[Federal Register Volume 62, Number 203 (Tuesday, October 21, 1997)]
[Notices]
[Pages 54732-54742]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-27769]


      

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Part III





Department of Housing and Urban Development





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

  Federal Register / Vol. 62, No. 203 / Tuesday, October 21, 1997 / 
Notices  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-4287-N-01]


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 provides revised designations of ``Difficult 
Development Areas'' for purposes of the Low-Income Housing Tax Credit 
(``LIHTC'') under section 42 of the Internal Revenue Code of 1986, and 
describes the methodology used by the United States Department of 
Housing and Urban Development (``HUD''). The new Difficult Development 
Areas are based on FY 1997 Fair Market Rents (``FMRs''), FY 1997 income 
limits and 1990 census population counts as explained below. The 
corrected designations of ``Qualified Census Tracts'' under section 42 
of the Internal Revenue Code published May 1, 1995 (60 FR 21246) remain 
in effect.

FOR FURTHER INFORMATION CONTACT: With questions on how areas are 
designated and on geographic definitions, Kurt G. Usowski, Economist, 
Division of Economic Development and Public Finance, Office of Policy 
Development and Research, Department of Housing and Urban Development, 
451 Seventh Street, SW, Washington, DC 20410, telephone (202) 708-0426, 
e-mail Kurt__G.__U[email protected]. With specific legal questions 
pertaining to section 42 and this notice, Chris Wilson, Attorney, 
Office of the Chief Counsel, Pass Throughs and Special Industries 
Branch 5, Internal Revenue Service, 1111 Constitution Ave, NW, 
Washington, DC 20244, telephone (202) 622-3040, fax (202) 622-4779; or 
Harold J. Gross, Senior Tax Attorney, Office of the General Counsel, 
Department of Housing and Urban Development, 451 Seventh Street, SW, 
Washington, DC 20410, telephone (202) 708-3260, e-mail 
[email protected]. A telecommunications device for deaf persons 
(TTY) is available at (202) 708-9300. (These are not toll-free 
telephone numbers.) Additional copies of this notice are available 
through HUDUSER at (800) 245-2691 for a small fee to cover duplication 
and mailing costs.

COPIES AVAILABLE ELECTRONICALLY: This notice is available 
electronically on the Internet (World Wide Web) at http://
www.huduser.org/ under the heading ``Data Available from HUD.''

SUPPLEMENTARY INFORMATION:

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, as 
enacted by the Tax Reform Act of 1986 (Pub. L. 99-514), as amended by 
the Technical and Miscellaneous Revenue Act of 1988 (Pub. L. 100-647), 
as amended by the Omnibus Budget Reconciliation Act of 1989 (Pub. L. 
101-239), as amended by the Omnibus Budget Reconciliation Act of 1990 
(Pub. L. 101-508), as amended by the Tax Extension Act of 1991 (Pub. L. 
102-227), and as amended and made permanent by the Omnibus Budget 
Reconciliation Act of 1993 (Pub. L. 103-66). The Secretary of HUD is 
required to designate Difficult Development Areas by section 
42(d)(5)(C) of the Code.
    In order to assist in understanding HUD's mandated designation of 
Difficult Development Areas 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 $1.25 per resident. 
Also, states may carry forward unused or returned credit 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.
    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 acquisition of 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 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,

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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.
    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. There is a limit on the amount 
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. This Notice does not redesignate Qualified 
Census Tracts. The corrected designation of Qualified Census Tracts 
published May 1, 1995, at 60 FR 21246 remains in effect. Qualified 
Census Tracts will not be redesignated until data from the 2000 census 
become available.
    Section 42 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. Again, 
limits apply. 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.

Explanation of HUD Designation Methodology

A. Difficult Development Areas

    In developing the list of Difficult Development Areas, HUD compared 
incomes with housing costs. HUD used 1990 Census data and the MSA/PMSA 
definitions as published by the Office of Management and Budget 
(``OMB'') in OMB Bulletin No. 96-08 on June 28, 1996, with the 
exceptions described in section C., below. The basis for these 
comparisons was the fiscal year (``FY'') 1997 HUD income limits for 
Very Low Income households (``VLILs'') and Fair Market Rents (``FMRs'') 
used for the section 8 Housing Assistance Payments Program. The 
procedure used in making these calculations follows:
    1. For each MSA/PMSA and each non-metropolitan county, a ratio was 
calculated. This calculation used the FY 1997 two-bedroom FMR and the 
FY 1997 four-person VLIL. The numerator of the ratio was the area's FY 
1997 FMR. 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 1990 population of all 
metropolitan areas and of all non-metropolitan counties.

B. Application of Population Caps to Difficult Development Area 
Determinations

    In identifying Difficult Development Areas, 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 three 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 are minimal overruns 
of the caps. 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.

C. Exceptions to OMB Definitions of MSAs/PMSAs and Other Geographic 
Matters

    As stated in OMB Bulletin 96-08 defining metropolitan areas: 
``OMB establishes and maintains the definitions of the (Metropolitan 
Areas) MAs 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. In 
addition, HUD is required by statute to calculate a separate FMR and 
VLIL for Westchester County, New York, which OMB includes as part of 
the New York, NY PMSA. 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

Atlanta, GA: Carrol, Pickens, and Walton Counties.
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 York, NY: Westchester County.
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

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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.
    Finally, 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.
    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.

Future Designations

    Difficult Development Areas are designated annually as updated 
income and FMR data become available. Qualified Census Tracts will not 
be redesignated until data from the 2000 census become available.

Effective Date

    The list of Difficult Development Areas is effective for 
allocations of credit made after December 31, 1997. In the case of a 
building described in Internal Revenue Code section 42(h)(4)(B), the 
list is effective if the bonds are issued and the building is placed in 
service after December 31, 1997. The corrected designations of 
Qualified Census Tracts published May 1, 1995, at 60 FR 21246 remain in 
effect.

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 Internal Revenue Code 
section 42(h)(4)(B).
    (Case A) Project ``A'' is located in a newly-designated 1998 
Difficult Development Area. Bonds are issued for Project ``A'' on 
November 1, 1997, but Project ``A'' is placed in service March 1, 1998. 
Project ``A'' IS NOT eligible for the increase in basis otherwise 
accorded a project in this location because the bonds were issued 
BEFORE December 31, 1997.
    (Case B) Project ``B'' is located in a newly-designated 1998 
Difficult Development Area. Project ``B'' is placed in service November 
15, 1997. The bonds which will support the permanent financing of 
Project ``B'' are issued January 15, 1998. 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 December 31, 
1997.
    (Case C) Project ``C'' is located in an area which is a Difficult 
Development Area in 1998, but IS NOT a Difficult Development Area in 
1999. Bonds are issued for Project ``C'' on October 30, 1998, but 
Project ``C'' is not placed in service until March 30, 1999. Project 
``C'' is eligible for the increase in basis available to projects 
located in 1998 Difficult Development Areas because both events (bonds 
issued and project placed in service) have occurred AFTER December 31, 
1997.

Other Matters

Environmental Impact

    In accordance with 40 CFR 1508.4 of the CEQ regulations and 24 CFR 
50.20 of the HUD regulations, the policies and actions in this notice 
are determined not to have the potential of having a significant impact 
on the quality of human environment and therefore further environmental 
review under the National Environmental Policy Act is not necessary.

Regulatory Flexibility Act

    In accordance with 5 U.S.C. 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'' 
for use by political subdivisions of the States in allocating the 
LIHTC, as required by section 42 of the Code, as amended. 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'' for the use by 
political subdivisions of the States in allocating the LIHTC, as 
required under section 42 of the Internal Revenue Code, as amended. The 
notice also details the technical methodology used in making such 
designations.

    Dated: October 14, 1997.
Andrew M. Cuomo,
Secretary.

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[FR Doc. 97-27769 Filed 10-20-97; 8:45 am]
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