54732 Federal Register / Vol. 62, No. 203 / Tuesday, October 21, 1997 / Notices

DEPARTMENT OF HOUSING AND

URBAN DEVELOPMENT

[Docket No. FR–4287–N–01]

Statutorily Mandated Designation of

Difficult Development Areas for

Section 42 of the Internal Revenue

Code of 1986

AGENCY: Office of the Secretary, HUD.

ACTION: Notice.

SUMMARY: This document provides

revised designations of ‘‘Difficult

Development Areas’’ for purposes of the

Low-Income Housing Tax Credit

(‘‘LIHTC’’) under section 42 of the

Internal Revenue Code of 1986, and

describes the methodology used by the

United States Department of Housing

and Urban Development (‘‘HUD’’). The

new Difficult Development Areas are

based on FY 1997 Fair Market Rents

(‘‘FMRs’’), FY 1997 income limits and

1990 census population counts as

explained below. The corrected

designations of ‘‘Qualified Census

Tracts’’ under section 42 of the Internal

Revenue Code published May 1, 1995

(60 FR 21246) remain in effect.

FOR FURTHER INFORMATION CONTACT:

With questions on how areas are

designated and on geographic

definitions, Kurt G. Usowski,

Economist, Division of Economic

Development and Public Finance, Office

of Policy Development and Research,

Department of Housing and Urban

Development, 451 Seventh Street, SW,

Washington, DC 20410, telephone (202)

708–0426, e-mail

KurtlG.lUsowski@hud.gov. With

specific legal questions pertaining to

section 42 and this notice, Chris Wilson,

Attorney, Office of the Chief Counsel,

Pass Throughs and Special Industries

Branch 5, Internal Revenue Service,

1111 Constitution Ave, NW,

Washington, DC 20244, telephone (202)

622–3040, fax (202) 622–4779; or Harold

J. Gross, Senior Tax Attorney, Office of

the General Counsel, Department of

Housing and Urban Development, 451

Seventh Street, SW, Washington, DC

20410, telephone (202) 708–3260, e-mail

H.lJERRYlGROSS@hud.gov. A

telecommunications device for deaf

persons (TTY) is available at (202) 708–

9300. (These are not toll-free telephone

numbers.) Additional copies of this

notice are available through HUDUSER

at (800) 245–2691 for a small fee to

cover duplication and mailing costs.

COPIES AVAILABLE ELECTRONICALLY: This

notice is available electronically on the

Internet (World Wide Web) at http://

www.huduser.org/ under the heading

‘‘Data Available from HUD.’’

SUPPLEMENTARY INFORMATION:

Background

The U.S. Treasury Department and

the Internal Revenue Service thereof are

authorized to interpret and enforce the

provisions of the Internal Revenue Code

of 1986 (the ‘‘Code’’), including the

Low-Income Housing Tax Credit

(‘‘LIHTC’’) found at section 42 of the

Code, as enacted by the Tax Reform Act

of 1986 (Pub. L. 99–514), as amended by

the Technical and Miscellaneous

Revenue Act of 1988 (Pub. L. 100–647),

as amended by the Omnibus Budget

Reconciliation Act of 1989 (Pub. L. 101–

239), as amended by the Omnibus

Budget Reconciliation Act of 1990 (Pub.

L. 101–508), as amended by the Tax

Extension Act of 1991 (Pub. L. 102–

227), and as amended and made

permanent by the Omnibus Budget

Reconciliation Act of 1993 (Pub. L. 103–

66). The Secretary of HUD is required to

designate Difficult Development Areas

by section 42(d)(5)(C) of the Code.

In order to assist in understanding

HUD’s mandated designation of

Difficult Development Areas for use in

administering section 42 of the Code, a

summary of section 42 is provided. The

following summary does not purport to

bind the Treasury or the IRS in any way,

nor does it purport to bind HUD as HUD

has no authority to interpret or

administer the Code, except in those

instances where it has a specific

delegation.

Summary of Low Income Housing Tax

Credit

The LIHTC is a tax incentive intended

to increase the availability of low

income housing. Section 42 provides an

income tax credit to owners of newly

constructed or substantially

rehabilitated low-income rental housing

projects. The dollar amount of the

LIHTC available for allocation by each

state (the ‘‘credit ceiling’’) is limited by

population. Each state is allocated credit

based on $1.25 per resident. Also, states

may carry forward unused or returned

credit for one year; if not used by then,

credit goes into a national pool to be

allocated to states as additional credit.

State and local housing agencies

allocate the state’s credit ceiling among

low-income housing buildings whose

owners have applied for the credit.

The credit allocated to a building is

based on the cost of units placed in

service as low-income units under

certain minimum occupancy and

maximum rent criteria. In general, a

building must meet one of two

thresholds to be eligible for the LIHTC:

Either 20 percent of units must be rentrestricted 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 rentrestricted means that gross rent,

including an allowance for utilities,

cannot exceed 30 percent of the tenant’s

imputed income limitation (i.e., 50

percent or 60 percent of AMGI). The

rent and occupancy thresholds remain

in effect for at least 15 years, and

building owners are required to enter

into agreements to maintain the low

income character of the building for at

least an additional 15 years.

The LIHTC reduces income tax

liability dollar for dollar. It is taken

annually for a term of ten years and is

intended to yield a present value of

either (1) 70 percent of the ‘‘qualified

basis’’ for new construction or

substantial rehabilitation expenditures

that are not federally subsidized (i.e.,

financed with tax-exempt bonds or

below-market federal loans), or (2) 30

percent of the qualified basis for the

acquisition of existing projects or

projects that are federally subsidized.

The actual credit rates are adjusted

monthly for projects placed in service

after 1987 under procedures specified in

section 42. Individuals can use the

credit up to a deduction equivalent of

$25,000. This equals $9,900 at the 39.6

percent maximum marginal tax rate.

Individuals cannot use the credit against

the alternative minimum tax.

Corporations, other than S or personal

service corporations, can use the credit

against ordinary income tax. They

cannot use the credit against the

alternative minimum tax. These

corporations can also deduct the losses

from the project.

The qualified basis represents the

product of the ‘‘applicable fraction’’ of

the building and the ‘‘eligible basis’’ of

the building. The applicable fraction is

based on the number of low income

units in the building as a percentage of

the total number of units, or based on

the floor space of low income units as

a percentage of the total floor space in

the building. The eligible basis is the

adjusted basis attributable to

acquisition, rehabilitation, or new

construction costs (depending on the

type of LIHTC involved). These costs

include amounts chargeable to capital

account incurred prior to the end of the

first taxable year in which the qualified

low income building is placed in service

or, at the election of the taxpayer, the

end of the succeeding taxable year. In

the case of buildings located in

designated Qualified Census Tracts or

designated Difficult Development Areas,
Federal Register / Vol. 62, No. 203 / Tuesday, October 21, 1997 / Notices 54733

eligible basis can be increased up to 130

percent of what it would otherwise be.

This means that the available credit also

can be increased by up to 30 percent.

For example, if the 70 percent credit is

available, it effectively could be

increased up to 91 percent.

Under section 42(d)(5)(C) of the Code,

a Qualified Census Tract is any census

tract (or equivalent geographic area

defined by the Bureau of the Census) in

which at least 50 percent of households

have an income less than 60 percent of

the AMGI. There is a limit on the

amount of Qualified Census Tracts in

any Metropolitan Statistical Area

(‘‘MSA’’) or Primary Metropolitan

Statistical Area (‘‘PMSA’’) that may be

designated to receive an increase in

eligible basis: All of the designated

census tracts within a given MSA/

PMSA may not together contain more

than 20 percent of the total population

of the MSA/PMSA. For purposes of

HUD designations of Qualified Census

Tracts, all non-metropolitan areas in a

state are treated as if they constituted a

single metropolitan area. This Notice

does not redesignate Qualified Census

Tracts. The corrected designation of

Qualified Census Tracts published May

1, 1995, at 60 FR 21246 remains in

effect. Qualified Census Tracts will not

be redesignated until data from the 2000

census become available.

Section 42 defines a Difficult

Development Area as any area

designated by the Secretary of HUD as

an area that has high construction, land,

and utility costs relative to the AMGI.

Again, limits apply. All designated

Difficult Development Areas in MSAs/

PMSAs may not contain more than 20

percent of the aggregate population of

all MSAs/PMSAs, and all designated

areas not in metropolitan areas may not

contain more than 20 percent of the

aggregate population of all nonmetropolitan counties.

Explanation of HUD Designation

Methodology

A. Difficult Development Areas

In developing the list of Difficult

Development Areas, HUD compared

incomes with housing costs. HUD used

1990 Census data and the MSA/PMSA

definitions as published by the Office of

Management and Budget (‘‘OMB’’) in

OMB Bulletin No. 96–08 on June 28,

1996, with the exceptions described in

section C., below. The basis for these

comparisons was the fiscal year (‘‘FY’’)

1997 HUD income limits for Very Low

Income households (‘‘VLILs’’) and Fair

Market Rents (‘‘FMRs’’) used for the

section 8 Housing Assistance Payments

Program. The procedure used in making

these calculations follows:

1. For each MSA/PMSA and each

non-metropolitan county, a ratio was

calculated. This calculation used the FY

1997 two-bedroom FMR and the FY

1997 four-person VLIL. The numerator

of the ratio was the area’s FY 1997 FMR.

The denominator of the ratio was the

monthly LIHTC income-based rent limit

calculated as 1/12 of 30 percent of 120

percent of the area’s VLIL (where 120

percent of the VLIL was rounded to the

nearest $50 and not allowed to exceed

80 percent of the AMGI in areas where

the VLIL is adjusted upward from its 50

percent of AMGI base).

2. The ratios of the FMR to the LIHTC

income-based rent limit were arrayed in

descending order, separately, for MSAs/

PMSAs and for non-metropolitan

counties.

3. The Difficult Development Areas

are those with the highest ratios

cumulative to 20 percent of the 1990

population of all metropolitan areas and

of all non-metropolitan counties.

B. Application of Population Caps to

Difficult Development Area

Determinations

In identifying Difficult Development

Areas, HUD applied various caps, or

limitations, as noted above. The

cumulative population of metropolitan

Difficult Development Areas cannot

exceed 20 percent of the cumulative

population of all metropolitan areas and

the cumulative population of

nonmetropolitan Difficult Development

Areas cannot exceed 20 percent of the

cumulative population of all

nonmetropolitan counties.

In applying these caps, HUD

established procedures to deal with how

to treat small overruns of the caps. The

remainder of this section explains the

procedure. In general, HUD stops

selecting areas when it is impossible to

choose another area without exceeding

the applicable cap. The only exceptions

to this policy are when the next eligible

excluded area contains either a large

absolute population or a large

percentage of the total population, or

the next excluded area’s ranking ratio as

described above was identical (to three

decimal places) to the last area selected,

and its inclusion resulted in only a

minor overrun of the cap. Thus for both

the designated metropolitan and

nonmetropolitan Difficult Development

Areas there are minimal overruns of the

caps. HUD believes the designation of

these additional areas is consistent with

the intent of the legislation. Some

latitude is justifiable because it is

impossible to determine whether the 20

percent cap has been exceeded, as long

as the apparent excess is small, due to

measurement error. Despite the care and

effort involved in a decennial census, it

is recognized by the Census Bureau, and

all users of the data, that the population

counts for a given area and for the entire

country are not precise. The extent of

the measurement error is unknown.

Thus, there can be errors in both the

numerator and denominator of the ratio

of populations used in applying a 20

percent cap. In circumstances where a

strict application of a 20 percent cap

results in an anomalous situation,

recognition of the unavoidable

imprecision in the census data justifies

accepting small variances above the 20

percent limit.

C. Exceptions to OMB Definitions of

MSAs/PMSAs and Other Geographic

Matters

As stated in OMB Bulletin 96–08 defining

metropolitan areas: ‘‘OMB establishes and

maintains the definitions of the

(Metropolitan Areas) MAs solely for

statistical purposes * * * OMB does not take

into account or attempt to anticipate any

nonstatistical uses that may be made of the

definitions * * * We recognize that some

legislation specifies the use of metropolitan

areas for programmatic purposes, including

allocating Federal funds.’’

HUD makes exceptions to OMB

definitions in calculating FMRs by

deleting counties from metropolitan

areas whose OMB definitions are

determined by HUD to be larger than

their housing market areas. In addition,

HUD is required by statute to calculate

a separate FMR and VLIL for

Westchester County, New York, which

OMB includes as part of the New York,

NY PMSA. The following counties are

assigned their own FMRs and VLILs and

evaluated as if they were separate

metropolitan areas for purposes of

designating Difficult Development

Areas.

Metropolitan Area and Counties Deleted

Atlanta, GA: Carrol, Pickens, and

Walton Counties.

Chicago, IL: DeKalb, Grundy, and

Kendall Counties.

Cincinnati-Hamilton, OH–KY–IN:

Brown County, Ohio; Gallatin,

Grant, and Pendleton Counties,

Kentucky; and Ohio County,

Indiana.

Dallas, TX: Henderson County.

Flagstaff, AZ–UT: Kane County, Utah.

New York, NY: Westchester County.

New Orleans, LA: St. James Parish.

Washington, DC–MD–VA–WV: Clarke,

Culpeper, King George, and Warren

Counties, Virginia; and Berkely and

Jefferson Counties, West Virginia.

Affected MSAs/PMSAs are assigned

the indicator ‘‘(part)’’ in the list of
54734 Federal Register / Vol. 62, No. 203 / Tuesday, October 21, 1997 / Notices

Metropolitan Difficult Development

Areas. Any of the excluded counties

designated as difficult development

areas separately from their metropolitan

areas are designated by the county

name.

Finally, in the New England states

(Connecticut, Maine, Massachusetts,

New Hampshire, Rhode Island, and

Vermont) OMB defines MSAs/PMSAs

according to county subdivisions or

Minor Civil Divisions (‘‘MCDs’’) rather

than county boundaries. Thus, when a

New England county is designated as a

Nonmetropolitan Difficult Development

Area, only that part of the county (the

group of MCDs) not included in any

MSA/PMSA is the Nonmetropolitan

Difficult Development Area. Affected

counties are assigned the indicator

‘‘(part)’’ in the list of Nonmetropolitan

Difficult Development Areas.

For the convenience of readers of this

Notice, the geographic definitions of

designated Metropolitan Difficult

Development Areas and the MCDs

included in Nonmetropolitan Difficult

Development Areas in the New England

states are included in the list of Difficult

Development Areas.

Future Designations

Difficult Development Areas are

designated annually as updated income

and FMR data become available.

Qualified Census Tracts will not be

redesignated until data from the 2000

census become available.

Effective Date

The list of Difficult Development

Areas is effective for allocations of

credit made after December 31, 1997. In

the case of a building described in

Internal Revenue Code section

42(h)(4)(B), the list is effective if the

bonds are issued and the building is

placed in service after December 31,

1997. The corrected designations of

Qualified Census Tracts published May

1, 1995, at 60 FR 21246 remain in effect.

Interpretive Examples for Effective Date

For the convenience of readers of this

Notice, interpretive examples are

provided below to illustrate the

consequences of the effective date in

areas that gain or lose Difficult

Development Area status with respect to

projects described in Internal Revenue

Code section 42(h)(4)(B).

(Case A) Project ‘‘A’’ is located in a

newly-designated 1998 Difficult

Development Area. Bonds are issued for

Project ‘‘A’’ on November 1, 1997, but

Project ‘‘A’’ is placed in service March

1, 1998. Project ‘‘A’’ IS NOT eligible for

the increase in basis otherwise accorded

a project in this location because the

bonds were issued BEFORE December

31, 1997.

(Case B) Project ‘‘B’’ is located in a

newly-designated 1998 Difficult

Development Area. Project ‘‘B’’ is

placed in service November 15, 1997.

The bonds which will support the

permanent financing of Project ‘‘B’’ are

issued January 15, 1998. Project ‘‘B’’ IS

NOT eligible for the increase in basis

otherwise accorded a project in this

location because the project was placed

in service BEFORE December 31, 1997.

(Case C) Project ‘‘C’’ is located in an

area which is a Difficult Development

Area in 1998, but IS NOT a Difficult

Development Area in 1999. Bonds are

issued for Project ‘‘C’’ on October 30,

1998, but Project ‘‘C’’ is not placed in

service until March 30, 1999. Project

‘‘C’’ is eligible for the increase in basis

available to projects located in 1998

Difficult Development Areas because

both events (bonds issued and project

placed in service) have occurred AFTER

December 31, 1997.

Other Matters

Environmental Impact

In accordance with 40 CFR 1508.4 of

the CEQ regulations and 24 CFR 50.20

of the HUD regulations, the policies and

actions in this notice are determined not

to have the potential of having a

significant impact on the quality of

human environment and therefore

further environmental review under the

National Environmental Policy Act is

not necessary.

Regulatory Flexibility Act

In accordance with 5 U.S.C. 605(b)

(the Regulatory Flexibility Act), the

undersigned hereby certifies that this

notice does not have a significant

economic impact on a substantial

number of small entities. The notice

involves the designation of ‘‘Difficult

Development Areas’’ for use by political

subdivisions of the States in allocating

the LIHTC, as required by section 42 of

the Code, as amended. This notice

places no new requirements on the

States, their political subdivisions, or

the applicants for the credit. This notice

also details the technical methodology

used in making such designations.

Executive Order 12612, Federalism

The General Counsel, as the

Designated Official under section 6(a) of

Executive Order 12612, Federalism, has

determined that the policies contained

in this notice will not have any

substantial direct effects on States or

their political subdivisions, or the

relationship between the Federal

government and the States, or on the

distribution of power and

responsibilities among the various

levels of government. As a result, the

notice is not subject to review under the

order. The notice merely designates

‘‘Difficult Development Areas’’ for the

use by political subdivisions of the

States in allocating the LIHTC, as

required under section 42 of the Internal

Revenue Code, as amended. The notice

also details the technical methodology

used in making such designations.

Dated: October 14, 1997.

Andrew M. Cuomo,

Secretary.

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[FR Doc. 97–27769 Filed 10–20–97; 8:45 am]

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