Statutorily Mandated Designation of Difficult Development Areas and Qualified Census Tracts for 2012, 66741-66747 [2011-27817]

Agencies

• DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Federal Register Volume 76, Number 208 (Thursday, October 27, 2011)]
[Notices]
[Pages 66741-66747]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-27817]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-5575-N-01]


Statutorily Mandated Designation of Difficult Development Areas 
and Qualified Census Tracts for 2012

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) for purposes of the Low-Income Housing Tax Credit (LIHTC) under 
Section 42 of the Internal Revenue Code

[[Page 66742]]

of 1986 (IRC) (26 U.S.C. 42). The United States Department of Housing 
and Urban Development (HUD) makes new DDA designations annually. The 
designations of ``Qualified Census Tracts'' (QCTs) under IRC Section 42 
published October 6, 2009, remain in effect.
    In addition to announcing the 2012 DDA designations, HUD seeks 
public comment on whether it should use Small Area Fair Market Rents 
(FMRs), rather than metropolitan-area FMRs, in future designations of 
metropolitan DDAs.

DATES: Comment Due Date: December 27, 2011.

ADDRESSES: Interested persons are invited to submit comments regarding 
this rule to the Regulations Division, Office of General Counsel, 451 
7th Street, SW., Room 10276, Department of Housing and Urban 
Development, Washington, DC 20410-0500. Communications must refer to 
the above docket number and title. There are two methods for submitting 
public comments. All submissions must refer to the above docket number 
and title.
    1. Submission of Comments by Mail. Comments may be submitted by 
mail to the Regulations Division, Office of General Counsel, Department 
of Housing and Urban Development, 451 7th Street, SW., Room 10276, 
Washington, DC 20410-0500.
    2. Electronic Submission of Comments. Interested persons may submit 
comments electronically through the Federal eRulemaking Portal at 
https://www.regulations.gov. HUD strongly encourages commenters to 
submit comments electronically. Electronic submission of comments 
allows the commenter maximum time to prepare and submit comments, 
ensures timely receipt by HUD, and enables HUD to make them immediately 
available to the public. Comments submitted electronically through the 
https://www.regulations.gov Web site can be viewed by other commenters 
and interested members of the public. Commenters should follow the 
instructions provided on that site to submit comments electronically.

    Note:  To receive consideration as public comments, comments 
must be submitted through one of the two methods specified above. 
Again, all submissions must refer to the docket number and title of 
the rule.

    No Facsimile Comments. Facsimile (FAX) comments are not acceptable.
    Public Inspection of Public Comments. All properly submitted 
comments and communications submitted to HUD will be available for 
public inspection and copying between 8 a.m. and 5 p.m. eastern time 
weekdays at the above address. Due to security measures at the HUD 
Headquarters building, an advance appointment to review the public 
comments must be scheduled by calling the Regulations Division at 202-
708-3055 (this is not a toll-free number). Individuals with speech or 
hearing impairments may access this number through TTY by calling the 
Federal Relay Service at 800-877-8339. Copies of all comments submitted 
are available for inspection and downloading at https://www.regulations.gov.

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 8234, Washington, DC 
20410-6000; telephone number 202-402-5878, or send an email to 
Michael.K.Hollar@hud.gov. 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-
622-3040, fax number 202-622-4753. For questions about the ``HUB 
Zones'' program, contact Mariana Pardo, Assistant Administrator for 
Procurement Policy, Office of Government Contracting, Small Business 
Administration, 409 Third Street, SW., Suite 8800, Washington, DC 
20416; telephone number 202-205-8885, fax number 202-205-7167, or send 
an email to hubzone@sba.gov. A text telephone is available for persons 
with hearing or speech impairments at 202-708-8339. (These are not 
toll-free telephone numbers.) Additional copies of this 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 https://www.huduser.org/datasets/qct.html.

SUPPLEMENTARY INFORMATION:

This Document

    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 final Fiscal Year (FY) 2011 Fair Market Rents 
(FMRs), FY 2011 income limits, 2000 Decennial Census population counts 
for nonmetropolitan areas, and 2010 Decennial Census population counts 
for metropolitan areas, as explained below.
    This notice also seeks public comment on whether HUD should change 
the methodology for determining metropolitan DDAs to use Small Area 
FRMs (SAFMRS), estimated at the ZIP-Code level based on the 
relationship of ZIP-Code rents to metropolitan area rents, as the 
housing cost component of the DDA formula rather than metropolitan-area 
FMRs. Such a change would more widely distribute DDAs to metropolitan 
areas around the country than the current methodology, and encourage 
the development of LIHTC and tax-exempt bond-financed housing in 
neighborhoods with potentially greater opportunities for resident 
employment and education.

2000 and 2010 Census

    Data from the 2010 census on total population of metropolitan areas 
and from the 2000 census for nonmetropolitan areas are used in the 
designation of DDAs. Population totals from the 2000 census are used 
for the designation of nonmetropolitan areas because 2010 population 
totals are not uniformly available for all nonmetropolitan areas, 
specifically Guam and the Virgin Islands. The Office of Management and 
Budget (OMB) first published new metropolitan area definitions 
incorporating 2000 census data in OMB Bulletin No. 03-04 on June 6, 
2003, and updated them periodically through OMB Bulletin No. 09-01 on 
November 20, 2008. The FY 2011 FMRs and FY 2011 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.

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 IRC, including the LIHTC found at Section 42. The 
Secretary of HUD is required to designate DDAs and QCTs by IRC Section 
42(d)(5)(B). 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. 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

[[Page 66743]]

where it receives explicit statutory delegation.

Summary of the Low-Income Housing Tax Credit

    The LIHTC is a tax incentive intended to increase the availability 
of low-income housing. IRC 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 (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. In general, a building must meet 
one of two thresholds to be eligible for the LIHTC: (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. The term 
``rent-restricted'' means that gross rent, including an allowance for 
tenant-paid 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 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 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 
actual credit rates are adjusted monthly for projects placed in service 
after 1987 under procedures specified in IRC Section 42. 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, 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.
    IRC Section 42 defines a DDA as any area designated by the 
Secretary of HUD as an area 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.
    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).

Explanation of HUD Designation Methodology

A. Difficult Development Areas

    In developing the list of DDAs, HUD compared housing costs with 
incomes. HUD used 2010 census population for metropolitan areas, 2000 
census population data for nonmetropolitan areas, and the MSA 
definitions, as published in OMB Bulletin No. 09-01 on November 20, 
2008, 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 FY 2011 HUD 
income limits for very low-income households (very low-income limits, 
or VLILs), which are based on 50 percent of AMGI, and final FY 2011 
FMRs used for the Housing Choice Voucher (HCV) program. In formulating 
the FY 2011 FMRs and VLILs, HUD modified the current OMB definitions of 
MSAs to account for substantial differences in rents among areas within 
each new 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 that previously 
were in separate FMR areas had 2000 census-based 40th-percentile 
recent-mover rents that differed, by 5 percent or more, from the same 
statistic calculated at the MSA level. In addition, a few HMFAs were 
formed on the basis of very large differences in AMGIs among the MSA 
parts. 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 FY 2011 FMR areas and FMRs are available at 
https://www.huduser.org/portal/datasets/fmr/fmrs/docsys.html&data=fmr11. 
Complete details on HUD's process for determining FY2011 income limits 
are available at https://www.huduser.org/portal/datasets/il/il11/.)
    HUD's unit of analysis for designating metropolitan DDAs, 
therefore, consists

[[Page 66744]]

of: entire MSAs, in cases where these were not broken up into HMFAs for 
purposes of computing FMRs and 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 HMFA, and 
the unit of analysis for nonmetropolitan DDAs will be the 
nonmetropolitan county or county equivalent area. The procedure used in 
making the DDA calculations follows:
    1. For each HMFA and each nonmetropolitan county, a ratio was 
calculated. This calculation used the final FY 2011 two-bedroom FMR and 
the FY 2011 four-person VLIL.
    a. The numerator of the ratio, representing the development cost of 
housing, was the area's final FY 2011 FMR. In general, the FMR is based 
on the 40th-percentile gross rent paid by recent movers to live in a 
two-bedroom apartment. In metropolitan areas granted a FMR based on the 
50th-percentile rent for purposes of improving the administration of 
HUD's HCV program (see 76 FR 52058), the 40th-percentile rent was used 
to ensure nationwide consistency of comparisons.
    b. 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. The ratios of the FMR to the LIHTC income-based rent limit were 
arrayed in descending order, separately, for HMFAs and for 
nonmetropolitan counties.
    3. The DDAs are those with the highest ratios cumulative to 20 
percent of the 2010 population of all metropolitan areas and 2000 
population of all nonmetropolitan areas. Population totals from the 
2000 census are used for the designation of nonmetropolitan areas 
because 2010 population totals are not uniformly available for all 
nonmetropolitan areas, specifically Guam and the Virgin Islands.

B. Application of Population Caps to DDA Determinations

    IRC Section 42 requires the application of 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 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 Bureau of the Census 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. Exceptions to OMB Definitions of MSAs and Other Geographic Matters

    As stated in OMB Bulletin 09-01, defining metropolitan areas:

    OMB establishes and maintains the definitions 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 definitions[.] 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 definitions are 
appropriate for such use. An agency using the statistical 
definitions in a nonstatistical program may modify the definitions, 
but only for the purposes of that program. In such cases, any 
modifications should be clearly identified as deviations from the 
OMB statistical area definitions in order to avoid confusion with 
OMB's official definitions of Metropolitan * * * Statistical Areas.

    Following OMB guidance, the estimation procedure for the FY 2011 
FMRs incorporates the current OMB definitions of metropolitan areas 
based on the Core-Based Statistical Area (CBSA) standards, as 
implemented with 2000 Census data, but makes adjustments to the 
definitions, in order to separate subparts of these areas in cases 
where FMRs (and in a few cases, VLILs) would otherwise change 
significantly if the new area definitions were used without 
modification. In CBSAs where subareas are established, it is HUD's view 
that the geographic extent of the housing markets are not yet the same 
as the geographic extent of the CBSAs, but may approach becoming so as 
the social and economic integration of the CBSA component areas 
increases.
    The geographic baseline for the new estimation procedure is the 
CBSA Metropolitan Areas (referred to as Metropolitan Statistical Areas 
or MSAs) and CBSA NonMetropolitan Counties (nonmetropolitan counties 
include the county components of Micropolitan CBSAs where the counties 
are generally assigned separate FMRs). The HUD-modified CBSA 
definitions allow for subarea FMRs within MSAs based on the boundaries 
of ``Old FMR Areas'' (OFAs) within the boundaries of new MSAs. (OFAs 
are the FMR areas defined for the FY 2005 FMRs. Collectively, they 
include the June 30, 1999, OMB definitions of MSAs and primary MSAs 
(old definition MSAs/primary metropolitan statistical areas (PMSAs), 
metropolitan counties deleted from old definition MSAs/PMSAs by HUD for 
FMR-setting purposes, and counties and county parts outside of old 
definition MSAs/PMSAs referred to as nonmetropolitan counties). 
Subareas of MSAs are assigned their own FMRs when the subarea 2000 
census base FMR differs significantly from the MSA 2000 census base FMR 
(or, in some cases, where the 2000 census base AMGI differs 
significantly from the MSA 2000 census base AMGI). MSA subareas, and 
the remaining portions of MSAs after subareas have been determined, are 
referred to as ``HUD Metro FMR Areas (HMFAs),'' to distinguish such 
areas from OMB's official definition of MSAs.
    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,

[[Page 66745]]

county-based MSA, all New England nonmetropolitan counties are kept 
intact for purposes of designating Nonmetropolitan DDAs.
    For the convenience of readers of this notice, the geographical 
definitions of designated Metropolitan DDAs are included in the list of 
DDAs.

Future Designations

    DDAs are designated annually as updated income and FMR data are 
made public. QCTs are designated periodically as new data become 
available, or as metropolitan area definitions change. QCTs are not 
redesignated for 2012 because household income distribution and poverty 
data is not available for 2010 census tract boundaries. The most recent 
data for which household income by tract is available is from the 2005-
2009, 5-year American Community Survey (ACS). This data, however, was 
released using the 2000 census tract boundaries, while the 2010 
decennial census population counts were released using the 2010 census 
tract boundaries. The geography of the population counts does not match 
the geography of the income and poverty rate information. This makes 
the most recent data incompatible for QCT designation, meaning HUD 
cannot designate QCTs in accordance with statute.
    The next release of census tract-level data from the ACS, which 
will be the 2006-2010, 5-year data using 2010 Decennial Census 
boundaries, is scheduled for December 2011. At this point, all data 
needed to designate QCTs in accordance with statute will be tabulated 
to compatible geographies. Since the LIHTC program, for which QCTs are 
designated, operates on a calendar-year annual allocation cycle, HUD's 
standing practice is to designate QCTs in the fall prior to the 
effective date, which coincides with the calendar year. This provides 
lead time for the LIHTC developers and administrators to adjust plans 
in accordance with the revised designations. Thus, the next scheduled 
designation of QCTs using data released in December 2011 is the fall of 
2012, for an effective date of January 1, 2013.

Effective Date

    The 2012 lists of DDAs are effective:
    (1) For allocations of credit after December 31, 2011; 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, 2011.
    If an area is not on a subsequent list of DDAs, the 2012 lists are 
effective for the area if:
    (1) The allocation of credit to an applicant is made no later than 
the end of the 365-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 365-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 sole 
legal authority to designate DDAs and QCTs, by publishing lists of 
geographic entities as defined by, in the case of DDAs, 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.
    The designations of ``Qualified Census Tracts'' under IRC Section 
42, published October 6, 2009 (74 FR 51304), remain in effect. The 
above language regarding 2012 and subsequent designations of DDAs also 
applies to the designations of QCTs published October 6, 2009 (74 FR 
51304) and to subsequent designations of QCTs.

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 DDA status. The examples 
covering DDAs are equally applicable to QCT designations.

(Case A)

    Project A is located in a 2012 DDA that is NOT a designated DDA in 
2013. A complete application for tax credits for Project A is filed 
with the allocating agency on November 15, 2012. Credits are allocated 
to Project A on October 30, 2013. Project A is eligible for the 
increase in basis accorded a project in a 2012 DDA because the 
application was filed BEFORE January 1, 2013 (the assumed effective 
date for the 2013 DDA lists), and because tax credits were

[[Page 66746]]

allocated no later than the end of the 365-day period after the filing 
of the complete application for an allocation of tax credits.

(Case B)

    Project B is located in a 2012 DDA that is NOT a designated DDA in 
2013 or 2014. A complete application for tax credits for Project B is 
filed with the allocating agency on December 1, 2012. Credits are 
allocated to Project B on March 30, 2014. Project B is not eligible for 
the increase in basis accorded a project in a 2012 DDA because, 
although the application for an allocation of tax credits was filed 
before January 1, 2013 (the assumed effective date of the 2013 DDA 
lists), the tax credits were allocated later than the end of the 365-
day period after the filing of the complete application.

(Case C)

    Project C is located in a 2012 DDA that was not a DDA in 2011. 
Project C was placed in service on November 15, 2011. A complete 
application for tax-exempt bond financing for Project C is filed with 
the bond-issuing agency on January 15, 2012. The bonds that will 
support the permanent financing of Project C are issued on September 
30, 2012. Project C is not eligible for the increase in basis otherwise 
accorded a project in a 2012 DDA, because the project was placed in 
service before January 1, 2012.

(Case D)

    Project D is located in an area that is a DDA in 2012, but is not a 
DDA in 2013. A complete application for tax-exempt bond financing for 
Project D is filed with the bond-issuing agency on October 30, 2012. 
Bonds are issued for Project D on April 30, 2013, but Project D is not 
placed in service until January 30, 2014. Project D is eligible for the 
increase in basis available to projects located in 2012 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, 2013, within the 365-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 2012 DDA that is not 
a designated DDA in 2013. The first phase of Project E received an 
allocation of credits in 2012, pursuant to an application filed March 
15, 2012, which describes the multiphase composition of the project. An 
application for tax credits for the second phase Project E is filed 
with the allocating agency by the same entity on March 15, 2013. 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, 2013. 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 2012 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 2012 DDA that is not 
a designated DDA in 2013. The first phase of Project F received an 
allocation of credits in 2012, pursuant to an application filed March 
15, 2012, 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, 
2014. Credits are allocated to the second phase of Project F on October 
30, 2014. 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 2012 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.

Request for Public Comment on Designating DDAs Using Small Area FMRs in 
Metropolitan Areas

    HUD is considering a major policy change in the method of 
designating metropolitan DDAs beginning with the 2013 designations. 
Rather than using FMRs established for HUD Metropolitan FMR Areas as 
the measure of ``construction, land, and utility costs relative to area 
median gross income,'' HUD would use ``Small Area FMRs'' (SAFMRs) 
defined at the ZIP Code level within metropolitan areas. In general, 
HUD estimates SAFMRs by multiplying the ratio of ZIP-Code area to 
metropolitan-area median gross rent by the metropolitan-area FMRs (a 
complete description of how SAFMRs are estimated was published in a 
Federal Register notice at 75 FR 27808-12 (May 18, 2010) and is 
available at: https://www.huduser.org/portal/datasets/_fmr/fmr2010f/Small_Area_FMRs.pdf). HUD would use the same income measure as used 
in the current metropolitan DDA designation method, the HUD income 
limits for very low-income households, or VLILs, estimated at the HUD 
Metropolitan FMR Area level, which are used to determine LIHTC and tax-
exempt bond-financed project maximum rents and tenant income limits.
    HUD would otherwise designate Small Area Difficult Development 
Areas (SADDAs) in the same way as it designates metropolitan DDAs as 
described above in this notice, except that the unit of analysis is the 
metropolitan ZIP Code instead of the HUD Metropolitan FMR Area. Thus, 
the population-weighted 20 percent of ZIP Codes with the highest ratios 
of SAFMR to metropolitan VLIL would be designated as DDAs.
    HUD has available an evaluative list of the 2,118 metropolitan ZIP 
Codes that would be designated Small Area DDAs based on the data 
available to HUD at the time of this publication. The main piece of 
currently missing data that HUD would have for a 2013 designation of 
SADDAs is the 2010 Decennial Census population counts for ZIP Codes. 
Thus, HUD used the ZIP Code-to-metropolitan area rent relationships and 
ZIP Code populations from the 2000 Decennial Census to create the 
evaluative list of SADDAs. In general, the metropolitan areas 
designated DDAs in this notice have many, but not all, ZIP Codes 
designated as SADDAs, while a number of metropolitan areas that have 
never been DDAs in the history of the program get one or more SADDAs. 
Under SADDAs, the additional subsidy available under section 42 would 
be limited to the higher opportunity areas of high-cost rental markets, 
and to the highest opportunity areas of otherwise lower-cost rental 
markets.
    HUD seeks comments on the relative merits of SADDAs versus existing 
metropolitan DDA policy in advancing HUD's goals of meeting the need 
for quality affordable rental homes and utilizing housing as a platform 
for improving quality of life.

[[Page 66747]]

Findings and Certifications

Environmental Impact

    In accordance with 40 CFR 1508.4 of the regulations of the Council 
on Environmental Quality and 24 CFR 50.19(c)(6) of HUD's regulations, 
the policies and procedures contained in this notice provide for the 
establishment of fiscal requirements or procedures that do not 
constitute a development decision affecting the physical condition of 
specific project areas or building sites. Therefore, they are 
categorically excluded from the requirements of the National 
Environmental Policy Act, except for extraordinary circumstances, and 
no Finding of No Significant Impact is required.

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 as required under Section 42 of the IRC, 
as amended, for the use by political subdivisions of the states in 
allocating the LIHTC. This notice also details the technical 
methodology used in making such designations. As a result, this notice 
is not subject to review under the order.

    Dated: October 20, 2011.
Raphael W. Bostic,
Assistant Secretary for Policy Development and Research.
[FR Doc. 2011-27817 Filed 10-26-11; 8:45 am]
BILLING CODE 4210-67-P