[Federal Register Volume 65, Number 185 (Friday, September 22, 2000)]
[Notices]
[Pages 57526-57535]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-24286]



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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. 65, No. 185 / Friday, September 22, 2000 / 
Notices  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-4401-N-04]


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'' 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.

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 [email protected]. 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 [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 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 fiscal year (``FY'') 2000 Fair Market Rents (``FMRs''), FY 
2000 income limits and 1990 census population counts as explained 
below. The corrected designations of Qualified Census Tracts published 
on May 1, 1995 (60 FR 21246), as amended by the supplemental 
designations of Qualified Census tracts published on June 25, 1998 (63 
FR 34748), December 9, 1998 (63 FR 68115) and September 15, 1999 (64 FR 
50233) are not affected by this notice.

Background

    The U.S. Treasury Department and the Internal Revenue Service 
(``IRS'') 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 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. 
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

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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.

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 in OMB 
Bulletin No. 99-04 on June 30, 1999, with the exceptions described in 
section C., below. The basis for these comparisons was the FY 2000 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 2000 two-bedroom FMR and the 
FY 2000 four-person VLIL. The numerator of the ratio was the area's FY 
2000 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 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.

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 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

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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, 2000. 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, 2000. The 
corrected designations of Qualified Census Tracts published on May 1, 
1995 (60 FR 21246), as amended by the supplemental designations of 
Qualified Census tracts published on June 25, 1998 (63 FR 34748), 
December 9, 1998 (63 FR 68115), and September 15, 1999 (64 FR 50233) 
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 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 2001 
Difficult Development Area. Bonds are issued for Project ``A'' on 
November 1, 2000, and Project ``A'' is placed in service March 1, 2001. 
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, 2001.
    (Case B) Project ``B'' is located in a newly-designated 2001 
Difficult Development Area. Project ``B'' is placed in service November 
15, 2000. The bonds which will support the permanent financing of 
Project ``B'' are issued January 15, 2001. 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, 
2001.
    (Case C) Project ``C'' is located in an area which is a Difficult 
Development Area in 2000, but IS NOT a Difficult Development Area in 
2001. Bonds are issued for Project ``C'' on October 30, 2000, but 
Project ``C'' is not placed in service until March 30, 2001. Project 
``C'' is eligible for the increase in basis available to projects 
located in 2000 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, 
2000, a time when project ``C'' was located in a Difficult Development 
Area.

Findings and Certifications

Environmental Impact

    In accordance with 24 CFR 50.19(c)(6) of the Department's 
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. 
Therefore, this notice is categorically excluded from the requirements 
of the National Environmental Policy Act (42 U.S.C. 4321 et seq.).

Regulatory Flexibility Act

    The Secretary, in accordance with the Regulatory Flexibility Act (5 
U.S.C. 605(b)), has reviewed and approved this notice and in so doing 
certifies that this notice will not have a significant economic impact 
on a substantial number of small entities. The notice involves the 
designation of ``Difficult Development Areas'' 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 small entities.
    Executive Order 13132, Federalism Executive Order 13132 (entitled 
``Federalism'') prohibits, to the extent practicable and permitted by 
law, an agency from promulgating policies that have federalism 
implications and either impose substantial direct compliance costs on 
State and local governments and are not required by statute, or preempt 
State law, unless the relevant requirements of section 6 of the 
Executive Order are met. This notice does not have federalism 
implications and does not impose substantial direct compliance costs on 
State and local governments or preempt State law within the meaning of 
the Executive Order.

    Dated: September 15, 2000.
Andrew Cuomo,
Secretary.
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[FR Doc. 00-24286 Filed 9-21-00; 8:45 am]
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