[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
[[Page 54734]]
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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