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Statutorily Mandated Designation of Difficult Development Areas for Section 42 of the Internal Revenue Code of 1986

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 [Federal Register: August 22, 2005 (Volume 70, Number 161)]
[Notices]
[Page 49139-49151]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr22au05-141]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
[Docket No. FR-4889-N-05]
 
Statutorily Mandated Designation of Difficult Development Areas 
for Section 42 of the Internal Revenue Code of 1986

AGENCY: Office of the Secretary, HUD.
ACTION: Notice.

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SUMMARY: This document designates ``Difficult Development Areas'' 
(DDAs) for purposes of the Low-Income Housing Tax Credit (LIHTC) under 
Section 42 of the Internal Revenue Code of 1986 (the Code) (26 U.S.C. 
42). The United States Department of Housing and Urban Development 
(HUD) makes new Difficult Development Area designations annually. The 
designations of ``Qualified Census Tracts'' (QCTs) under Section 42 of 
the Internal Revenue Code published December 12, 2002, as supplemented 
on December 19, 2003, remain in effect.

FOR FURTHER INFORMATION CONTACT: For questions on how areas are 
designated and on geographic definitions, contact Kurt G. Usowski, 
Associate Deputy Assistant Secretary for Economic Affairs, Office of 
Policy Development and Research, Department of Housing and Urban 
Development, 451 Seventh Street, SW., Washington, DC 20410-6000, 
telephone (202) 708-2770, or send e-mail to 
Alastair_McFarlane@hud.gov. For specific legal questions pertaining to 
Section 42, contact Branch 5, Office of the Associate Chief Counsel, 
Passthroughs & Special Industries, Internal Revenue Service, 1111 
Constitution Avenue, NW., Washington, DC 20224, telephone (202) 622-
3040, fax (202) 622-4524. For questions about the ``HUB Zones'' 
program, contact Michael P. McHale, Assistant Administrator for 
Procurement Policy, Office of Government Contracting, Small Business 
Administration, 409 Third Street, SW., Suite 8800, Washington, DC 
20416, telephone (202) 205-8885, fax (202) 205-7167, or send e-mail to 
hubzone@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 DDAs and QCTs are available electronically on the 
Internet at http://www.huduser.org/datasets/qct.html. Exit Disclaimer

SUPPLEMENTARY INFORMATION:

This Document

    This notice designates DDAs for each of the 50 states, the District 
of Columbia, Puerto Rico, American Samoa, Guam, the Northern Mariana 
Islands, and the U.S. Virgin Islands. The designations of DDAs in this 
notice are based on final Fiscal Year (FY) 2005 Fair Market Rents 
(FMRs), 2005 income limits, and 2000 Census population counts as 
explained below. The designations of QCTs under Section 42 of the 
Internal Revenue Code published December 12, 2002 (67 FR 76451), as 
supplemented on December 19, 2003 (68 FR 70982), remain in effect.

2000 Census

    Data from the 2000 Census on total population of metropolitan areas 
and nonmetropolitan areas are used in the designation of DDAs. The 
Office of Management and Budget (OMB) published new metropolitan area 
definitions incorporating 2000 Census data in OMB Bulletin No. 03-04 on 
June 6, 2003, as updated in OMB Bulletin No. 04-03 on February 18, 
2004, and OMB Bulletin No. 05-02 on February 22, 2005. The FY2005 FMRs 
and 2005 income limits used to designate Difficult Development Areas 
are based on the Metropolitan Statistical Area (MSA) and Primary 
Metropolitan Statistical Area (PMSA) definitions established by OMB in 
OMB Bulletin No. 99-04 on June 30, 1999. Therefore, for the purposes of 
designating DDAs, ``metropolitan areas'' will continue to be defined 
according to the MSA/PMSA definitions established in OMB Bulletin No. 
99-04 on June 30, 1999, until further notice.

Background

    The U.S. Department of the Treasury (Treasury) and its Internal 
Revenue Service (IRS) are authorized to interpret and enforce the 
provisions of the Code, including the LIHTC found at Section 42 of the 
Code. The Secretary of HUD is required to designate DDAs and QCTs by 
Section 42(d)(5)(C) of the Code. In order to assist in understanding 
HUD's mandated designation of DDAs and QCTs for use in administering 
Section 42, a summary of the section is provided. The following summary 
does not purport to bind Treasury or the IRS in any way, nor does it 
purport to bind HUD, as HUD has authority to interpret or administer 
the Code only in instances where it receives explicit 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 (credit ceiling) is limited by population. 
Each state is allowed a credit ceiling based on a statutory formula 
indicated at Section 42(h)(3). States may carry forward unallocated 
credits derived from the credit ceiling for one year; however, to the 
extent these unallocated credits are not used by then, the credits go 
into a national pool to be redistributed 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 on 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 credits available from the credit ceiling.
    The credits allocated to a building are 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 the 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 
the 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 buildings 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

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credits up to a deduction equivalent of $25,000 (the actual maximum 
amount of credit that an individual can claim depends on the 
individual's marginal tax rate). Individuals cannot use the credits 
against the alternative minimum tax. Corporations, other than S or 
personal service corporations, can use the credits against ordinary 
income tax. They cannot use the credits against the alternative minimum 
tax. These corporations can also deduct losses from the project.
    The qualified basis represents the product of the building's 
``applicable fraction'' and its ``eligible basis.'' 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 a capital account that are 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 DDAs or designated QCTs, eligible basis can be increased by 
up to 130 percent from what it would otherwise be. This means that the 
available credits also can be increased by up to 30 percent. For 
example, if a 70 percent credit is available, it effectively could be 
increased to as much as 91 percent.
    Section 42 of the Code defines a DDA 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 DDAs in metropolitan 
areas (taken together) may not contain more than 20 percent of the 
aggregate population of all metropolitan areas, and all designated 
areas not in metropolitan areas may not contain more than 20 percent of 
the aggregate population of all nonmetropolitan areas.

Explanation of HUD Designation Methodology

A. Difficult Development Areas

    In developing the list of DDAs, HUD compared housing costs with 
incomes. HUD used 2000 Census population data and the metropolitan area 
(MSA/PMSA) definitions as published in OMB Bulletin No. 99-04 on June 
30, 1999. In keeping with past practice of basing the coming year's DDA 
designations on data from the preceding year, the basis for these 
comparisons was the 2005 HUD income limits for Very Low-Income 
households (Very Low Income Limits, or VLILs) and final FY2005 FMRs 
used for the Section 8 Housing Choice Voucher program. The procedure 
used in making the DDA calculations follows:
    1. For each MSA/PMSA and each nonmetropolitan area, a ratio was 
calculated. This calculation used the final FY2005 two-bedroom FMR and 
the 2005 four-person VLIL.
    a. The numerator of the ratio was the area's final FY2005 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 was used for nationwide consistency of 
comparisons.
    b. The denominator of the ratio was the monthly LIHTC income-based 
rent limit calculated as \1/2\ of 30 percent of 120 percent of the 
area's VLIL (where 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 
nonmetropolitan areas.
    3. The DDAs are those with the highest ratios cumulative to 20 
percent of the 2000 population of all metropolitan areas and of all 
nonmetropolitan areas, respectively.

B. Application of Population Caps to Difficult Development Area 
Determinations

    In identifying DDAs, HUD applied caps, or limitations, as noted 
above. The cumulative population of metropolitan DDAs cannot exceed 20 
percent of the cumulative population of all metropolitan areas and the 
cumulative population of nonmetropolitan DDAs cannot exceed 20 percent 
of the cumulative population of all nonmetropolitan areas.
    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 DDAs, there may be minimal overruns of the cap. HUD 
believes the designation of these additional areas is consistent with 
the intent of the legislation. As long as the apparent excess is small 
due to measurement errors, some latitude is justifiable because it is 
impossible to determine whether the 20 percent cap has been exceeded. 
Despite the care and effort involved in a decennial census, the Census 
Bureau and all users of the data recognize 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.

C. 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 DDAs.
Metropolitan Area and Counties Deleted
Chicago, Illinois: DeKalb, Grundy, and Kendall Counties.
Cincinnati-Hamilton, Ohio-Kentucky-Indiana: Brown County, Ohio; 
Gallatin, Grant, and Pendleton Counties, Kentucky; and Ohio County, 
Indiana.
Dallas, Texas: Henderson County.

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Flagstaff, Arizona-Utah: Kane County, Utah.
New Orleans, Louisiana: St. James Parish.
Washington, DC-Maryland-Virginia-West Virginia: 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 DDAs. Any of the excluded counties designated as 
DDAs 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 defined 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 DDA, only that part of the county (the group of MCDs) 
not included in any MSA/PMSA is the Nonmetropolitan DDA. Affected 
counties are assigned the indicator ``(part)'' in the list of 
Nonmetropolitan DDAs.
    For the convenience of readers of this notice, the geographical 
definitions of designated Metropolitan DDAs and the MCDs included in 
partial-county Nonmetropolitan DDAs in the New England states are 
included in the list of DDAs.

Future Designations

    DDAs are designated annually as updated income and FMR data become 
available.

Effective Date

    The 2006 lists of DDAs are effective: (1) For allocations of credit 
after December 31, 2005; or (2) for purposes of Section 42(h)(4)(B) of 
the Code, if the bonds are issued and the building is placed in service 
after December 31, 2005. If an area is not on a subsequent list of 
DDAs, the 2006 lists are effective for the area if (1) the allocation 
of credit to an applicant is made no later than the end of the 365-day 
period after the submission to the credit-allocating agency of a 
complete application by the applicant, and the submission is made 
before the effective date of the subsequent lists; or (2) for purposes 
of Section 42(h)(4)(B) of the Code, the bonds are issued or the 
building is placed in service no later than the end of the 365-day 
period after the applicant submits a complete application to the bond-
issuing agency, and the submission is made before the effective date of 
the subsequent lists, provided that both the issuance of the bonds and 
the placement in service of the building occur after the application is 
submitted.
    An application is deemed to be submitted on the date it is filed if 
the application is determined to be complete as certified in writing by 
the credit-allocating agency or bond-issuing agency. A ``complete 
application'' means that no more than de minimis clarification of the 
application is required for the agency to make a decision about the 
allocation of tax credits or issuance of bonds requested in the 
application.
    The designations of QCTs under Section 42 of the Internal Revenue 
Code published December 12, 2002 (67 FR 76451), as supplemented on 
December 19, 2003 (68 FR 70982), remain in effect. The above language 
regarding calendar year 2006 and subsequent designations of DDAs also 
applies to the designations of QCTs published December 12, 2002 (67 FR 
76451), as supplemented on December 19, 2003 (68 FR 70982), and 
subsequent designations of QCTs.

Interpretive Examples of 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 DDA status. The examples are 
equally applicable to future QCT designations.
    (Case A) Project ``A'' is located in a 2006 DDA that is NOT a 
designated DDA in 2007. An application for tax credits for Project 
``A'' is filed with the allocating agency November 15, 2006, which the 
credit-allocating agency certifies in writing as complete. Credits are 
allocated to Project ``A'' on October 30, 2007. Project ``A'' IS 
eligible for the increase in basis accorded a project in a 2006 DDA 
because the application was filed BEFORE January 1, 2007 (the assumed 
effective date for the 2007 DDA lists), and tax credits were allocated 
no later than the end of the 365-day period after the filing of the 
complete application for an allocation of tax credits.
    (Case B) Project ``B'' is located in a 2006 DDA that is NOT a 
designated DDA in 2007. An application for tax credits for Project 
``B'' is filed with the allocating agency December 1, 2006, which the 
credit-allocating agency certifies in writing as complete. Credits are 
allocated to Project ``B'' on March 30, 2008. Project ``B'' IS NOT 
eligible for the increase in basis accorded a project in a 2006 DDA 
because, although the application for an allocation of tax credits was 
filed BEFORE January 1, 2007 (the assumed effective date of the 2007 
DDA lists), the tax credits were allocated later than the end of the 
365-day period after the filing of the complete application.
    (Case C) Project ``C'' is located in a 2006 DDA that was not a DDA 
in 2005. Project ``C'' was placed in service November 15, 2005. An 
application for tax-exempt bond financing for Project ``C'' is filed 
with the bond-issuing agency on January 15, 2006, which the bond-
issuing agency certifies in writing as complete. The bonds that will 
support the permanent financing of Project ``C'' are issued September 
30, 2006. Project ``C'' IS NOT eligible for the increase in basis 
otherwise accorded a project in a 2006 DDA because the project was 
placed in service BEFORE January 1, 2006.
    (Case D) Project ``D'' is located in an area that is a DDA in 2006, 
but IS NOT a DDA in 2007. An application for tax-exempt bond financing 
for Project ``D'' is filed with the bond-issuing agency on October 30, 
2006, which the bond-issuing agency certifies in writing as complete. 
Bonds are issued for Project ``D'' on April 30, 2007, but Project ``D'' 
is not placed in service until January 30, 2008. Project ``D'' is 
eligible for the increase in basis available to projects located in 
2006 DDAs 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 April 30, 2007, within the 365-day period after 
a complete application for tax-exempt bond financing was filed, and the 
application was filed during a time when the location of Project ``D'' 
was in a DDA.

Findings and Certifications

Environmental Impact

    In accordance with 40 CFR 1508.4 of the regulations of the Council 
on Environmental Quality and 24 CFR 50.19(c)(6) of HUD's regulations, 
the policies and procedures contained in this notice provide for the 
establishment of fiscal requirements or procedures that do not 
constitute a development decision affecting 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 Finding of No Significant Impact is required.

Federalism Impact

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any policy document that has federalism implications if 
the

[[Page 49143]]

document either imposes substantial direct compliance costs on state 
and local governments and is not required by statute, or the document 
preempts state law, unless the agency meets the consultation and 
funding requirements of section 6 of the executive order. This 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. This notice also 
details the technical methodology used in making such designations. As 
a result, this notice is not subject to review under the order.

    Dated: August 12, 2005.
Roy A. Bernardi,
Deputy Secretary.
BILLING CODE 4210-62-P

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[FR Doc. 05-16605 Filed 8-19-05; 8:45 am]
BILLING CODE 4210-62-C

 
 

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