Some Areas May Lose Rural Designation
Approximately 55 areas around the country with MTSP income limits lower than the National Non-Metropolitan Income (NNMI) limits are in danger of losing their status as rural areas. These areas are found in the following states: Alabama, Arizona, Arkansas, Florida, Georgia, Idaho, Louisiana, Mississippi, Missouri, North Carolina, Oklahoma, Puerto Rico, South Carolina, Tennessee, and Texas.
Section 3004 of HERA allows LIHTC properties without tax-exempt bonds to use the higher of the MTSP limits or NNMI limits. Properties eligible to use the NNMI limits are held harmless from reductions in income limits from one-year to the next. IRC §142(d)(2)(E) states that the MTSP for a LIHTC property will never be less than the income limit used in the prior year. IRC §42(i)(8) states that for non-tax-exempt bond properties located in a rural area, “any income limitation measured by reference to the Area Median Gross Income (AMGI) shall be measured by reference to the greater of the AMGI or NNMI.” Since AMGI is replaced for LIHTC properties in rural areas by the greater of MTSP or NNMI, use of NNMI or MTSP is held harmless.
However, if a property loses its rural designation, it will no longer be eligible to use the NNMI and will have to use the appropriate MTSP limit. The property would be able to use the highest MTSP limit in place since the project was placed in service, but this still could be less than the NNMI that had been in use.
How is a Rural Area Defined?
Technically, the definition of a rural area is based on the Housing Act of 1949. The Department of Agriculture (UDSA) list of eligible areas is usually an accurate indicator of a rural area, but since USDA has delayed implementation of 2010 census data (the census no longer will provide income information), and some legislative amendments that altered the 1949 Act have expired, care should be taken in depending on the USDA list of rural areas.
Generally, communities with less than 20,000 people and meeting certain other criteria have qualified as rural. In 1983, Congress amended the 1949 Act, “grandfathering” growing rural communities. The most recent legislation in this area allowed communities of up to 25,000 to remain eligible if they were eligible under either the 1990 or 2000 census, but this provision expired on September 30, 2012.
Based on the 2010 census data, approximately 900 areas could be deemed ineligible for rural funding and use of the NNMII income limit benefit. Only if Congress passes a bill extending the safe harbor for formerly rural communities will these 900+ communities continue to qualify as rural areas. The proposed Farm Bill in Congress will deal with this issue, but has not yet been acted upon.
The main impact of losing rural designation on LIHTC properties is that they would no longer have the option of using higher NNMI limits. This would impact existing properties in a number of localities and planned developments, where the higher NNMI income limits are rents are necessary for financial feasibility.
Owners and managers operating under the NNMI should examine whether or not they will be affected by a change in designation and plan accordingly.