HUD Notice on Designation of Difficult Development Areas and Qualified Census Tracts for 2016

 

On November 24, 2015, HUD issued a Notice in the Federal Register designating “Difficult Development Areas” (DDAs) and “Qualified Census Tracts” (QCTs) for purposes of the Low-Income Housing Tax Credit Program (LIHTC). For the first time, HUD is using Small Area Fair Market Rents (SAFMRs), rather than metropolitan area Fair Market Rents (FMRs) for the designation of metropolitan DDAs. The notice extends from 365 days to 730 days the period for which the 2016 list of QCTs and DDAs are effective for projects located in areas not on a subsequent list of DDAs or QCTs, but having submitted applications while the area was a 2016 QCT or DDA. The effective date of the new QCTs and DDAs will be July 1, 2016.

 

The 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.

 

The notice outlines the methodology used in determining the DDAs and QCTs, which include 2010 Census population counts, and American Community Survey data.

 

Determining whether a LIHTC project is located in a DDA or QCT may be critical to project feasibility, since buildings located in designated DDAs or QCTs may receive an increase in eligible basis of up to 30% over the cost certified eligible basis of the building.

 

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 median income in the area.

 

To be designated as a QCT, a census tract must have 50% of its households with incomes below 60% of the Area Median Gross Income (AMGI) or have a poverty rate of 25% or more.

One of these two conditions must be met in at least two of the three evaluation years for a tract to be considered eligible for QCT designation.

 

Future Designations

 

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

 

The 2016 lists of QCTs and DDAs are effective:

1. For allocations of credit after June 30, 2016; or
2. For purposes of IRC §42(h)(4), if the tax-exempt bonds are issued and the building is placed in service after June 30, 2016.

If an area is not on a subsequent list of QCTs or DDAs, the 2016 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 §42(h)(4), if:
   1. 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
   2. 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.

 

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 credits. For purposes of IRC §42(h)(4), the DDA or QCT status 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.

 

A “multiphase project” must be made known by the applicant in the first application of credit for any building in the project, and the applicant must identify the buildings in the project for which credit is (or will be) sought. Also, the aggregate amount of credit applied for on behalf of, or that would eventually be allocated to, the buildings on the site must exceed the one-year limitation on credits per applicant (as defined in the Qualified Allocation Plan), or the annual per-capital credit authority of the state agency. This must also be the reason the applicant must request multiple allocations over two or more years, and the applications for credit must be made in immediately consecutive years.

 

The notice provides interpretive examples of how the effective date will work based on various scenarios, and owners that may be affected by a change in DDA or QCT designation should become familiar with how the effective dates will work.

 

The actual list of HUD DDAs and QCTs may be found at HUDUSER.ORG.