[Federal Register Volume 63, Number 236 (Wednesday, December 9, 1998)]
[Notices]
[Pages 68116-68127]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32561]
[[Page 68115]]
_______________________________________________________________________
Part III
Department of Housing and Urban Development
_______________________________________________________________________
Statutorily Mandated Designation of Difficult Development Areas, and
Supplemental Designation of Qualified Census Tracts, for Section 42 of
the Internal Revenue Code of 1986; Notice
Federal Register / Vol. 63, No. 236 / Wednesday, December 9, 1998 /
Notices
[[Page 68116]]
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
[Docket No. FR-4401-N-01]
Statutorily Mandated Designation of Difficult Development Areas,
and Supplemental Designation of Qualified Census Tracts, 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'' and
supplemental ``Qualified Census Tracts'' for purposes of the Low-Income
Housing Tax Credit (``LIHTC'') under section 42 of the Internal Revenue
Code of 1986. The United States Department of Housing and Urban
Development (``HUD'') makes new Difficult Development Area designations
annually and makes supplemental designations of Qualified Census Tracts
at this time because of recent legislation. The corrected designations
of ``Qualified Census Tracts'' under section 42 of the Internal Revenue
Code published May 1, 1995 (60 FR 21246), as amended by the
supplemental designations of ``Qualified Census Tracts'' under section
42 of the Internal Revenue Code published June 25, 1998 (63 FR 34748),
are not affected by this Notice.
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, S.W., Washington, D.C. 20410, telephone (202) 708-
0426, e-mail Kurt__G.__Usowski@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, N.W.,
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, S.W.,
Washington, D.C. 20410, telephone (202) 708-3260, e-mail
[email protected] For questions about the ``HUBZones'' program,
Michael P. McHale, Assistant Administrator for Procurement Policy,
Office of Government Contracting, Suite 8800, Small Business
Administration, 409 Third Street, S.W., Washington, D.C. 20416,
telephone (202) 205-6731, fax (202) 205-7324, e-mail
michael.mchale@sba.gov. 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 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 HUDUser.''
SUPPLEMENTARY INFORMATION:
This Document
The designations of Difficult Development Areas in this document
are based on FY 1998 Fair Market Rents (``FMRs''), FY 1998 income
limits and 1990 census population counts as explained below. Section
508(c) of the Quality Housing and Work Responsibility Act of 1998 (Pub.
L. 105-276, approved October 21, 1998) requires HUD to treat certain
areas differently in making Difficult Development Area designations
than they had been treated in past designations. The designations of
Qualified Census Tracts in newly designated metropolitan areas and the
nonmetropolitan parts of States affected by the most recent
metropolitan area designation and for the U.S. Territories of the
Virgin Islands, American Samoa, Guam, Northern Marianas Islands, and
Palau, are made necessary by the recently enacted ``HUBZones''
provisions of the Small Business Reauthorization Act of 1997, which
incorporate section 42 Qualified Census Tracts by reference. These
designations are made based on 1990 Census data.
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 (26
U.S.C. 42) as amended. 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 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 rent-restricted and occupied by tenants with incomes no higher
than 50 percent of the Area Median Gross Income (``AMGI''), or 40
percent of units must be rent restricted and occupied by tenants with
incomes no higher than 60 percent of AMGI. The term ``rent-restricted''
means that gross rent, including an allowance for utilities, cannot
exceed 30 percent of the tenant's imputed income limitation (i.e., 50
percent or 60 percent of AMGI). The rent and occupancy thresholds
remain in effect for at least 15 years, and building owners are
required to enter into agreements to maintain the low income character
of the building for at least an additional 15 years.
The LIHTC reduces income tax liability dollar for dollar. It is
taken annually for a term of ten years and is intended to yield a
present value of either (1) 70 percent of the ``qualified basis'' for
new construction or substantial rehabilitation expenditures that are
not federally subsidized (i.e., financed with tax-exempt bonds or
below-market federal loans), or (2) 30 percent of the qualified basis
for the acquisition of existing projects or projects that are federally
subsidized. The actual credit rates are adjusted monthly for projects
placed in service
[[Page 68117]]
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, 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.
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 non-
metropolitan counties.
In the last general designation of Qualified Census Tracts
published May 1, 1995 (60 FR 21246), no tract designations were made in
the U.S. Territories of the Virgin Islands, American Samoa, Guam,
Northern Marianas Islands, and Palau, because they were all designated
``Difficult Development Areas'' under section 42 of the Internal
Revenue Code--making the designation of Qualified Census Tract
superfluous. HUD is again designating the U.S. Territories of the
Virgin Islands, American Samoa, Guam, Northern Marianas Islands, and
Palau, as Difficult Development Areas and expects them to maintain
their eligibility for designation for the foreseeable future. However,
the recently enacted ``HUBZones'' provisions of the Small Business
Reauthorization Act of 1997 (111 Stat. 2627) incorporate section 42
Qualified Census Tracts by reference, making it necessary to revise the
designation of Qualified Census Tracts to ensure legal compliance with
this new program. The following changes in MSA/PMSA definitions were
made after HUD's last designation of Qualified Census Tracts.
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New MSA (MSA No.) Component counties
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Missoula, MT MSA (5140).................. Missoula
County, MT.
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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 (``OMB'') in OMB Bulletin No. 98-06
on June 23, 1998. 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 as
120% of HUD's Very Low Income Limits (VLILs), which 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 as published by the Office of Management and Budget in OMB
Bulletin No. 98-06 on June 23, 1998, with the exceptions described in
section C., below. The basis for these comparisons was the fiscal year
(``FY'') 1998 HUD income limits for Very Low Income Households and Fair
Market Rents (``FMRs'') used for the section 8 Housing Assistance
Payments Program. The procedure used in making these calculations
follows:
1. For each MSA/PMSA and each non-metropolitan county, a ratio was
calculated. This calculation used the FY 1998 two-bedroom FMR and the
FY 1998 four-person VLIL. The numerator of the ratio was the area's FY
1998 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
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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.
C. Application of Population Caps to Difficult Development Area
Determinations
In identifying Difficult Development Areas and Qualified Census
Tracts, HUD applied various caps, or limitations, as noted above. The
cumulative population of metropolitan Difficult Development Areas
cannot exceed 20 percent of the cumulative population of all
metropolitan areas and the cumulative population of nonmetropolitan
Difficult Development Areas cannot exceed 20 percent of the cumulative
population of all nonmetropolitan counties.
For Qualified Census Tracts, section 42(d)(5)(C)(ii)(II) of the
Code specifies that the population of designated census tracts within a
metropolitan area cannot exceed 20% of the population of that
metropolitan area. Similarly, for census tracts/block numbering areas
(BNAs) located outside metropolitan areas, the population of designated
census tracts/BNAs cannot exceed 20% of the population of the non-
metropolitan counties in a State or equivalent area.
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 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.
D. Exceptions to OMB Definitions of MSAs/PMSAs and Other Geographic
Matters
As stated in OMB Bulletin 98-06 defining metropolitan areas:
OMB establishes and maintains the definitions of the
[Metropolitan Areas] solely for statistical purposes * * * OMB does
not take into account or attempt to anticipate any nonstatistical
uses that may be made of the definitions * * * We recognize that
some legislation specifies the use of metropolitan areas for
programmatic purposes, including allocating Federal funds.
HUD makes exceptions to OMB definitions in calculating FMRs by deleting
counties from metropolitan areas whose OMB definitions are determined
by HUD to be larger than their housing market areas.
The following counties are assigned their own FMRs and VLILs and
evaluated as if they were separate metropolitan areas for purposes of
designating Difficult Development Areas.
Metropolitan Area and Counties Deleted
Chicago, IL: DeKalb, Grundy, and Kendall Counties.
Cincinnati-Hamilton, OH-KY-IN: Brown County, Ohio; Gallatin, Grant,
and Pendleton Counties, Kentucky; and Ohio County, Indiana.
Dallas, TX: Henderson County.
Flagstaff, AZ-UT: Kane County, Utah.
New Orleans, LA: St. James Parish.
Washington, DC-MD-VA-WV: Clarke, Culpeper, King George, and Warren
Counties, Virginia; and Berkely and Jefferson Counties, West Virginia.
Affected MSAs/PMSAs are assigned the indicator ``(part)'' in the
list of Metropolitan Difficult Development Areas. Any of the excluded
counties designated as difficult development areas separately from
their metropolitan areas are designated by the county name.
Finally, in the New England states (Connecticut, Maine,
Massachusetts, New Hampshire, Rhode Island, and Vermont) OMB defines
MSAs/PMSAs according to county subdivisions or Minor Civil Divisions
(``MCDs'') rather than county boundaries. Thus, when a New England
county is designated as a Nonmetropolitan Difficult Development Area,
only that part of the county (the group of MCDs) not included in any
MSA/PMSA is the Nonmetropolitan Difficult Development Area. Affected
counties are assigned the indicator ``(part)'' in the list of
Nonmetropolitan Difficult Development Areas.
For the convenience of readers of this notice, the geographic
definitions of designated Metropolitan Difficult Development Areas and
the MCDs included in Nonmetropolitan Difficult Development Areas in the
New England states are included in the list of Difficult Development
Areas.
Future Designations
Difficult Development Areas are designated annually as updated
income and FMR data become available. Qualified Census Tracts will not
be redesignated until data from the 2000 census become available unless
changes in MSA/PMSA definitions are made by OMB in the interim.
Effective Date
The list of Difficult Development Areas and the supplemental list
of Qualified Census Tracts is effective for allocations of credit made
after December 31, 1998. 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, 1998. The corrected designations of Qualified Census Tracts
published May 1, 1995, at 60 FR 21246, as amended by the supplemental
designation of Qualified Census tracts published June 25, 1998, at 63
FR 34748, are not affected by this Notice.
Interpretive Examples for Effective Date
For the convenience of readers of this Notice, interpretive
examples are provided below to illustrate the consequences of the
effective date in areas that gain or lose Difficult Development Area
status with respect to projects described in Internal Revenue Code
section 42(h)(4)(B). The examples are equally applicable to Qualified
Census Tract designations.
(Case A) Project ``A'' is located in a newly-designated 1999
Difficult Development Area. Bonds are issued for Project ``A'' on
November 1, 1998, but Project ``A'' is placed in service March
[[Page 68119]]
1, 1999. 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, 1999.
(Case B) Project ``B'' is located in a newly-designated 1999
Difficult Development Area. Project ``B'' is placed in service November
15, 1998. The bonds which will support the permanent financing of
Project ``B'' are issued January 15, 1999. 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,
1998.
(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
50.19(c)(6) of the HUD regulations, the policies and procedures
contained in this notice provide for the establishment of fiscal
requirements or procedures which do not constitute a development
decision that affects the physical condition of specific project areas
or building sites and therefore, are categorically excluded from the
requirements of the National Environmental Policy Act, except for
extraordinary circumstances, and no FONSI is required.
Regulatory Flexibility Act
In accordance with 5 U.S.C. section 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'' as required by
section 42 of the Code, as amended, for use by political subdivisions
of the States in allocating the LIHTC. This notice places no new
requirements on 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'' as required under
section 42 of the Internal Revenue Code, as amended, for the 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 29, 1998.
Andrew M. Cuomo,
Secretary.
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[FR Doc. 98-32561 Filed 12-8-98; 8:45 am]
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