21246 Federal Register / Vol. 60, No. 83 / Monday, May 1, 1995 / Notices

DEPARTMENT OF HOUSING AND

URBAN DEVELOPMENT

Office of the Secretary

[Docket No. N-94-3821; FR-3796-N-01]

Statutorily Mandated Designation of

Qualified Census Tracts and Difficult

Development Areas for Section 42 of

the Internal Revenue Code of 1986;

Republication

Editorial Note: FR Doc. 94-26217 was

originally published at 59 FR 53518 in the

issue of Monday, October 24, 1994. In that

publication numerous errors were made. The

corrected document is republished below in

its entirety.

AGENCY: Office of the Secretary, HUD.

ACTION: Notice.

SUMMARY: This document provides

revised designations of ‘‘Qualified

Census Tracts’’ and ‘‘Difficult

Development Areas’’ for purposes of the

Low-Income Housing Tax Credit

(‘‘LIHTC’’) under section 42 of the

Internal Revenue Code of 1986, and

provides the methodology used by the

United States Department of Housing

and Urban Development (‘‘HUD’’). The

new Qualified Census Tract

designations are based on 1990 census

data. The new Difficult Development

Areas are based on FY 1994 Fair Market

Rents (‘‘FMRs’’), FY 1994 income limits

and 1990 census population counts as

explained below.

EFFECTIVE DATE: The lists of Qualified

Census Tracts and Difficult

Development Areas are effective for

allocations of credit made after

December 31, 1994. 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, 1994.

FOR FURTHER INFORMATION CONTACT:

Harold J. Gross, Senior Tax Attorney,

Office of the General Counsel,

Department of Housing and Urban

Development, 451 Seventh Street, S.W.,

Washington, D.C. 20410, telephone

(202) 708–3260, or Kurt G. Usowski,

Economist, Division of Economic

Development and Public Finance, Office

of Policy Development and Research,

Department of Housing and Urban

Development, 451 Seventh Street, S.W.,

Washington, D.C. 20410, telephone

(202) 708–0426. A telecommunications

device for deaf persons (TDD) is

available at (202) 708–9300. (These are

not toll-free telephone numbers.)

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 Qualified Census Tracts and

Difficult Development Areas by section

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

In order to assist in understanding

HUD’s mandated designation of

Qualified Census Tracts and 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 building owners

applying for the credit.

The credit 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% of units must be

rent-restricted and occupied by tenants

with incomes no higher than 50% of the

Area Median Gross Income (‘‘AMGI’’),

or 40% of units must be rent restricted

and occupied by tenants with incomes

no higher than 60% of AMGI. The term

‘‘rent-restricted’’ means that gross rent,

including an allowance for utilities,

cannot exceed 30% of the tenant’s

imputed income limitation (i.e., 50% or

60% of AMGI). The rental restrictions

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 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 or

financed with tax-exempt bonds, or (2)

30 percent of the qualified basis for the

acquisition of existing projects or

projects involving federal subsidies or

financing with tax-exempt bonds. The

actual credit rates were fixed at 9

percent (70 percent present value) and

4 percent (30 percent present value) for

1987, and 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% maximum

marginal tax rate. Individuals cannot

use the credit against the alternative

minimum tax. Corporations, other than

S or professional service corporations,

can use the credit against ordinary

income tax. They cannot use the credit

against the alternative minimum tax.

These corporations can also use the

losses from the project.

The qualified basis represents a

fraction of the ‘‘eligible basis,’’ 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

cost plus the 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. In the case of buildings

located in designated Qualified Census

Tracts or designated Difficult

Development Areas, eligible basis is

increased to 130% of what it would

otherwise be. This means that the

available credit will also be increased by

30%; if the 70% credit is available, it

will effectively be increased to 91%.
Federal Register / Vol. 60, No. 83 / Monday, May 1, 1995 / Notices 21247

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% of households have

an income less than 60% 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% of the total

population of the MSA/PMSA. For

purposes of this rule, all nonmetropolitan areas in a state are treated

as if they constituted a single

metropolitan area.

Section 42 defines a Difficult

Development Area as any area

designated by the Secretary of HUD as

an area that has high construction, land,

and utility costs relative to the AMGI.

Again, limits apply. All designated

Difficult Development Areas in MSAs/

PMSAs may not contain more than 20%

of the aggregate population of all MSAs/

PMSAs, and all designated areas not in

metropolitan areas may not contain

more than 20% of the aggregate

population of the non-metropolitan

counties.

An amendment to section 42 made by

section 11701(a)(2) of the Omnibus

Budget Reconciliation Act of 1990

specifies that the income test for

designation of Qualified Census Tracts

should be based on the most recent

census data. Changes in MSA/PMSA

definitions made after HUD’s last

designation of Qualified Census Tracts

and Difficult Development Areas

necessitate this notice.

Explanation of HUD Designation

Methodology

A. Qualified Census Tracts

In developing this revised list of

LIHTC Qualified Census Tracts, HUD

used 1990 Census data and the MSA/

PMSA definitions established by the

Office of Management and Budget that

applied as of June 30, 1993. Beginning

with the 1990 census, tract-level data

are available for the entire country.

Generally, in metropolitan areas these

geographic divisions are called census

tracts while in most non-metropolitan

areas the equivalent nomenclature is

Block Numbering Area (‘‘BNA’’). BNAs

are treated as census tracts for the

purposes of this Notice.

The LIHTC Qualified Census Tracts

were determined as follows:

1. A census tract must have 50% of

its households with incomes below 60%

of the AMGI to be eligible. HUD has

defined 60% of AMGI income as 120%

of HUD’s Very Low Income Limits, that

are based on 50% of area median family

income, adjusted for high cost and low

income areas. The 1994 income

estimates were then deflated to 1989

dollars, so they would match the 1990

Census income data.

2. For each census tract, the

percentage of households below the

60% income standard was determined

by (a) calculating the average household

size of the census tract, (b) applying the

income standard after adjusting it to

match the average household size, and

(c) calculating the number of

households with incomes below the

income standard.

3. Qualified Census Tracts are those

in which 50% or more of the

households are income eligible and the

population of all census tracts that

satisfy this criterion does not exceed

20% of the total population of the

respective area.

4. In areas where more than 20% of

the population qualifies, census tracts

are ordered from the highest percentage

of eligible households to the lowest.

Starting with the highest percentage,

census tracts are included until the 20%

limit is exceeded. If a census tract is

excluded because it raises the

percentage above 20%, then subsequent

census tracts are considered to

determine if a census tract with a

smaller population could be included

without exceeding the 20% limit.

B. Difficult Development Areas

In developing the list of Difficult

Development Areas, HUD compared

incomes with housing costs. HUD used

1990 Census data and the MSA/PMSA

definitions established by the Office of

Management and Budget that applied as

of June 30, 1993. The basis for these

comparisons was the HUD income

limits 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

1994 two-bedroom FMR and the FY

1994 four-person income limit for Very

Low Income households. The numerator

of the ratio was the ratio of the area FMR

to the FY 1994 U.S. average FMR. The

denominator of the ratio was the ratio of

60% of the AMGI to 60% of the FY 1994

U.S. average of area median gross

incomes.

2. The ratios of the FMR to the income

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% of the 1990

population of all metropolitan areas and

of all non-metropolitan counties.

4. The American Housing Survey data

used to calculate the FMRs for New

York City were adjusted by eliminating

rent-controlled units. The FMRs were

recalculated on the basis of the adjusted

data. Because FMRs are based on recent

mover rents, the FMRs generally reflect

market rents rather than rent-controlled

rents. In this case, the adjustment had

no impact on the FMR.

C. Application of Caps to Qualified

Census Tract and Difficult Development

Area Determinations

In identifying Qualified Census Tracts

and Difficult Development Areas, HUD

applied various caps, or limitations, as

noted above. For Qualified Census

Tracts, section 42(d)(5)(C)(ii)(II) of the

Code specifies that the population of

eligible census tracts within a

metropolitan area cannot exceed 20% of

the population of that metropolitan area.

Similarly, for census tracts/BNAs

located outside metropolitan areas, the

population of eligible census tracts/

BNAs cannot exceed 20% of the

population of the non-metropolitan

counties in a State. The cumulative

population of metropolitan Difficult

Development Areas cannot exceed 20%

of the cumulative population of all

metropolitan areas and the cumulative

population of non-metropolitan Difficult

Development Areas cannot exceed 20%

of the cumulative population of all nonmetropolitan counties.

In applying these caps, HUD

established procedures to deal with two

issues: (1) How to proceed when the

next logical choice for inclusion causes

the cumulative area population to

exceed the cap, and (2) how to treat

small overruns of the caps. The

remainder of this section explains the

procedures.

1. Next choice causes cumulative

population to exceed the cap. In

applying the 20% cap to Qualified

Census Tracts, HUD did not attempt to

break a borderline census tract into

smaller areas. Instead HUD looked tractby-tract down the ranking beyond the

excluded tract to see if a smaller tract

could be included without exceeding

the cap. The approach to Qualified

Census Tracts differs from the treatment

of difficult development metropolitan

areas because of an important difference

in how caps affect each of them. Section

42(d)(5)(C)(ii)(I) of the Code sets a

simple test for eligibility for Qualified
21248 Federal Register / Vol. 60, No. 83 / Monday, May 1, 1995 / Notices

Census Tracts. If a tract’s low income

population exceeds 50% of its total

population, then the tract is eligible

unless it becomes necessary to eliminate

the tract to satisfy the cap. There are

many metropolitan areas and States in

which the population of eligible areas

falls short of 20%. When HUD had to

eliminate tracts to satisfy the 20% cap,

it was choosing among tracts that were

otherwise eligible. By comparison,

section (42)(d)(5)(C) does not specify

under what conditions an area is

automatically a Difficult Development

Area. HUD did not attempt to establish

a threshold for eligibility. Instead HUD

used the 20% cap as a limit on

eligibility.

2. For both Qualified Census Tracts

and Difficult Development Areas, HUD

applied the caps strictly unless a strict

application produced an anomalous

result. Specifically, HUD stopped

selecting areas when it was impossible

to choose another area without

exceeding the applicable cap. The only

exception to this policy was when an

excluded area contained either a large

absolute population or a large

percentage of the total population and

its inclusion resulted in only a minor

overrun of the cap. There were some

cases where the inclusion of an area

would result in a minimal overrun of

the cap; but, in all of these cases, the

exclusion of the area resulted in neither

a large absolute loss of population nor

a large short-fall below 20%. HUD

believes the designation of these areas is

consistent with the intent of the

legislation. Some latitude is justifiable

because it is impossible to really

determine whether the 20% 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%

cap. In circumstances where a strict

application of a 20% cap results in an

anomalous situation, recognition of the

unavoidable imprecision in the census

data justifies accepting small variances

above the 20% limit.

Future Designations

Difficult Development Areas are

designated annually as updated income

and FMR data become available.

Qualified Census Tracts will not be

redesignated until year 2000 census data

become available.

Other Matters

Environmental Review

A finding of No Significant Impact

with respect to the environment has

been made in accordance with HUD

regulations at 24 CFR part 50, that

implement section 102(2)(C) of the

National Environmental Policy Act of

1969. The Finding of No Significant

Impact is available for public inspection

between 7:30 a.m. and 5:30 p.m.

weekdays in the Office of the Rules

Docket Clerk at the above address.

Impact on Small Entities

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’’ and ‘‘Qualified

Census Tracts’’ for use by political

subdivisions of the States in allocating

the LIHTC, as required by section 42 of

the Internal Revenue 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’’ and

‘‘Qualified Census Tracts’’ as required

under section 42 of the Internal Revenue

Code, as amended, for use by political

subdivisions of the States in allocating

the LIHTC. The notice also details the

technical methodology used in making

such designations.

Executive Order 12606, The Family

The General Counsel, as the

Designated Official under Executive

Order 12606, The Family, has

determined that this notice does not

have potential for significant impact on

family formation, maintenance, and

general well-being, and is not subject to

review under the Order. The notice only

designates ‘‘Difficult Development

Areas’’ and ‘‘Qualified Census Tracts’’

as required under section 42 of the

Internal Revenue Code, as amended, for

use by political subdivisions of the

States in allocating the LIHTC. The

notice also details the technical

methodology used in making such

designations.

Dated: October 13, 1994.

Henry G. Cisneros,

Secretary.

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[FR Doc. 94–26217 Filed 10–21–94; 8:45 am]

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