83 FR 53282 - Statutorily Mandated Designation of Difficult Development Areas and Qualified Census Tracts for 2019

DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Federal Register Volume 83, Issue 204 (October 22, 2018)

This document designates ``Difficult Development Areas'' (DDAs) and ``Qualified Census Tracts'' (QCTs) for purposes of the Low- Income Housing Tax Credit (LIHTC) under Internal Revenue Code (IRC) Section 42, as enacted by the Tax Reform Act of 1986. The United States Department of Housing and Urban Development (HUD) makes new DDA and QCT designations annually.

[Federal Register Volume 83, Number 204 (Monday, October 22, 2018)]
[Notices]
[Pages 53282-53288]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2018-23000]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-6129-N-01]


Statutorily Mandated Designation of Difficult Development Areas 
and Qualified Census Tracts for 2019

AGENCY: Office of the Assistant Secretary for Policy Development and 
Research, HUD.

ACTION: Notice.

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SUMMARY: This document designates ``Difficult Development Areas'' 
(DDAs) and ``Qualified Census Tracts'' (QCTs) for purposes of the Low-
Income Housing Tax Credit (LIHTC) under Internal Revenue Code (IRC) 
Section 42, as enacted by the Tax Reform Act of 1986. The United States 
Department of Housing and Urban Development (HUD) makes new DDA and QCT 
designations annually.

FOR FURTHER INFORMATION CONTACT: For questions on how areas are 
designated and on geographic definitions, contact Michael K. Hollar, 
Senior Economist, Economic Development and Public Finance Division, 
Office of Policy Development and Research, Department of Housing and 
Urban Development, 451 Seventh Street SW, Room 8216, Washington, DC 
20410-6000; telephone number 202-402-5878, or send an email to 
[email protected]. For specific legal questions pertaining to 
Section 42, contact Branch 5, Office of the Associate Chief Counsel, 
Passthroughs and Special Industries, Internal Revenue Service, 1111 
Constitution Avenue NW, Washington, DC 20224; telephone number 202-317-
4137, fax number 202-317-6731. For questions about the ``HUBZone'' 
program, contact Mariana Pardo, Director, HUBZone Program, Office of 
Government Contracting and Business Development, U.S. Small Business 
Administration, 409 Third Street, SW, Suite 8800, Washington, DC 20416; 
telephone number 202-205-2985, fax number 202-481-6443, or send an 
email to [email protected]. (These are not toll-free telephone numbers.) 
A text telephone is available for persons with hearing or speech 
impairments at 800-877-8339. Additional copies of this

[[Page 53283]]

notice are available through HUD User at 800-245-2691 for a small fee 
to cover duplication and mailing costs.
    Copies Available Electronically: This notice and additional 
information about DDAs and QCTs are available electronically on the 
internet at http://www.huduser.org/datasets/qct.html.

SUPPLEMENTARY INFORMATION: 

I. This Notice

    Under 26 U.S.C. 42(d)(5)(B)(iii), for purposes of the LIHTC, the 
Secretary of HUD must designate DDAs, which are areas with high 
construction, land, and utility costs relative to area median gross 
income. This 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 designations of DDAs 
in this notice are based on modified Fiscal Year (FY) 2018 Small Area 
Fair Market Rents (Small Area FMRs), FY2018 nonmetropolitan county 
FMRs, FY2018 income limits, and 2010 Census population counts, as 
explained below.
    Similarly, under 26 U.S.C. 42(d)(5)(B)(ii), the Secretary of HUD 
must designate QCTs, which are areas where either 50 percent or more of 
the households have an income less than 60 percent of the area median 
gross income for such year or have a poverty rate of at least 25 
percent. This notice designates QCTs based on new income and poverty 
data released in the American Community Survey (ACS). Specifically, HUD 
relies on the most recent three sets of ACS data to ensure that 
anomalous estimates, due to sampling, do not affect the QCT status of 
tracts.

II. Data Used To Designate DDAs

    Data from the 2010 Census on total population of metropolitan 
areas, metropolitan Zip Code Tabulation Areas (ZCTAs), and 
nonmetropolitan areas are used in the designation of DDAs. The Office 
of Management and Budget (OMB) first published new metropolitan area 
definitions incorporating 2010 Census data in OMB Bulletin No. 15-01 on 
July 15, 2015. FY2018 FMRs and FY2018 income limits used to designate 
DDAs are based on these metropolitan statistical area (MSA) 
definitions, with modifications to account for substantial differences 
in rental housing markets (and, in some cases, median income levels) 
within MSAs. Small Area FMRs are calculated for the ZCTAs, or portions 
of ZCTAs within the metropolitan areas defined by OMB Bulletin No. 15-
01.

III. Data Used To Designate QCTs

    Data from the 2010 Census on total population of census tracts, 
metropolitan areas, and the nonmetropolitan parts of states are used in 
the designation of QCTs. The FY2018 income limits used to designate 
QCTs are based on these MSA definitions with modifications to account 
for substantial differences in rental housing markets (and in some 
cases median income levels) within MSAs. This QCT designation uses the 
OMB metropolitan area definitions published in OMB Bulletin No. 15-01 
on July 15, 2015, without modification for purposes of evaluating how 
many census tracts can be designated under the population cap, but uses 
the HUD-modified definitions and their associated area median incomes 
for determining QCT eligibility.
    Because the 2010 Decennial Census did not include questions on 
respondent household income, HUD uses ACS data to designate QCTs. The 
ACS tabulates data collected over 5 years to provide estimates of 
socioeconomic variables for small areas containing fewer than 65,000 
persons, such as census tracts. Due to sample-related anomalies in 
estimates from year to year, HUD utilizes three sets of ACS tabulations 
to ensure that anomalous estimates do not affect QCT status.

IV. Background

    The U.S. Department of the Treasury (Treasury) and its Internal 
Revenue Service (IRS) are authorized to interpret and enforce the 
provisions of the LIHTC found at IRC Section 42. In order to assist in 
understanding HUD's mandated designation of DDAs and QCTs for use in 
administering IRC Section 42, a summary of the section is provided 
below. The following summary does not purport to bind Treasury or the 
IRS in any way, nor does it purport to bind HUD, since HUD has 
authority to interpret or administer the IRC only in instances where it 
receives explicit statutory delegation.

V. Summary of the Low-Income Housing Tax Credit

A. Determining Eligibility

    The LIHTC is a tax incentive intended to increase the availability 
of low-income rental housing. IRC Section 42 provides an income tax 
credit to certain owners of newly constructed or substantially 
rehabilitated low-income rental housing projects. The dollar amount of 
the LIHTC available for allocation by each state (credit ceiling) is 
limited by population. Each state is allowed a credit ceiling based on 
a statutory formula indicated at IRC Section 42(h)(3). States may carry 
forward unallocated credits derived from the credit ceiling for one 
year; however, to the extent such unallocated credits are not used by 
then, the credits go into a national pool to be redistributed 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. Besides IRC Section 42 credits derived 
from the credit ceiling, states may also provide IRC Section 42 credits 
to owners of buildings based on the percentage of certain building 
costs financed by tax-exempt bond proceeds. Credits provided under the 
tax-exempt bond ``volume cap'' do not reduce the credits available from 
the credit ceiling.
    The credits allocated to a building are based on the cost of units 
placed in service as low-income units under particular minimum 
occupancy and maximum rent criteria. Prior to the enactment of the 
Consolidated Appropriations Act of 2018 (Act), under IRC Section 42(h), 
a building was required to meet one of two tests to be eligible for the 
LIHTC; either: (1) 20 percent of the units must be rent-restricted and 
occupied by tenants with incomes no higher than 50 percent of the Area 
Median Gross Income (AMGI), or (2) 40 percent of the units must be 
rent-restricted and occupied by tenants with incomes no higher than 60 
percent of AMGI. A unit is ``rent-restricted'' if the gross rent, 
including an allowance for tenant-paid utilities, does not exceed 30 
percent of the imputed income limitation (i.e., 50 percent or 60 
percent of AMGI) applicable to that unit. 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 Act added a third test, the average income test. See Sec.  
42(g)(1), as amended by section 103(a)(1), Division T, of the Act. A 
building meets the minimum requirements of the average income test if 
40 percent or more (25 percent or more in the case of a project located 
in a high cost housing area as described in IRS Section 142(d)(6)) of 
the residential units in such project are both rent-restricted and 
occupied by individuals whose income does not exceed the imputed income 
limitation designated by the taxpayer with respect to the respective 
unit. The taxpayer designates the imputed income limitation for each 
unit. The designated imputed income limitation of any unit is 
determined in 10-percentage-point increments, and may be designated as

[[Page 53284]]

20, 30, 40, 50, 60, 70, or 80 percent of area median gross income. The 
average of the imputed income limitations designated must not exceed 60 
percent of area median gross income. See Sec.  42(g)(1)(C), as amended 
by section 103(a)(2), Division T, of the Act.

B. Calculating the LIHTC

    The LIHTC reduces income tax liability dollar-for-dollar. It is 
taken annually for a term of 10 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 (as defined in IRC Section 42(i)(2)), or (2) 
30 percent of the qualified basis for the cost of acquiring certain 
existing buildings or projects that are federally subsidized. The tax 
credit rates are determined monthly under procedures specified in IRC 
Section 42 and cannot be less than 9 percent for new buildings that are 
not federally subsidized. Individuals can use the credits up to a 
deduction equivalent of $25,000 (the actual maximum amount of credit 
that an individual can claim depends on the individual's marginal tax 
rate). For buildings placed in service after December 31, 2007, 
individuals can use the credits against the alternative minimum tax. 
Corporations, other than S or personal service corporations, can use 
the credits against ordinary income tax, and, for buildings placed in 
service after December 31, 2007, against the alternative minimum tax. 
These corporations also can deduct losses from the project.
    The qualified basis represents the product of the building's 
``applicable fraction'' and its ``eligible basis.'' 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 of 
residential units 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 a capital account that are 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 DDAs or designated QCTs, or buildings designated by the 
state agency, eligible basis can be increased up to 130 percent from 
what it would otherwise be. This means that the available credits also 
can be increased by up to 30 percent. For example, if a 70 percent 
credit is available, it effectively could be increased to as much as 91 
percent (70 percent x 130 percent).

C. Defining Difficult Development Areas (DDAs) and Qualified Census 
Tracts (QCTs)

    As stated above, 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 AMGI. All designated DDAs in metropolitan areas 
(taken together) may not contain more than 20 percent of the aggregate 
population of all metropolitan areas, and all designated areas not in 
metropolitan areas may not contain more than 20 percent of the 
aggregate population of all nonmetropolitan areas. See 26 U.S.C. 
42(d)(5)(B)(iii).
    Similarly, IRC Section 42 defines a QCT as an area designated by 
the Secretary of HUD where, for the most recent year for which census 
data are available on household income in such tract, either 50 percent 
or more of the households in the tract have an income which is less 
than 60 percent of the area median gross income or the tract's poverty 
rate is at least 25 percent. All designated QCTs in a single 
metropolitan area or nonmetropolitan area (taken together) may not 
contain more than 20 percent of the population of that metropolitan or 
nonmetropolitan area. Thus, unlike the restriction on DDA designations, 
QCTs are restricted by the total population of each individual area as 
opposed to the aggregate population across all metropolitan areas and 
nonmetropolitan areas. See 26 U.S.C. 42(d)(5)(B)(ii).
    IRC Section 42(d)(5)(B)(v) allows states to award an increase in 
basis up to 30 percent to buildings located outside of federally 
designated DDAs and QCTs if the increase is necessary to make the 
building financially feasible. This state discretion applies only to 
buildings allocated credits under the state housing credit ceiling and 
is not permitted for buildings receiving credits in connection with 
tax-exempt bonds. Rules for such designations shall be set forth in the 
LIHTC-allocating agencies' qualified allocation plans (QAPs). See 26 
U.S.C. 42(m).

VI. Explanation of HUD Designation Method

A. 2019 Difficult Development Areas

    In developing the 2019 list of DDAs, as required by 26 U.S.C. 
42(d)(5)(B)(iii), HUD compared housing costs with incomes. HUD used 
2010 Census population for ZCTAs, and nonmetropolitan areas, and the 
MSA definitions, as published in OMB Bulletin 15-01 on July 15, 2015, 
with modifications, as described below. In keeping with past practice 
of basing the coming year's DDA designations on data from the preceding 
year, the basis for these comparisons is the FY2018 HUD income limits 
for very low-income households (very low-income limits, or VLILs), 
which are based on 50 percent of AMGI, and modified FMRs based on the 
FY2018 FMRs used for the Housing Choice Voucher (HCV) program. For 
metropolitan DDAs, HUD used Small Area FMRs based on three annual 
releases of ACS data, to compensate for statistical anomalies which 
affect estimates for some ZCTAs. For non-metropolitan DDAs, HUD used 
the FY2018 FMRs published on October 2, 2017 (83 FR 7205) as updated 
through February 20, 2018 (83 FR 7205).
    In formulating the FY2018 FMRs and VLILs, HUD modified the current 
OMB definitions of MSAs to account for differences in rents among areas 
within each current MSA that were in different FMR areas under 
definitions used in prior years. HUD formed these ``HUD Metro FMR 
Areas'' (HMFAs) in cases where one or more of the parts of newly 
defined MSAs were previously in separate FMR areas. All counties added 
to metropolitan areas are treated as HMFAs with rents and incomes based 
on their own county data, where available. HUD no longer requires 
recent-mover rents to differ by five percent or more in order to form a 
new HMFA. All HMFAs are contained entirely within MSAs. All 
nonmetropolitan counties are outside of MSAs and are not broken up by 
HUD for purposes of setting FMRs and VLILs. (Complete details on HUD's 
process for determining FY2018 FMR areas and FMRs are available at 
https://www.huduser.gov/portal/datasets/fmr.html#2018. Complete details 
on HUD's process for determining FY2018 income limits are available at 
https://www.huduser.gov/portal/datasets/il.html#2018.)
    HUD's unit of analysis for designating metropolitan DDAs consists 
of ZCTAs, whose Small Area FMRs are compared to metropolitan VLILs. For 
purposes of computing VLILs in metropolitan areas, HUD considers entire 
MSAs in cases where these were not broken up into HMFAs for purposes of 
computing VLILs; and HMFAs within the MSAs that were broken up for such 
purposes. Hereafter in this notice, the unit of analysis for 
designating metropolitan DDAs will be called the ZCTA, and the unit of 
analysis for nonmetropolitan

[[Page 53285]]

DDAs will be the nonmetropolitan county or county equivalent area. The 
procedure used in making the DDA designations follows:
    1. Calculate FMR-to-Income Ratios. For each metropolitan ZCTA and 
each nonmetropolitan county, HUD calculated a ratio of housing costs to 
income. HUD used a modified FY2018 two-bedroom Small Area FMR for 
ZCTAs, the FY2018 two-bedroom FMR as published for non-metropolitan 
counties, and the FY2018 four-person VLIL for this calculation.
    The modified FY2018 two-bedroom Small Area FMRs for ZCTAs differ 
from the FY2018 Small Area FMRs in four ways. First, HUD did not limit 
the Small Area FMR to 150 percent of its metropolitan area FMR. Second, 
HUD did not limit annual decreases in Small Area FMRs to ten percent, 
which was first applied in the FY2018 FMR calculations. Third, HUD 
adjusted the Small Area FMRs in New York City using the New York City 
Housing and Vacancy Survey, which is conducted by the U.S. Census 
Bureau, to adjust for the effect of local rent control and 
stabilization regulations. No other jurisdictions have provided HUD 
with data that could be used to adjust Small Area FMRs for rent control 
or stabilization regulations.\1\ Finally, the Small Area FMRs are not 
limited to the State non-metropolitan minimum FMR.
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    \1\ HUD encourages other jurisdictions with rent control laws 
that affect rents paid by recent movers into existing units to 
contact HUD about what data might be provided or collected to adjust 
Small Area FMRs in those jurisdictions.
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    The numerator of the ratio, representing the development cost of 
housing, was the area's FY2018 FMR, or Small Area FMR in metropolitan 
areas. In general, the FMR is based on the 40th-percentile gross rent 
paid by recent movers to live in a two-bedroom rental unit.
    The denominator of the ratio, representing the maximum income of 
eligible tenants, was the monthly LIHTC income-based rent limit, which 
was calculated as 1/12 of 30 percent of 120 percent of the area's VLIL 
(where 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. Sort Areas by Ratio and Exclude Unsuitable Areas. The ratios of 
the FMR, or Small Area FMR, to the LIHTC income-based rent limit were 
arrayed in descending order, separately, for ZCTAs and for 
nonmetropolitan counties. ZCTAs with populations less than 100 were 
excluded in order to avoid designating areas unsuitable for residential 
development, such as ZCTAs containing airports.
    3. Select Areas with Highest Ratios and Exclude QCTs. The DDAs are 
those areas with the highest ratios that cumulatively comprise 20 
percent of the 2010 population of all metropolitan areas and all 
nonmetropolitan areas. For purposes of applying this population cap, 
HUD excluded the population in areas designated as 2019 QCTs. Thus, an 
area can be designated as a QCT or DDA, but not both.

B. Application of Population Caps to DDA Determinations

    In identifying DDAs, HUD applied caps, or limitations, as noted 
above. The cumulative population of metropolitan DDAs cannot exceed 20 
percent of the cumulative population of all metropolitan areas, and the 
cumulative population of nonmetropolitan DDAs cannot exceed 20 percent 
of the cumulative population of all nonmetropolitan areas.
    In applying these caps, HUD established procedures to deal with how 
to treat small overruns of the caps. The remainder of this section 
explains those procedures. 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 DDAs, there may be minimal overruns of the cap. HUD 
believes the designation of additional areas in the above examples of 
minimal overruns is consistent with the intent of the IRC. As long as 
the apparent excess is small due to measurement errors, some latitude 
is justifiable, because it is impossible to determine whether the 20 
percent cap has been exceeded. Despite the care and effort involved in 
a Decennial Census, the Census Bureau and all users of the data 
recognize that the population counts for a given area and for the 
entire country are not precise. Therefore, the extent of the 
measurement error is unknown. 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. Qualified Census Tracts

    In developing the list of QCTs, HUD used 2010 Census 100-percent 
count data on total population, total households, and population in 
households; the median household income and poverty rate as estimated 
in the 2010-2014, 2011-2015 and 2012-2016, ACS tabulations; the FY2018 
Very Low-Income Limits (VLILs) computed at the HUD Metropolitan FMR 
Area (HMFA) level to determine tract eligibility; and the MSA 
definitions published in OMB Bulletin No. 15-01 on July 15, 2015, for 
determining how many eligible tracts can be designated under the 
statutory 20 percent population cap.
    HUD uses the HMFA-level AMGIs to determine QCT eligibility because 
the statute, specifically IRC Section 42(d)(5)(B)(iv)(II), refers to 
the same section of the IRC that defines income for purposes of tenant 
eligibility and unit maximum rent, specifically IRC Section 42(g)(4). 
By rule, the IRS sets these income limits according to HUD's VLILs, 
which, starting in FY2006 and thereafter, are established at the HMFA 
level. HUD uses the entire MSA to determine how many eligible tracts 
can be designated under the 20 percent population cap as required by 
the statute (IRC Section 42(d)(5)(B)(ii)(III)), which states that MSAs 
should be treated as singular areas.
    The QCTs were determined as follows:
    1. Calculate 60 percent AMGI. To be eligible to be designated a 
QCT, a census tract must have 50 percent of its households with incomes 
below 60 percent of the AMGI or have a poverty rate of 25 percent or 
more. Due to potential statistical anomalies in the ACS 5-year 
estimates, one of these conditions must be met in at least 2 of the 3 
ACS 5-year tabulations for a tract to be considered eligible for QCT 
designation. HUD calculates 60 percent of AMGI by multiplying by a 
factor of 1.2 the HMFA or nonmetropolitan county FY2017 VLIL adjusted 
for inflation to match the ACS estimates, which are adjusted to the 
value of the dollar in the last year of the 5-year group.
    2. Determine Whether Census Tracts Have Less than 50 percent of 
Households Below 60 percent AMGI. For each census tract, whether or not 
50 percent of households have incomes below the 60 percent income 
standard (income criterion) was determined by: (a) Calculating the 
average household size of the census tract, (b) adjusting the

[[Page 53286]]

income standard to match the average household size, and (c) comparing 
the average-household-size-adjusted income standard to the median 
household income for the tract reported in each of the three years of 
ACS tabulations (2010-2014, 2011-2015 and 2012-2016). HUD did not 
consider estimates of median household income to be statistically 
reliable unless the margin of error was less than half of the estimate 
(or a Margin of Error Ratio, MoER, of 50 percent or less). If at least 
two of the three estimates were not statistically reliable by this 
measure, HUD determined the tract to be ineligible under the income 
criterion due to lack of consistently reliable median income statistics 
across the three ACS tabulations. Since 50 percent of households in a 
tract have incomes above and below the tract median household income, 
if the tract median household income is less than the average-
household-size-adjusted income standard for the tract, then more than 
50 percent of households have incomes below the standard.
    3. Estimate Poverty Rate. For each census tract, the poverty rate 
was determined in each of the three releases of ACS tabulations (2010-
2014, 2011-2015 and 2012-2016) by dividing the population with incomes 
below the poverty line by the population for whom poverty status has 
been determined. As with the evaluation of tracts under the income 
criterion, HUD applies a data quality standard for evaluating ACS 
poverty rate data in designating the 2019 QCTs. HUD did not consider 
estimates of the poverty rate to be statistically reliable unless both 
the population for whom poverty status has been determined and the 
number of persons below poverty had MoERs of less than 50 percent of 
the respective estimates. If at least two of the three poverty rate 
estimates were not statistically reliable, HUD determined the tract to 
be ineligible under the poverty rate criterion due to lack of reliable 
poverty statistics across the ACS tabulations.
    4. Designate QCTs Where 20 percent or Less of Population Resides in 
Eligible Census Tracts. QCTs are those census tracts in which 50 
percent or more of the households meet the income criterion in at least 
two of the three years evaluated, or 25 percent or more of the 
population is in poverty in at least two of the three years evaluated, 
such that the population of all census tracts that satisfy either one 
or both of these criteria does not exceed 20 percent of the total 
population of the respective area.
    5. Designate QCTs Where More than 20 percent of Population Resides 
in Eligible Census Tracts. In areas where more than 20 percent of the 
population resides in eligible census tracts, census tracts are 
designated as QCTs in accordance with the following procedure:
    a. The statistically reliable income and poverty criteria are each 
averaged over the three ACS tabulations (2010-2014, 2011-2015 and 2012-
2016). Statistically reliable values that did not exceed the income and 
poverty rate thresholds were included in the average.
    b. Eligible tracts are placed in one of two groups based on the 
averaged values of the income and poverty criteria. The first group 
includes tracts that satisfy both the income and poverty criteria for 
QCTs for at least two of the three evaluation years; a different pair 
of years may be used to meet each criterion. The second group includes 
tracts that satisfy either the income criterion in at least two of the 
three years, or the poverty criterion in at least two of three years, 
but not both. A tract must qualify by at least one of the criteria in 
at least two of the three evaluation years to be eligible.
    c. Tracts in the first group are ranked from highest to lowest by 
the average of the ratios of the tract average-household-size-adjusted 
income limit to the median household income. Then, tracts in the first 
group are ranked from highest to lowest by the average of the poverty 
rates. The two ranks are averaged to yield a combined rank. The tracts 
are then sorted on the combined rank, with the census tract with the 
highest combined rank being placed at the top of the sorted list. In 
the event of a tie, more populous tracts are ranked above less populous 
ones.
    d. Tracts in the second group are ranked from highest to lowest by 
the average of the ratios of the tract average-household-size-adjusted 
income limit to the median household income. Then, tracts in the second 
group are ranked from highest to lowest by the average of the poverty 
rates. The two ranks are then averaged to yield a combined rank. The 
tracts are then sorted on the combined rank, with the census tract with 
the highest combined rank being placed at the top of the sorted list. 
In the event of a tie, more populous tracts are ranked above less 
populous ones.
    e. The ranked first group is stacked on top of the ranked second 
group to yield a single, concatenated, ranked list of eligible census 
tracts.
    f. Working down the single, concatenated, ranked list of eligible 
tracts, census tracts are identified as designated until the 
designation of an additional tract would cause the 20 percent limit to 
be exceeded. If a census tract is not designated because doing so would 
raise the percentage above 20 percent, subsequent eligible census 
tracts are then considered to determine if one or more eligible census 
tract(s) with smaller population(s) could be designated without 
exceeding the 20 percent limit.

D. Exceptions to OMB Definitions of MSAs and Other Geographic Matters

    As stated in OMB Bulletin 15-01, defining metropolitan areas:

    ``OMB establishes and maintains the delineations of Metropolitan 
Statistical Areas, . . . solely for statistical purposes. . . . OMB 
does not take into account or attempt to anticipate any non-
statistical uses that may be made of the delineations, [.] In cases 
where . . . an agency elects to use the Metropolitan . . . Area 
definitions in nonstatistical programs, it is the sponsoring 
agency's responsibility to ensure that the delineations are 
appropriate for such use. An agency using the statistical 
delineations in a nonstatistical program may modify the 
delineations, but only for the purposes of that program. In such 
cases, any modifications should be clearly identified as 
delineations from the OMB statistical area delineations in order to 
avoid confusion with OMB's official definitions of Metropolitan . . 
. Statistical Areas.''

    Following OMB guidance, the estimation procedure for the FMRs and 
income limits incorporates the current OMB definitions of metropolitan 
areas based on the CBSA standards, as implemented with 2010 Census 
data, but makes adjustments to the definitions, in order to separate 
subparts of these areas in cases where counties were added to an 
existing or newly defined metropolitan area. In CBSAs where subareas 
are established, it is HUD's view that the geographic extent of the 
housing markets are not the same as the geographic extent of the CBSAs.
    In the New England states (Connecticut, Maine, Massachusetts, New 
Hampshire, Rhode Island, and Vermont), HMFAs are defined according to 
county subdivisions or minor civil divisions (MCDs), rather than county 
boundaries. However, since no part of an HMFA is outside an OMB-
defined, county-based MSA, all New England nonmetropolitan counties are 
kept intact for purposes of designating Nonmetropolitan DDAs.

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.

[[Page 53287]]

Effective Date

    The 2019 lists of QCTs and DDAs are effective:
    (1) for allocations of credit after December 31, 2018; or
    (2) for purposes of IRC Section 42(h)(4), if the bonds are issued 
and the building is placed in service after December 31, 2018.
    If an area is not on a subsequent list of QCTs or DDAs, the 2019 
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 Section 42(h)(4), if:
    (a) 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
    (b) 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.
    An application is deemed to be submitted on the date it is filed if 
the application is determined to be complete by the credit-allocating 
or bond-issuing agency. A ``complete application'' means that no more 
than de minimis clarification of the application is required for the 
agency to make a decision about the allocation of tax credits or 
issuance of bonds requested in the application.
    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 
LIHTC. For purposes of IRC Section 42(h)(4), 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 first of the following occurred: (a) The 
building(s) in the first phase were placed in service, or (b) the bonds 
were issued.
    For purposes of this notice, a ``multiphase project'' is defined as 
a set of buildings to be constructed or rehabilitated under the rules 
of the LIHTC and meeting the following criteria:
    (1) The multiphase composition of the project (i.e., total number 
of buildings and phases in project, with a description of how many 
buildings are to be built in each phase and when each phase is to be 
completed, and any other information required by the agency) is made 
known by the applicant in the first application of credit for any 
building in the project, and that applicant identifies the buildings in 
the project for which credit is (or will be) sought;
    (2) the aggregate amount of LIHTC applied for on behalf of, or that 
would eventually be allocated to, the buildings on the site exceeds the 
one-year limitation on credits per applicant, as defined in the 
Qualified Allocation Plan (QAP) of the LIHTC-allocating agency, or the 
annual per-capita credit authority of the LIHTC allocating agency, and 
is the reason the applicant must request multiple allocations over 2 or 
more years; and
    (3) all applications for LIHTC for buildings on the site are made 
in immediately consecutive years.
    Members of the public are hereby reminded that the Secretary of 
Housing and Urban Development, or the Secretary's designee, has legal 
authority to designate DDAs and QCTs, by publishing lists of geographic 
entities as defined by, in the case of DDAs, the Census Bureau, the 
several states and the governments of the insular areas of the United 
States and, in the case of QCTs, by the Census Bureau; and to establish 
the effective dates of such lists. The Secretary of the Treasury, 
through the IRS thereof, has sole legal authority to interpret, and to 
determine and enforce compliance with the IRC and associated 
regulations, including Federal Register notices published by HUD for 
purposes of designating DDAs and QCTs. Representations made by any 
other entity as to the content of HUD notices designating DDAs and QCTs 
that do not precisely match the language published by HUD should not be 
relied upon by taxpayers in determining what actions are necessary to 
comply with HUD notices.

Interpretive Examples of 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 QCT or DDA status. The 
examples covering DDAs are equally applicable to QCT designations.
    (Case A) Project A is located in a 2019 DDA that is NOT a 
designated DDA in 2020 or 2021. A complete application for tax credits 
for Project A is filed with the allocating agency on November 15, 2019. 
Credits are allocated to Project A on October 30, 2021. Project A is 
eligible for the increase in basis accorded a project in a 2019 DDA 
because the application was filed BEFORE January 1, 2020 (the assumed 
effective date for the 2020 DDA lists), and because tax credits were 
allocated no later than the end of the 730-day period after the filing 
of the complete application for an allocation of tax credits.
    (Case B) Project B is located in a 2019 DDA that is NOT a 
designated DDA in 2020 or 2021. A complete application for tax credits 
for Project B is filed with the allocating agency on December 1, 2019. 
Credits are allocated to Project B on March 30, 2022. Project B is NOT 
eligible for the increase in basis accorded a project in a 2019 DDA 
because, although the application for an allocation of tax credits was 
filed BEFORE January 1, 2020 (the assumed effective date of the 2020 
DDA lists), the tax credits were allocated later than the end of the 
730-day period after the filing of the complete application.
    (Case C) Project C is located in a 2019 DDA that was not a DDA in 
2018. Project C was placed in service on November 15, 2018. A complete 
application for tax-exempt bond financing for Project C is filed with 
the bond-issuing agency on January 15, 2019. The bonds that will 
support the permanent financing of Project C are issued on September 
30, 2019. Project C is NOT eligible for the increase in basis otherwise 
accorded a project in a 2019 DDA, because the project was placed in 
service BEFORE January 1, 2019.
    (Case D) Project D is located in an area that is a DDA in 2019 but 
is NOT a DDA in 2020 or 2021. A complete application for tax-exempt 
bond financing for Project D is filed with the bond-issuing agency on 
October 30, 2019. Bonds are issued for Project D on April 30, 2021, but 
Project D is not placed in service until January 30, 2022. Project D is 
eligible for the increase in basis available to projects located in 
2019 DDAs because: (1) one of the two events necessary for triggering 
the effective date for buildings described in Section 42(h)(4)(B) of 
the IRC (the two events being bonds issued and buildings placed in 
service) took place on April 30, 2021, within the 730-day period after 
a complete application for tax-exempt bond financing was filed, (2) the 
application was filed during a time when the location of Project D was 
in a DDA, and (3) both the issuance of the bonds and placement in 
service of Project D occurred after the application was submitted.
    (Case E) Project E is a multiphase project located in a 2019 DDA 
that is NOT a designated DDA or QCT in 2020. The first phase of Project 
E received an allocation of credits in 2019, pursuant to an application 
filed March 15, 2019,

[[Page 53288]]

which describes the multiphase composition of the project. An 
application for tax credits for the second phase of Project E is filed 
with the allocating agency by the same entity on March 15, 2020. The 
second phase of Project E is located on a contiguous site. Credits are 
allocated to the second phase of Project E on October 30, 2020. The 
aggregate amount of credits allocated to the two phases of Project E 
exceeds the amount of credits that may be allocated to an applicant in 
one year under the allocating agency's QAP and is the reason that 
applications were made in multiple phases. The second phase of Project 
E is, therefore, eligible for the increase in basis accorded a project 
in a 2019 DDA, because it meets all of the conditions to be a part of a 
multiphase project.
    (Case F) Project F is a multiphase project located in a 2019 DDA 
that is NOT a designated DDA in 2020 or 2021. The first phase of 
Project F received an allocation of credits in 2019, pursuant to an 
application filed March 15, 2019, which does not describe the 
multiphase composition of the project. An application for tax credits 
for the second phase of Project F is filed with the allocating agency 
by the same entity on March 15, 2021. Credits are allocated to the 
second phase of Project F on October 30, 2021. The aggregate amount of 
credits allocated to the two phases of Project F exceeds the amount of 
credits that may be allocated to an applicant in one year under the 
allocating agency's QAP. The second phase of Project F is, therefore, 
NOT eligible for the increase in basis accorded a project in a 2019 
DDA, since it does not meet all of the conditions for a multiphase 
project, as defined in this notice. The original application for 
credits for the first phase did not describe the multiphase composition 
of the project. Also, the application for credits for the second phase 
of Project F was not made in the year immediately following the first 
phase application year.

Findings and Certifications

Environmental Impact

    This notice involves the establishment of fiscal requirements or 
procedures that are related to rate and cost determinations and do not 
constitute a development decision affecting the physical condition of 
specific project areas or building sites. Accordingly, under 40 CFR 
1508.4 of the regulations of the Council on Environmental Quality and 
24 CFR 50.19(c)(6) of HUD's regulations, this notice is categorically 
excluded from environmental review under the National Environmental 
Policy Act of 1969 (42 U.S.C. 4321).

Federalism Impact

    Executive Order 13132 (entitled ``Federalism'') prohibits an agency 
from publishing any policy document that has federalism implications if 
the document either imposes substantial direct compliance costs on 
state and local governments and is not required by statute, or the 
document preempts state law, unless the agency meets the consultation 
and funding requirements of section 6 of the executive order. This 
notice merely designates DDAs and QCTs as required under IRC Section 
42, as amended, for the use by political subdivisions of the states in 
allocating the LIHTC. This notice also details the technical methods 
used in making such designations. As a result, this notice is not 
subject to review under the order.

    Dated: September 26, 2018.
Todd M. Richardson,
 General Deputy Assistant Secretary for Policy Development and 
Research.
[FR Doc. 2018-23000 Filed 10-19-18; 8:45 am]
 BILLING CODE 4210-67-P