[Federal Register Volume 63, Number 236 (Wednesday, December 9, 1998)]
[Notices]
[Pages 68116-68127]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32561]



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Part III





Department of Housing and Urban Development





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Statutorily Mandated Designation of Difficult Development Areas, and 
Supplemental Designation of Qualified Census Tracts, for Section 42 of 
the Internal Revenue Code of 1986; Notice

  Federal Register / Vol. 63, No. 236 / Wednesday, December 9, 1998 / 
Notices  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-4401-N-01]


Statutorily Mandated Designation of Difficult Development Areas, 
and Supplemental Designation of Qualified Census Tracts, 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'' and 
supplemental ``Qualified Census Tracts'' for purposes of the Low-Income 
Housing Tax Credit (``LIHTC'') under section 42 of the Internal Revenue 
Code of 1986. The United States Department of Housing and Urban 
Development (``HUD'') makes new Difficult Development Area designations 
annually and makes supplemental designations of Qualified Census Tracts 
at this time because of recent legislation. The corrected designations 
of ``Qualified Census Tracts'' under section 42 of the Internal Revenue 
Code published May 1, 1995 (60 FR 21246), as amended by the 
supplemental designations of ``Qualified Census Tracts'' under section 
42 of the Internal Revenue Code published June 25, 1998 (63 FR 34748), 
are not affected by this Notice.

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, S.W., Washington, D.C. 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, N.W., 
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, S.W., 
Washington, D.C. 20410, telephone (202) 708-3260, e-mail 
[email protected]. 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 
[email protected]. 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 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 HUDUser.''

SUPPLEMENTARY INFORMATION:

This Document

    The designations of Difficult Development Areas in this document 
are based on FY 1998 Fair Market Rents (``FMRs''), FY 1998 income 
limits and 1990 census population counts as explained below. Section 
508(c) of the Quality Housing and Work Responsibility Act of 1998 (Pub. 
L. 105-276, approved October 21, 1998) requires HUD to treat certain 
areas differently in making Difficult Development Area designations 
than they had been treated in past designations. The designations of 
Qualified Census Tracts in newly designated metropolitan areas and the 
nonmetropolitan parts of States affected by the most recent 
metropolitan area designation and for the U.S. Territories of the 
Virgin Islands, American Samoa, Guam, Northern Marianas Islands, and 
Palau, are made necessary by the recently enacted ``HUBZones'' 
provisions of the Small Business Reauthorization Act of 1997, which 
incorporate section 42 Qualified Census Tracts by reference. These 
designations are made based on 1990 Census data.

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 $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

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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, 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.
    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.
    In the last general designation of Qualified Census Tracts 
published May 1, 1995 (60 FR 21246), no tract designations were made in 
the U.S. Territories of the Virgin Islands, American Samoa, Guam, 
Northern Marianas Islands, and Palau, because they were all designated 
``Difficult Development Areas'' under section 42 of the Internal 
Revenue Code--making the designation of Qualified Census Tract 
superfluous. HUD is again designating the U.S. Territories of the 
Virgin Islands, American Samoa, Guam, Northern Marianas Islands, and 
Palau, as Difficult Development Areas and expects them to maintain 
their eligibility for designation for the foreseeable future. However, 
the recently enacted ``HUBZones'' provisions of the Small Business 
Reauthorization Act of 1997 (111 Stat. 2627) incorporate section 42 
Qualified Census Tracts by reference, making it necessary to revise the 
designation of Qualified Census Tracts to ensure legal compliance with 
this new program. The following changes in MSA/PMSA definitions were 
made after HUD's last designation of Qualified Census Tracts.

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            New MSA (MSA No.)                    Component counties
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Missoula, MT MSA (5140)..................  Missoula
                                           County, MT.
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Explanation of HUD Designation Methodology

A. Qualified Census Tracts

    In developing this revised 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. 98-06 
on June 23, 1998. 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% of its households with incomes 
below 60% of the AMGI to be eligible. HUD has defined 60% of AMGI as 
120% of HUD's Very Low Income Limits (VLILs), which are based on 50% of 
area median family income, adjusted for high cost and low income areas. 
The 1994 income estimates were then deflated to 1989 dollars, so they 
would match the 1990 Census income data.
    2. For each census tract, the percentage of households below the 
60% income standard 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. Qualified Census Tracts are those in which 50% or more of the 
households are income eligible and the population of all census tracts 
that satisfy this criterion does not exceed 20% of the total population 
of the respective area.
    4. In areas where more than 20% of the population qualifies, 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% limit is exceeded. If a census tract is excluded 
because it raises the percentage above 20%, then subsequent census 
tracts are considered to determine if a census tract with a smaller 
population could be included without exceeding the 20% limit.

B. 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 in OMB 
Bulletin No. 98-06 on June 23, 1998, with the exceptions described in 
section C., below. The basis for these comparisons was the fiscal year 
(``FY'') 1998 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 these calculations 
follows:
    1. For each MSA/PMSA and each non-metropolitan county, a ratio was 
calculated. This calculation used the FY 1998 two-bedroom FMR and the 
FY 1998 four-person VLIL. The numerator of the ratio was the area's FY 
1998 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

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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.

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.
    For Qualified Census Tracts, section 42(d)(5)(C)(ii)(II) of the 
Code specifies that the population of designated census tracts within a 
metropolitan area cannot exceed 20% of the population of that 
metropolitan area. Similarly, for census tracts/block numbering areas 
(BNAs) located outside metropolitan areas, the population of designated 
census tracts/BNAs cannot exceed 20% of the population of the non-
metropolitan counties in a State or equivalent area.
    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 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.

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

    As stated in OMB Bulletin 98-06 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.
    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 unless 
changes in MSA/PMSA definitions are made by OMB in the interim.

Effective Date

    The list of Difficult Development Areas and the supplemental list 
of Qualified Census Tracts is effective for allocations of credit made 
after December 31, 1998. 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, 1998. The corrected designations of Qualified Census Tracts 
published May 1, 1995, at 60 FR 21246, as amended by the supplemental 
designation of Qualified Census tracts published June 25, 1998, at 63 
FR 34748, are not affected by this Notice.

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). The examples are equally applicable to Qualified 
Census Tract designations.
    (Case A) Project ``A'' is located in a newly-designated 1999 
Difficult Development Area. Bonds are issued for Project ``A'' on 
November 1, 1998, but Project ``A'' is placed in service March

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1, 1999. 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, 1999.
    (Case B) Project ``B'' is located in a newly-designated 1999 
Difficult Development Area. Project ``B'' is placed in service November 
15, 1998. The bonds which will support the permanent financing of 
Project ``B'' are issued January 15, 1999. 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, 
1998.
    (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 
50.19(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 LIHTC. 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'' as required under 
section 42 of the Internal Revenue Code, as amended, for the use by 
political subdivisions of the States in allocating the LIHTC. The 
notice also details the technical methodology used in making such 
designations.

    Dated: October 29, 1998.
Andrew M. Cuomo,
Secretary.

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[FR Doc. 98-32561 Filed 12-8-98; 8:45 am]
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