allocated to the Valdez-Cordova Census Area.
Future
Designations
Difficult
Development Areas are designated annually as updated income and FMR data
become available.Qualified Census
Tracts will be redesignated next year when data from the 2000 Census become
available.
Effective
Date
The
list of Difficult Development Areas and the list of Qualified Census Tracts
is effective for allocations of credit made after December 31, 2001.In
the case of a building described in section 42(h)(4)(B) of the Code, the
list is effective if the bonds are issued and the building is placed in
service after December 31, 2001.
Interpretive
Examples for Effective Date
For
the convenience of readers of this Notice, interpretive examples are provided
below to illustrate the consequences of the effective date in areas that
gain or lose Difficult Development Area status with respect to projects
described in section 42(h)(4)(B) of the Code.The
examples are equally applicable to Qualified Census Tract designations.
(Case
A) Project
“A” is located in a newly-designated 2002 Difficult Development Area.Bonds
are issued for Project “A” on November 1, 2001, and Project “A” is placed
in service March 1, 2002. Project “A” IS NOT eligible for the increase
in basis otherwise accorded a project in this location because the bonds
were issued BEFORE January 1, 2002.
(Case
B) Project
“B” is located in a newly-designated 2002 Difficult Development Area.Project
“B” is placed in service November 15, 2001.The
bonds which will support the permanent financing of Project “B” are issued
January 15, 2002.Project “B” IS
NOT eligible for the increase in basis otherwise accorded a project in
this location because the project was placed in service BEFORE January
1, 2002.
(Case
C) Project
“C” is located in an area which is a Difficult Development Area in 2001,
but IS NOT a Difficult Development Area in 2002.Bonds
are issued for Project “C” on October 30, 2001, but Project “C” is not
placed in service until March 30, 2002.Project
“C” is eligible for the increase in basis available to projects located
in 2001 Difficult Development Areas because the first of the two events
necessary for triggering the effective date for buildings described in
section 42(h)(4)(B) of the Code (the two events being bonds issued and
buildings placed in service) took place on October 30, 2001, a time when
project “C” was located in a Difficult Development Area.
Other
Matters
Environmental
Impact
In
accordance with 40 CFR 1508.4 of the CEQ regulations and 24 CFR 50.19(c)(6)
of the HUD regulations, the policies and procedures contained in this notice
provide for the establishment of fiscal requirements or procedures which
do not constitute a development decision that affects the physical condition
of specific project areas or building sites and therefore, are categorically
excluded from the requirements of the National Environmental Policy Act,
except for extraordinary circumstances, and no FONSI is required.
Regulatory
Flexibility Act
In
accordance with 5 U.S.C. section 605(b) (the Regulatory Flexibility Act),
the undersigned hereby certifies that this notice does not have a significant
economic impact on a substantial number of small entities.The
notice involves the designation of “Difficult Development Areas” and “Qualified
Census Tracts” as required by section 42 of the Code, as amended, for use
by political subdivisions of the States in allocating the Low-Income Housing
Tax Credit.This notice places no
new requirements on the States, their political subdivisions, or the applicants
for the credit.This notice also
details the technical methodology used in making such designations.
Executive
Order 12612, Federalism
The
General Counsel, as the Designated Official under section 6(a) of Executive
Order 12612, Federalism, has determined that the policies contained
in this notice will not have any substantial direct effects on States or
their political subdivisions, or the relationship between the Federal government
and the States, or on the distribution of power and responsibilities among
the various levels of government.As
a result, the notice is not subject to review under the order.The
notice merely designates “Difficult Development Areas” and “Qualified Census
Tracts” as required under section 42 of the Internal Revenue Code, as amended,
for the use by political subdivisions of the States in allocating the Low-Income
Housing Tax Credit.The notice also
details the technical methodology used in making such designations.
Dated:
September, 11 2001
____________________
Mel
Martinez
Secretary
Nonmetropolitan
Difficult Development Areas (*.pdf, 30 KB)