[Federal Register Volume 69, Number 229 (Tuesday, November 30, 2004)]
[Notices]
[Pages 69730-69745]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-26328]



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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. 69, No. 229 / Tuesday, November 30, 2004 / 
Notices  

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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-4889-N-03]


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) (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'' 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: Alastair McFarlane, Senior 
Economist, Economic Development and Public Finance Division, Office of 
Policy Development and Research, Department of Housing and Urban 
Development, 451 Seventh Street, SW., Washington, DC 20410-6000, 
telephone (202) 708-2770, e-mail [email protected]. For 
specific legal questions pertaining to Section 42: 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: Michael P. McHale, Assistant 
Administrator for Procurement Policy, Office of Government Contracting, 
Suite 8800, Small Business Administration, 409 Third Street, SW., 
Washington, DC 20416, telephone (202) 205-8885, fax (202) 205-7167, 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

    This notice designates Difficult Development Areas 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 Difficult Development Areas in this notice are based on 
final fiscal year 2004 Fair Market Rents (FMRs), 2004 income limits, 
and 2000 Census population counts as explained below. The designations 
of Qualified Census Tracts 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 Difficult 
Development Areas. 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. The FY2004 FMRs and 2004 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 Difficult Development 
Areas, ``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 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, 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 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 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

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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 credits up to a deduction 
equivalent of $25,000 (the actual maximum amount of credit that an 
individual can claim depends upon 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 
``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 Difficult Development Areas or designated Qualified Census 
Tracts, eligible basis can be increased up to 130 percent of 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 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 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 Difficult Development Areas, 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 Difficult Development Area designations on 
data from the preceding year, the basis for these comparisons was the 
2004 HUD income limits for Very Low-Income households (Very Low Income 
Limits, or VLILs) and final FY2004 FMRs used for the Section 8 Housing 
Choice Voucher program. The procedure used in making the Difficult 
Development Area calculations follows:
    1. For each MSA/PMSA and each nonmetropolitan area, a ratio was 
calculated. This calculation used the final FY2004 two-bedroom FMR and 
the 2004 four-person VLIL.
    a. The numerator of the ratio was the area's final FY2004 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 is used for nationwide consistency of 
comparisons.
    b. 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 
nonmetropolitan areas.
    3. The Difficult Development Areas 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 Difficult Development Areas, HUD applied 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 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 Difficult Development Areas, 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

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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, 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.
    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 Difficult Development Areas. Any of the excluded 
counties designated as Difficult Development Areas 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 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 geographical 
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.
    Certain nonmetropolitan county equivalent areas in Alaska for which 
FMRs and VLILs are calculated and thus form the basis of Difficult 
Development Area determinations are no longer recognized as geographic 
entities by the Bureau of the Census. Therefore, no 2000 Census 
population counts are produced for these areas. HUD estimated the 2000 
population of these areas as follows:
    1. The 2000 Population of Denali Borough (1,893) was allocated 
entirely to the Yukon-Koyukuk Census Area. The part of Denali Borough 
created from the Southeast Fairbanks Census Area was deemed uninhabited 
after examination of Census Block data for, and maps of, the area of 
Denali Borough formerly in the Southeast Fairbanks Census Area.
    2. The population of Yakutat City and Borough (808) was allocated 
to the former Skagway-Yakutat-Angoon Census Area (680) and the Valdez-
Cordova Census Area (128). The populations of Yakutat City and Borough 
Census Blocks located east of 141[deg] west longitude were allocated to 
the Skagway-Yakutat-Angoon Census Area. The populations of Yakutat City 
and Borough Census Blocks located west of 141[deg] west longitude were 
allocated to the Valdez-Cordova Census Area.

Future Designations

    Difficult Development Areas are designated annually as updated 
income and FMR data become available.

Effective Date

    The 2005 lists of Difficult Development Areas are effective (1) for 
allocations of credit after December 31, 2004; 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, 2004. If an area is 
not on a subsequent list of Difficult Development Areas, the 2005 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 ``Qualified Census Tracts'' 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 2005 and subsequent designations 
of Difficult Development Areas also applies to the designations of 
Qualified Census Tracts published December 12, 2002 (67 FR 76451), as 
supplemented on December 19, 2003 (68 FR 70982), and subsequent 
designations of Qualified Census Tracts.

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 Difficult Development Area 
status. The examples are equally applicable to future Qualified Census 
Tract designations.
    (Case A): Project ``A'' is located in a 2005 Difficult Development 
Area that is not a designated Difficult Development Area in 2006. A 
complete application for tax credits for Project ``A'' is filed with 
the allocating agency November 15, 2005, which the credit-allocating 
agency certified in writing as complete. Credits are allocated to 
project ``A'' on October 30, 2006. Project ``A'' is eligible for the 
increase in basis accorded a project in a 2005 Difficult Development 
area because the application was filed before January 1, 2006 (the 
assumed effective date for the 2006 Difficult Development Area 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 2005 Difficult Development 
Area that is not a designated Difficult Development Area in 2006. A 
complete application for tax credits for Project ``B'' is filed with 
the allocating agency December 1, 2005, which the credit-allocating 
agency certified in writing as complete. Credits are allocated to 
project ``B'' on March 30, 2007. Project ``B'' is not eligible for the 
increase in basis accorded a project in a 2005 Difficult Development 
area because, although the application for an allocation of tax credits 
was filed before January 1, 2006 (the assumed effective date of the 
2006 Difficult Development Area lists), the tax credits were allocated 
later than the end of the 365-day period after the filing of the 
complete application.

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    (Case C): Project ``C'' is located in a 2005 Difficult Development 
Area that was not a Difficult Development Area in 2004. Project ``C'' 
was placed in service November 15, 2004. A complete application for 
tax-exempt bond financing for Project ``C'' is filed with the bond-
issuing agency on January 15, 2005, which the bond-issuing agency 
certified in writing as complete. The bonds that will support the 
permanent financing of Project ``C'' are issued September 30, 2005. 
Project ``C'' is not eligible for the increase in basis otherwise 
accorded a project in a 2005 Difficult Development Area because the 
project was placed in service before January 1, 2005.
    (Case D): Project ``D'' is located in an area that is a Difficult 
Development Area in 2005, but is not a Difficult Development Area in 
2006. A complete application for tax-exempt bond financing for Project 
``D'' is filed with the bond-issuing agency on October 30, 2005, which 
the bond-issuing agency certified in writing as complete. Bonds are 
issued for Project ``D'' on April 30, 2006, but Project ``D'' is not 
placed in service until January 30, 2007. Project ``D'' is eligible for 
the increase in basis available to projects located in 2005 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 April 30, 2006, 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 Difficult Development Area.

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 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: November 23, 2004.
Alphonso Jackson,
Secretary.
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[FR Doc. 04-26328 Filed 11-29-04; 8:45 am]
BILLING CODE 4210-62-C