[Federal Register Volume 85, Number 186 (Thursday, September 24, 2020)]
[Notices]
[Pages 60255-60261]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-21041]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-6235-N-01]


Statutorily Mandated Designation of Difficult Development Areas 
and Qualified Census Tracts for 2021

AGENCY: Office of the Assistant Secretary for Policy Development and 
Research, Housing and Urban Development (HUD).

ACTION: Notice.

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SUMMARY: This document designates ``Difficult Development Areas'' 
(DDAs) and ``Qualified Census Tracts'' (QCTs) for purposes of the Low-
Income Housing Credit (LIHTC) under Internal Revenue Code (IRC) Section 
42. The United States Department of Housing and Urban Development (HUD) 
makes new DDA and QCT designations annually.

FOR FURTHER INFORMATION CONTACT: For questions on how areas are 
designated and on geographic definitions, contact Michael K. Hollar, 
Senior Economist, Public Finance and Regulatory Analysis Division, 
Office of Policy Development and Research, Department of Housing and 
Urban Development, 451 Seventh Street SW, Room 8216, Washington, DC 
20410-6000; telephone number 202-402-5878, or send an email to 
[email protected]. For specific legal questions pertaining to 
Section 42, Office of the Associate Chief Counsel, Passthroughs and 
Special Industries, Internal Revenue Service, 1111 Constitution Avenue 
NW, Washington, DC 20224; telephone number 202-317-4137. For questions 
about the ``HUBZone'' program, contact Bruce Purdy, Deputy Director, 
HUBZone Program, Office of Government Contracting and Business 
Development, U.S. Small Business Administration, 409 Third Street SW, 
Suite 8800, Washington, DC 20416; telephone number 202-205-7554, or 
send an email to [email protected]. (These are not toll-free telephone 
numbers.) A text telephone is available for persons with hearing or 
speech impairments at 800-877-8339. Additional copies of this notice 
are available through HUD User at 800-245-2691 for a small fee to cover 
duplication and mailing costs.

SUPPLEMENTARY INFORMATION: 
    Copies Available Electronically: This notice and additional 
information about DDAs and QCTs including the lists of DDAs and QCTs 
are available electronically on the internet at https://www.huduser.gov/portal/datasets/qct.html.

I. This Notice

    Under IRC Section 42(d)(5)(B)(iii)(I), for purposes of the LIHTC, 
the Secretary of HUD must designate DDAs, which are areas with high 
construction, land, and utility costs relative to area median gross 
income (AMGI). This notice designates DDAs 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. HUD makes the 
designations of DDAs in this notice based on modified Fiscal Year (FY) 
2020 Small Area Fair Market Rents (Small Area FMRs), FY 2020 
nonmetropolitan county FMRs, FY 2020 income limits, and 2010 Census 
population counts, as explained below.
    Similarly, under IRC Section 42(d)(5)(B)(ii)(I), the Secretary of 
HUD must designate QCTs, which are areas where either 50 percent or 
more of the households have an income less than 60 percent of the AMGI 
for such year or have a poverty rate of at least 25 percent. This 
notice designates QCTs based on new income and poverty data released in 
the American Community Survey (ACS). Specifically, HUD relies on the 
most recent three sets of ACS data to ensure that anomalous estimates, 
due to sampling, do not affect the QCT status of tracts.

II. Data Used To Designate DDAs

    HUD uses data from the 2010 Census on total population of 
metropolitan areas, metropolitan ZIP Code Tabulation Areas (ZCTAs), and 
nonmetropolitan areas in the designation of DDAs. The Office of 
Management and Budget (OMB) published updated metropolitan areas in OMB 
Bulletin No. 15-01 on July 15, 2015. FY 2020 FMRs and FY 2020 income 
limits HUD uses to designate DDAs are based on these metropolitan 
statistical area (MSA) definitions, with modifications to account for 
substantial differences in rental housing markets (and, in some cases, 
median income levels) within MSAs. HUD calculates Small Area FMRs for 
the ZCTAs, or portions of ZCTAs within the metropolitan areas defined 
by OMB Bulletin No. 15-01.

III. Data HUD Uses To Designate QCTs

    HUD uses data from the 2010 Census on total population of census 
tracts, metropolitan areas, and the nonmetropolitan parts of states in 
the designation of QCTs. The FY 2020 income limits HUD uses to 
designate QCTs are based on these MSA definitions with modifications to 
account for substantial differences in rental housing markets (and in 
some cases median income levels) within MSAs. In this QCT designation, 
HUD uses the OMB metropolitan area definitions published in OMB 
Bulletin No. 15-01 on July 15, 2015, without modification for purposes 
of evaluating how many census tracts can be designated under the 
population cap but uses the HUD-modified definitions and their 
associated area median incomes for determining QCT eligibility.
    Because the 2010 Decennial Census did not include questions on 
respondent household income, HUD uses ACS data to designate QCTs. The 
ACS tabulates data collected over 5 years to provide estimates of 
socioeconomic variables for small areas containing fewer than 65,000 
persons, such as census tracts. Due to sample-related anomalies in 
estimates from year to year, HUD utilizes three sets of ACS tabulations 
to ensure that anomalous estimates do not affect QCT status.

IV. Disaster Relief

    On March 13, 2020, the President issued major disaster declarations 
under the authority of the Stafford Act with respect to all 50 States, 
the District of Columbia, and 5 territories (American Samoa, Guam, 
Puerto Rico, Northern Mariana Islands, and the U.S. Virgin Islands) to 
assist with additional needs identified under the nationwide emergency 
declaration for COVID-19. In the context of a Presidentially-declared 
Major Disaster, IRS Revenue Procedure 2014-49, 2014-37 I.R.B. 535, 
provides

[[Page 60256]]

temporary relief to housing finance agencies (HFAs) and owners from 
certain requirements of IRC Section 42 in the context of a 
Presidentially-declared Major Disaster. Among the relief provided, if 
an owner has a carryover allocation for a building located in a Major 
Disaster Area and the Major Disaster occurs on or after the date of the 
carryover allocation, an HFA may grant an extension to the placed in 
service requirement. Rev. Proc. 2014-49, Section 6.03.
    As explained below, HUD's effective date definition allows an owner 
to qualify for the basis boost if a property is placed in service 
within 730 days of the receipt of the complete application by the HFA 
or the issuer of tax-exempt bonds (bond-issuing agency) and the 
property was located in a QCT or DDA at the time that the complete 
application was accepted. If an owner with a carryover allocation 
receives an extension under IRS Revenue Procedure 2014-49, the owner is 
eligible for the basis boost as long as (1) the building is placed in 
service before the expiration of the extension period, (2) the 
extension is granted within HUD's 730-day grace period, and (3) the 
other conditions of the QCT/DDA eligibility rules were already met.

V. Background

    The U.S. Department of the Treasury (Treasury) and the Internal 
Revenue Service (IRS) are authorized to interpret and enforce the 
provisions of IRC Section 42. In order to assist in understanding HUD's 
mandated designation of DDAs and QCTs for use in administering IRC 
Section 42, a summary of the section is provided below. The following 
summary does not purport to bind Treasury or the IRS in any way, nor 
does it purport to bind HUD, since HUD has authority to interpret or 
administer the IRC only in instances where it receives explicit 
statutory delegation.

VI. Summary of the Low-Income Housing Credit

A. Determining Eligibility

    The LIHTC is a tax incentive intended to increase the availability 
of low-income rental housing. IRC Section 42 provides an income tax 
credit to certain 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. Section 42 allows each state a credit ceiling 
based on a statutory formula indicated at IRC Section 42(h)(3). States 
may carry forward unallocated credits derived from the credit ceiling 
for one year; however, to the extent such unallocated credits are not 
used by then, the credits go into a national pool to be allocated to 
qualified 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 IRC Section 42 
credits derived from the credit ceiling, states may also provide IRC 
Section 42 credits to owners of buildings based on the percentage of 
certain building costs financed by tax-exempt bond proceeds. Credits 
provided based on the use of tax-exempt bond proceeds do not reduce the 
credits available from the credit ceiling. See IRC Section 42(h)(4).
    The credits allocated to a building are based on the cost of units 
placed in service as low-income units under particular minimum 
occupancy and maximum rent criteria. Prior to the enactment of the 
Consolidated Appropriations Act of 2018 (the 2018 Act), under IRC 
Section 42(g), a building was required to meet one of two tests to be 
eligible for the LIHTC; either: (1) 20 percent of the units must be 
rent-restricted and occupied by tenants with incomes no higher than 50 
percent of AMGI, or (2) 40 percent of the units must be rent-restricted 
and occupied by tenants with incomes no higher than 60 percent of AMGI. 
A unit is ``rent-restricted'' if the gross rent, including an allowance 
for tenant-paid utilities, does not exceed 30 percent of the imputed 
income limitation (i.e., 50 percent or 60 percent of AMGI) applicable 
to that unit. 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 2018 Act added a third test, the average income test. See IRC 
Section 42(g)(1), as amended by Public Law 115-141, Section 103(a)(1), 
Division T (March 23, 2018). A building meets the minimum requirements 
of the average income test if 40 percent or more (25 percent or more in 
the case of a project located in a high cost housing area as described 
in IRS Section 142(d)(6)) of the residential units in such project are 
both rent-restricted and occupied by individuals whose income does not 
exceed the imputed income limitation designated by the taxpayer with 
respect to the respective unit. The taxpayer designates the imputed 
income limitation for each unit. The designated imputed income 
limitation of any unit is determined in 10-percentage-point increments, 
and may be designated as 20, 30, 40, 50, 60, 70, or 80 percent of AMGI. 
The average of the imputed income limitations designated must not 
exceed 60 percent of AMGI. See IRC Section 42(g)(1)(C).

B. Calculating the LIHTC

    The LIHTC reduces income tax liability dollar-for-dollar. It is 
taken annually for a term of 10 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 (as defined in IRC Section 42(i)(2)), or (2) 
30 percent of the qualified basis for the cost of acquiring certain 
existing buildings or projects that are federally subsidized. The tax 
credit rates are determined monthly under procedures specified in IRC 
Section 42 and cannot be less than 9 percent for new buildings that are 
not federally subsidized. 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 on the individual's marginal tax 
rate). For buildings placed in service after December 31, 2007, 
individuals can use the credits against the alternative minimum tax. 
Corporations, other than S or personal service corporations, can use 
the credits against ordinary income tax, and, for buildings placed in 
service after December 31, 2007, against the alternative minimum tax. 
These corporations also can deduct losses from the project.
    The qualified basis represents the product of the building's 
``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 DDAs or designated QCTs, or buildings designated by the 
state agency, eligible basis can be increased up to 130 percent from 
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

[[Page 60257]]

available, it effectively could be increased to as much as 91 percent 
(70 percent x 130 percent).

C. Defining Difficult Development Areas (DDAs) and Qualified Census 
Tracts (QCTs)

    As stated above, IRC Section 42 defines a DDA as an area designated 
by the Secretary of HUD that has high construction, land, and utility 
costs relative to the AMGI. All designated DDAs 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. See IRC Section 
42(d)(5)(B)(iii).
    Similarly, IRC Section 42 defines a QCT as an area designated by 
the Secretary of HUD where, for the most recent year for which census 
data are available on household income in such tract, either 50 percent 
or more of the households in the tract have an income which is less 
than 60 percent of the AMGI or the tract's poverty rate is at least 25 
percent. All designated QCTs in a single metropolitan area or 
nonmetropolitan area (taken together) may not contain more than 20 
percent of the population of that metropolitan or nonmetropolitan area. 
Thus, unlike the restriction on DDA designations, QCTs are restricted 
by the total population of each individual area as opposed to the 
aggregate population across all metropolitan areas and nonmetropolitan 
areas. See IRC Section 42(d)(5)(B)(ii).
    IRC Section 42(d)(5)(B)(v) allows states to award an increase in 
basis up to 30 percent to buildings located outside of federally 
designated DDAs and QCTs if the increase is necessary to make the 
building financially feasible. This state discretion applies only to 
buildings allocated credits under the state housing credit ceiling and 
is not permitted for buildings receiving credits entirely in connection 
with tax-exempt bonds. Rules for such designations shall be set forth 
in the LIHTC-allocating agencies' qualified allocation plans (QAPs). 
See IRC Section 42(m).

VII. Explanation of HUD Designation Method

A. 2021 Difficult Development Areas

    In developing the 2021 list of DDAs, as required by IRC Section 
42(d)(5)(B)(iii), HUD compared housing costs with incomes. HUD used 
2010 Census population for ZCTAs, and nonmetropolitan areas, and the 
MSA definitions, as published in OMB Bulletin 15-01 on July 15, 2015, 
with modifications, as described below. In keeping with past practice 
of basing the coming year's DDA designations on data from the preceding 
year, the basis for these comparisons is the FY 2020 HUD income limits 
for very low-income households (very low-income limits, or VLILs), 
which are based on 50 percent of AMGI, and modified FMRs based on the 
FY 2020 FMRs used for the Housing Choice Voucher (HCV) program. For 
metropolitan DDAs, HUD used Small Area FMRs based on three annual 
releases of ACS data, to compensate for statistical anomalies which 
affect estimates for some ZCTAs. For non-metropolitan DDAs, HUD used 
the FY 2020 FMRs released on August 30, 2019 and effective on October 
1, 2019 (84 FR 45789) as updated by the March 11, 2020 publication 
effective April 10, 2020 (85 FR 14235).
    In formulating the FY 2020 FMRs and VLILs, HUD modified the current 
OMB definitions of MSAs to account for differences in rents among areas 
within each current MSA that were in different FMR areas under 
definitions used in prior years. HUD formed these ``HUD Metro FMR 
Areas'' (HMFAs) in cases where one or more of the parts of newly 
defined MSAs were previously in separate FMR areas. All counties added 
to metropolitan areas are treated as HMFAs with rents and incomes based 
on their own county data, where available. HUD no longer requires 
recent-mover rents to differ by five percent or more in order to form a 
new HMFA. All HMFAs are contained entirely within MSAs. All 
nonmetropolitan counties are outside of MSAs and are not broken up by 
HUD for purposes of setting FMRs and VLILs. (Complete details on HUD's 
process for determining FY 2020 FMR areas and FMRs are available at 
https://www.huduser.gov/portal/datasets/fmr.html#2020. Complete details 
on HUD's process for determining FY 2020 income limits are available at 
https://www.huduser.gov/portal/datasets/il.html#2020.)
    HUD's unit of analysis for designating metropolitan DDAs consists 
of ZCTAs, whose Small Area FMRs are compared to metropolitan VLILs. For 
purposes of computing VLILs in metropolitan areas, HUD considers entire 
MSAs in cases where these were not broken up into HMFAs; and HMFAs 
within the MSAs that were broken up for such purposes. Hereafter in 
this notice, the unit of analysis for designating metropolitan DDAs 
will be called the ZCTA, and the unit of analysis for nonmetropolitan 
DDAs will be the nonmetropolitan county or county equivalent area. The 
procedure used in making the DDA designations follows:
    1. Calculate FMR-to-Income Ratios. For each metropolitan ZCTA and 
each nonmetropolitan county, HUD calculated a ratio of housing costs to 
income. HUD used a modified FY 2020 two-bedroom Small Area FMR for 
ZCTAs, a modified FY 2020 two-bedroom FMR for non-metropolitan 
counties, and the FY 2020 four-person VLIL for this calculation.
    The modified FY 2020 two-bedroom Small Area FMRs for ZCTAs differ 
from the FY 2020 Small Area FMRs in four ways. First, HUD did not limit 
the Small Area FMR to 150 percent of its metropolitan area FMR. Second, 
HUD did not limit annual decreases in Small Area FMRs to ten percent, 
which was first applied in the FY 2018 FMR calculations. Third, HUD 
adjusted the Small Area FMRs in New York City using the New York City 
Housing and Vacancy Survey, which is conducted by the U.S. Census 
Bureau, to adjust for the effect of local rent control and 
stabilization regulations. No other jurisdictions have provided HUD 
with data that could be used to adjust Small Area FMRs for rent control 
or stabilization regulations.\1\ Finally, the Small Area FMRs are not 
limited to the State non-metropolitan minimum FMR.
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    \1\ HUD encourages other jurisdictions with rent control laws 
that affect rents paid by recent movers into existing units to 
contact HUD about what data might be provided or collected to adjust 
Small Area FMRs in those jurisdictions.
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    The FY 2020 two-bedroom FMR for non-metropolitan counties was 
modified only by removing the state non-metropolitan minimum FMR.
    The numerator of the ratio, representing the development cost of 
housing, was the area's FY 2020 FMR, or Small Area FMR in metropolitan 
areas. In general, the FMR is based on the 40th-percentile gross rent 
paid by recent movers to live in a two-bedroom rental unit.
    The denominator of the ratio, representing the maximum income of 
eligible tenants, was the monthly LIHTC income-based rent limit, which 
was calculated as 1/12 of 30 percent of 120 percent of the area's VLIL 
(where 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. Sort Areas by Ratio and Exclude Unsuitable Areas. The ratios of 
the FMR, or Small Area FMR, to the LIHTC income-based rent limit were 
arrayed in descending order, separately, for ZCTAs and for 
nonmetropolitan counties. ZCTAs with populations less than 100

[[Page 60258]]

were excluded in order to avoid designating areas unsuitable for 
residential development, such as ZCTAs containing airports.
    3. Select Areas with Highest Ratios and Exclude QCTs. The DDAs are 
those areas with the highest ratios that cumulatively comprise 20 
percent of the 2010 population of all metropolitan areas and all 
nonmetropolitan areas. For purposes of applying this population cap, 
HUD excluded the population in areas designated as 2021 QCTs. Thus, an 
area can be designated as a QCT or DDA, but not both.

B. Application of Population Caps to DDA Determinations

    In identifying DDAs, HUD applied caps, or limitations, as noted 
above. The cumulative population of metropolitan DDAs cannot exceed 20 
percent of the cumulative population of all metropolitan areas, and the 
cumulative population of nonmetropolitan DDAs 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 those procedures. 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 DDAs, there may be minimal overruns of the cap. HUD 
believes the designation of additional areas in the above examples of 
minimal overruns is consistent with the intent of the IRC. 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. Therefore, the extent of the 
measurement error is unknown. 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. Qualified Census Tracts

    In developing the list of QCTs, HUD used 2010 Census 100-percent 
count data on total population, total households, and population in 
households; the median household income and poverty rate as estimated 
in the 2012-2016, 2013-2017 and 2014-2018 ACS tabulations; the FY 2020 
Very Low-Income Limits (VLILs) computed at the HMFA level to determine 
tract eligibility; and the MSA definitions published in OMB Bulletin 
No. 15-01 on July 15, 2015, for determining how many eligible tracts 
can be designated under the statutory 20 percent population cap.
    HUD uses the HMFA-level AMGIs to determine QCT eligibility because 
the statute, specifically IRC Section 42(d)(5)(B)(iv)(II), refers to 
the same section of the IRC that defines income for purposes of tenant 
eligibility and unit maximum rent, specifically IRC Section 42(g)(4). 
By rule, the IRS sets these income limits according to HUD's VLILs, 
which, starting in FY 2006 and thereafter, are established at the HMFA 
level. HUD uses the entire MSA to determine how many eligible tracts 
can be designated under the 20 percent population cap as required by 
the statute (IRC Section 42(d)(5)(B)(ii)(III)), which states that MSAs 
should be treated as singular areas.
    HUD determined the QCTs as follows:
    1. Calculate 60 percent AMGI. To be eligible to be designated a 
QCT, a census tract must have 50 percent of its households with incomes 
below 60 percent of AMGI or have a poverty rate of 25 percent or more. 
Due to potential statistical anomalies in the ACS 5-year estimates, one 
of these conditions must be met in at least 2 of the 3 ACS 5-year 
tabulations for a tract to be considered eligible for QCT designation. 
HUD calculates 60 percent of AMGI by multiplying by a factor of 1.2 the 
HMFA or nonmetropolitan county FY 2020 VLIL adjusted for inflation to 
match the ACS estimates, which are adjusted to the value of the dollar 
in the last year of the 5-year group.
    2. Determine Whether Census Tracts Have Less Than 50 Percent of 
Households Below 60 percent AMGI. For each census tract, whether or not 
50 percent of households have incomes below the 60 percent income 
standard (income criterion) was determined by: (a) Calculating the 
average household size of the census tract, (b) adjusting the income 
standard to match the average household size, and (c) comparing the 
average-household-size-adjusted income standard to the median household 
income for the tract reported in each of the three years of ACS 
tabulations (2012-2016, 2013-2017 and 2014-2018). HUD did not consider 
estimates of median household income to be statistically reliable 
unless the margin of error was less than half of the estimate (or a 
Margin of Error Ratio, MoER, of 50 percent or less). If at least two of 
the three estimates were not statistically reliable by this measure, 
HUD determined the tract to be ineligible under the income criterion 
due to lack of consistently reliable median income statistics across 
the three ACS tabulations. Since 50 percent of households in a tract 
have incomes above and below the tract median household income, if the 
tract median household income is less than the average-household-size-
adjusted income standard for the tract, then more than 50 percent of 
households have incomes below the standard.
    3. Estimate Poverty Rate. For each census tract, HUD determined the 
poverty rate in each of the three releases of ACS tabulations (2012-
2016, 2013-2017 and 2014-2018) by dividing the population with incomes 
below the poverty line by the population for whom poverty status has 
been determined. As with the evaluation of tracts under the income 
criterion, HUD applies a data quality standard for evaluating ACS 
poverty rate data in designating the 2021 QCTs. HUD did not consider 
estimates of the poverty rate to be statistically reliable unless both 
the population for whom poverty status has been determined and the 
number of persons below poverty had MoERs of less than 50 percent of 
the respective estimates. If at least two of the three poverty rate 
estimates were not statistically reliable, HUD determined the tract to 
be ineligible under the poverty rate criterion due to lack of reliable 
poverty statistics across the ACS tabulations.
    4. Designate QCTs Where 20 Percent or Less of Population Resides in 
Eligible Census Tracts. QCTs are those census tracts in which 50 
percent or more of the households meet the income criterion in at least 
two of the three years evaluated, or 25 percent or more of the 
population is in poverty in at least two of the three years evaluated, 
such that the population of all census tracts that satisfy either one 
or both of these criteria does not exceed 20 percent of the total 
population of the respective area.
    5. Designate QCTs Where More Than 20 Percent of Population Resides 
in Eligible Census Tracts. In areas where

[[Page 60259]]

more than 20 percent of the population resides in eligible census 
tracts, census tracts are designated as QCTs in accordance with the 
following procedure:
    a. The statistically reliable income and poverty criteria are each 
averaged over the three ACS tabulations (2012-2016, 2013-2017 and 2014-
2018). Statistically reliable values that did not exceed the income and 
poverty rate thresholds were included in the average.
    b. Eligible tracts are placed in one of two groups based on the 
averaged values of the income and poverty criteria. The first group 
includes tracts that satisfy both the income and poverty criteria for 
QCTs for at least two of the three evaluation years; a different pair 
of years may be used to meet each criterion. The second group includes 
tracts that satisfy either the income criterion in at least two of the 
three years, or the poverty criterion in at least two of three years, 
but not both. A tract must qualify by at least one of the criteria in 
at least two of the three evaluation years to be eligible.
    c. HUD ranked tracts in the first group from highest to lowest by 
the average of the ratios of the tract average-household-size-adjusted 
income limit to the median household income. Then, HUD ranked tracts in 
the first group from highest to lowest by the average of the poverty 
rates. HUD averaged the two ranks to yield a combined rank. HUD then 
sorted the tracts on the combined rank, with the census tract with the 
highest combined rank being placed at the top of the sorted list. In 
the event of a tie, HUD ranked more populous tracts above less populous 
ones.
    d. HUD ranked tracts in the second group from highest to lowest by 
the average of the ratios of the tract average-household-size-adjusted 
income limit to the median household income. Then, HUD ranked tracts in 
the second group from highest to lowest by the average of the poverty 
rates. HUD then averaged the two ranks to yield a combined rank. HUD 
then sorted the tracts on the combined rank, with the census tract with 
the highest combined rank being placed at the top of the sorted list. 
In the event of a tie, HUD ranked more populous tracts above less 
populous ones.
    e. HUD stacked the ranked first group on top of the ranked second 
group to yield a single, concatenated, ranked list of eligible census 
tracts.
    f. Working down the single, concatenated, ranked list of eligible 
tracts, HUD identified census tracts as designated until the 
designation of an additional tract would cause the 20 percent limit to 
be exceeded. If HUD does not designate a census tract because doing so 
would raise the percentage above 20 percent, HUD then considers 
subsequent eligible census tracts to determine if one or more eligible 
census tract(s) with smaller population(s) could be designated without 
exceeding the 20 percent limit.

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

    As stated in OMB Bulletin 15-01, defining metropolitan areas:

    ``OMB establishes and maintains the delineations of Metropolitan 
Statistical Areas, . . . solely for statistical purposes. . . . OMB 
does not take into account or attempt to anticipate any non-
statistical uses that may be made of the delineations, [.] In cases 
where . . . an agency elects to use the Metropolitan . . . Area 
definitions in nonstatistical programs, it is the sponsoring 
agency's responsibility to ensure that the delineations are 
appropriate for such use. An agency using the statistical 
delineations in a nonstatistical program may modify the 
delineations, but only for the purposes of that program. In such 
cases, any modifications should be clearly identified as 
delineations from the OMB statistical area delineations in order to 
avoid confusion with OMB's official definitions of Metropolitan . . 
. Statistical Areas.''

    Following OMB guidance, HUD's estimation procedure for the FMRs and 
income limits incorporates the current OMB definitions of metropolitan 
Core-Based Statistical Areas (CBSAs) based on the CBSA standards, as 
implemented with 2010 Census data, but makes adjustments to the 
definitions, in order to separate subparts of these areas in cases 
where counties were added to an existing or newly defined metropolitan 
area. In CBSAs where HUD establishes subareas, it is HUD's view that 
the geographic extent of the housing markets is not the same as the 
geographic extent of the CBSAs.
    In the New England states (Connecticut, Maine, Massachusetts, New 
Hampshire, Rhode Island, and Vermont), HUD defines HMFAs according to 
county subdivisions or minor civil divisions (MCDs), rather than county 
boundaries. However, since no part of an HMFA is outside an OMB-
defined, county-based MSA, all New England nonmetropolitan counties are 
kept intact for purposes of designating Nonmetropolitan DDAs.

VIII. Future Designations

    HUD designates DDAs annually as updated HUD income limit and FMR 
data are made public. HUD designates QCTs annually as new income and 
poverty rate data are released.

A. Effective Date

    The 2021 lists of QCTs and DDAs are effective:
    (1) For allocations of credit after December 31, 2020; or
    (2) for purposes of IRC Section 42(h)(4), if the bonds are issued 
and the building is placed in service after December 31, 2020.
    If an area is not on a subsequent list of QCTs or DDAs, the 2021 
lists are effective for the area if:
    (1) The allocation of credit to an applicant is made no later than 
the end of the 730-day period after the applicant submits a complete 
application to the LIHTC-allocating agency, and the submission is made 
before the effective date of the subsequent lists; or
    (2) for purposes of IRC Section 42(h)(4), if:
    (a) The bonds are issued or the building is placed in service no 
later than the end of the 730-day period after the applicant submits a 
complete application to the bond-issuing agency, and
    (b) 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 by the credit-allocating 
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.
    In the case of a ``multiphase project,'' the DDA or QCT status of 
the site of the project that applies for all phases of the project is 
that which applied when the project received its first allocation of 
LIHTC. For purposes of IRC Section 42(h)(4), the DDA or QCT status of 
the site of the project that applies for all phases of the project is 
that which applied when the first of the following occurred: (a) The 
building(s) in the first phase were placed in service, or (b) the bonds 
were issued.
    For purposes of this notice, a ``multiphase project'' is defined as 
a set of buildings to be constructed or rehabilitated under the rules 
of the LIHTC and meeting the following criteria:
    (1) The multiphase composition of the project (i.e., total number 
of buildings and phases in project, with a description of how many 
buildings are to be built in each phase and when each

[[Page 60260]]

phase is to be completed, and any other information required by the 
agency) is made known by the applicant in the first application of 
credit for any building in the project, and that applicant identifies 
the buildings in the project for which credit is (or will be) sought;
    (2) the aggregate amount of LIHTC applied for on behalf of, or that 
would eventually be allocated to, the buildings on the site exceeds the 
one-year limitation on credits per applicant, as defined in the 
Qualified Allocation Plan (QAP) of the LIHTC-allocating agency, or the 
annual per-capita credit authority of the LIHTC allocating agency, and 
is the reason the applicant must request multiple allocations over 2 or 
more years; and
    (3) all applications for LIHTC for buildings on the site are made 
in immediately consecutive years.
    Members of the public are hereby reminded that the Secretary of 
Housing and Urban Development, or the Secretary's designee, has legal 
authority to designate DDAs and QCTs, by publishing lists of geographic 
entities as defined by, in the case of DDAs, the Census Bureau, the 
several states and the governments of the insular areas of the United 
States and, in the case of QCTs, by the Census Bureau; and to establish 
the effective dates of such lists. The Secretary of the Treasury, 
through the IRS thereof, has sole legal authority to interpret, and to 
determine and enforce compliance with the IRC and associated 
regulations, including Federal Register notices published by HUD for 
purposes of designating DDAs and QCTs. Representations made by any 
other entity as to the content of HUD notices designating DDAs and QCTs 
that do not precisely match the language published by HUD should not be 
relied upon by taxpayers in determining what actions are necessary to 
comply with HUD notices.

B. 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 QCT or DDA status. The 
examples covering DDAs are equally applicable to QCT designations.
    (Case A) Project A is located in a 2021 DDA that is NOT a 
designated DDA in 2022 or 2023. A complete application for tax credits 
for Project A is filed with the allocating agency on November 15, 2021. 
Credits are allocated to Project A on October 30, 2023. Project A is 
eligible for the increase in basis accorded a project in a 2021 DDA 
because the application was filed BEFORE January 1, 2022 (the assumed 
effective date for the 2022 DDA lists), and because tax credits were 
allocated no later than the end of the 730-day period after the filing 
of the complete application for an allocation of tax credits.
    (Case B) Project B is located in a 2021 DDA that is NOT a 
designated DDA in 2022 or 2023. A complete application for tax credits 
for Project B is filed with the allocating agency on December 1, 2021. 
Credits are allocated to Project B on March 30, 2024. Project B is NOT 
eligible for the increase in basis accorded a project in a 2021 DDA 
because, although the application for an allocation of tax credits was 
filed BEFORE January 1, 2022 (the assumed effective date of the 2022 
DDA lists), the tax credits were allocated later than the end of the 
730-day period after the filing of the complete application.
     (Case C) Project C is located in a 2021 DDA that was not a DDA in 
2020. Project C was placed in service on November 15, 2020. A complete 
application for tax-exempt bond financing for Project C is filed with 
the bond-issuing agency on January 15, 2021. The tax-exempt bonds that 
will support the permanent financing of Project C are issued on 
September 30, 2021. Project C is NOT eligible for the increase in basis 
otherwise accorded a project in a 2021 DDA, because the project was 
placed in service BEFORE January 1, 2021.
    (Case D) Project D is located in an area that is a DDA in 2021 but 
is NOT a DDA in 2022 or 2023. A complete application for tax-exempt 
bond financing for Project D is filed with the bond-issuing agency on 
October 30, 2021. Tax-exempt bonds are issued for Project D on April 
30, 2023, but Project D is not placed in service until January 30, 
2024. Project D is eligible for the increase in basis available to 
projects located in 2021 DDAs because: (1) One of the two events 
necessary for triggering the effective date for buildings described in 
Section 42(h)(4)(B) of the IRC (the two events being tax-exempt bonds 
issued and buildings placed in service) took place on April 30, 2023, 
within the 730-day period after a complete application for tax-exempt 
bond financing was filed, (2) the application was filed during a time 
when the location of Project D was in a DDA, and (3) both the issuance 
of the tax-exempt bonds and placement in service of Project D occurred 
after the application was submitted.
    (Case E) Project E is a multiphase project located in a 2021 DDA 
that is NOT a designated DDA or QCT in 2022. The first phase of Project 
E received an allocation of credits in 2021, pursuant to an application 
filed March 15, 2021, which describes the multiphase composition of the 
project. An application for tax credits for the second phase of Project 
E is filed with the allocating agency by the same entity on March 15, 
2022. The second phase of Project E is located on a contiguous site. 
Credits are allocated to the second phase of Project E on October 30, 
2022. The aggregate amount of credits allocated to the two phases of 
Project E exceeds the amount of credits that may be allocated to an 
applicant in one year under the allocating agency's QAP and is the 
reason that applications were made in multiple phases. The second phase 
of Project E is, therefore, eligible for the increase in basis accorded 
a project in a 2021 DDA, because it meets all of the conditions to be a 
part of a multiphase project.
    (Case F) Project F is a multiphase project located in a 2021 DDA 
that is NOT a designated DDA in 2022 or 2023. The first phase of 
Project F received an allocation of credits in 2021, pursuant to an 
application filed March 15, 2021, which does not describe the 
multiphase composition of the project. An application for tax credits 
for the second phase of Project F is filed with the allocating agency 
by the same entity on March 15, 2023. Credits are allocated to the 
second phase of Project F on October 30, 2023. The aggregate amount of 
credits allocated to the two phases of Project F exceeds the amount of 
credits that may be allocated to an applicant in one year under the 
allocating agency's QAP. The second phase of Project F is, therefore, 
NOT eligible for the increase in basis accorded a project in a 2021 
DDA, since it does not meet all of the conditions for a multiphase 
project, as defined in this notice. The original application for 
credits for the first phase did not describe the multiphase composition 
of the project. Also, the application for credits for the second phase 
of Project F was not made in the year immediately following the first 
phase application year.
    (Case G) Project G is located in a 2018 DDA that is NOT a 
designated DDA or QCT in 2020 or 2021. A complete application for tax 
credits for Project G was filed with the allocating agency on May 1, 
2018. Credits are allocated to Project G on June 1, 2018. Due to COVID-
19 restrictions, the property cannot be completed and placed in service 
by April 30, 2020. The owner contacts the allocating agency and 
requests an extension under IRS Revenue Procedure 2014-49. The 
allocating agency grants an extension of

[[Page 60261]]

one year to the placed-in-service requirements on April 15, 2020. The 
property is placed into service on January 30, 2021. Project G is 
eligible for the increase in basis because the owner received an 
extension from the state allocating agency prior to the end of the 730-
day period and the property was placed in service within the extension 
granted under Revenue Procedure 2014-49.
Findings and Certifications
Environmental Impact
    This notice involves the establishment of fiscal requirements or 
procedures that are related to rate and cost determinations and do not 
constitute a development decision affecting the physical condition of 
specific project areas or building sites. Accordingly, under 40 CFR 
1508.4 of the regulations of the Council on Environmental Quality and 
24 CFR 50.19(c)(6) of HUD's regulations, this notice is categorically 
excluded from environmental review under the National Environmental 
Policy Act of 1969 (42 U.S.C. 4321).
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 DDAs and QCTs as required under IRC Section 
42, as amended, for the use by political subdivisions of the states in 
allocating the LIHTC. This notice also details the technical methods 
used in making such designations. As a result, this notice is not 
subject to review under the order.

Seth D. Appleton,
Assistant Secretary for Policy Development and Research.
[FR Doc. 2020-21041 Filed 9-23-20; 8:45 am]
BILLING CODE 4210-67-P