Predicting 2019 DDAs
Each year the U.S. Department of Housing and Urban Development (HUD) publishes a list of difficult to develop areas (DDAs). Low-income housing tax credit properties located in areas that are designated as DDAs are eligible for a 130 percent boost in eligible basis for determining the amount of LIHTCs a building can generate.
For non-metropolitan areas, DDAs are determined on a county basis. For metropolitan areas, DDAs are determined on ZIP code tabulation areas (ZCTA), referred to as Small Area DDAs (SDDAs). (It’s important to note ZCTAs and ZIP codes do not always have the same boundaries.)
When calculating DDAs, which includes SDDAs, HUD uses a ratio of two-bedroom fair market rents (FMR) divided by the two-bedroom 60 percent LIHTC rent (the DDA ratio). Note however, that For SDDAs HUD uses the small area FMRs (SAFMR), which are also determined on a zip code basis. The DDA ratio is a proxy for the difficulty of development in terms of construction cost relative to area income – therefore the higher the DDA ratio the more difficult it is to develop in the area. HUD sorts the DDA ratio from highest to lowest then starts at the top of the list and designates areas until 20 percent of the population is in DDAs. HUD sorts and designates rural and metro areas separately.
Predicting 2018 DDAs
When calculating the DDA ratio, HUD uses the prior year’s FMR and income limits. For example, HUD used the 2017 FMR and 2017 income limits to determine the 2018 DDA ratio. Therefore, the core of the information necessary to calculate the 2019 DDA ratio was available once HUD released the 2018 income limits in April (the FMR data for 2018 was released in late 2017). However, there are a few material adjustments HUD makes to the FMR that complicates the calculation, which will be discussed in the next section.
Adjustments for Metro Area FMR
For metro areas, HUD makes the following adjustments to SAFMR in calculating the SDDA ratio.
1. HUD does not limit the SAFMR for ZCTAs to 150 percent of the median gross rent for the ZCTAs’ Core-Based Statistical Areas. This adjustment allows certain ZCTAs with significantly higher market rents than its neighboring areas to have a higher adjusted SAFMR in calculating the DDA ratio.
2. The SAFMR for New York City was adjusted to remove the effects of rent control and stabilization regulations. For New York City, approximately 33 ZCTAs ended up with adjusted SAFMRs being $1,000 to $3,910 higher than their unadjusted SAFMR in 2018. At this time, this adjustment is only applicable to New York City, but this adjustment could expand to other cities in 2019. According to the Federal Register in Volume 82 Number 174, “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 SAFMRs in those jurisdictions.”
3. HUD applies a recent-mover adjustment to the SAFMR so that the SAFMR is based on the most recent rents.
Unfortunately, while the FMR, SAFMR, and income limits are available to calculate the 2019 DDA ratio, it is not yet known how to obtain the information or calculate for the three adjustments HUD makes to the SAFMR.
Adjustments for and Selection of DDA Population
After the DDA ratio is calculated, there are a couple additional adjustments made to the population before determining when 20 percent of the population has been selected. Per the Federal Register in Volume 82 Number 174, “For purposes of applying this population cap, HUD excluded the population in areas designated as 2018 QCTs. Thus, an area can be designated as a QCT or DDA, but not both.” In other words, when HUD looks at the population of a ZCTA or county, it does not include the population of any area within the ZCTA or county that is designated as a QCT.
Consider the following example:
When HUD is determining how much population to count against the 20 percent cap it would use 24,557 as opposed to 26,599 for this area. Additionally, for metro areas, HUD also excludes from the calculation any ZCTAs where the population is less than 100 so that these ZCTAs are not designated as DDAs.
Unfortunately, it is not yet known which areas will be designated as QCTs for 2019 or the population for those areas. Therefore, for this sort Novogradac assumed that QCTs would remain constant and have removed the population of these areas in 2018 from the 2019 sort. This means that there is a strong likelihood that the last few areas excluded or included in our prediction actually may be added or removed from the designated list when HUD publishes the official DDAs.
As mentioned above, the analysis is not entirely accurate due to the HUD adjustments made to SAFMRs for metro areas, and the unavailability of 2019’s QCT data until published as discussed in the above sections. However, the analysis is likely accurate for the majority of metro areas that are not significantly impacted by adjustments. For example, rural areas are not subject to the SAFMR adjustments or the population less than 100. For rural areas only, last year’s predictions for 2018’s rural area DDAs showed a 100 percent match to actual DDA designations despite the unavailability of the updated QCT areas for 2018 during last year’s analysis.
This analysis reveals an interesting finding. Many people believe that it is only those areas that are on the fringe (the bottom 5 percent of the designated areas) that are in jeopardy of being dropped from year to year, however, this is not the case. For example, ZIP code 06092 in the Hartford-West Hartford-East Hartford, Conn. HUD Metro FMR Area was in the top 12th percentile for 2018. In 2019, this area’s DDA ratio dropped so that it fell out of the top 20 percent (69 percentile for 2019). ZIP code 43718 in the Wheeling, W.V.-Ohio MSA, also had a very drastic fall in the analysis: from the 11th percentile all the way down to the 49th percentile.
Novogradac’s analysis predicts the following changes in SDDA by state:
Novogradac’s analysis projects non-metro DDAs will have a great bit of variability in 2019. Almost 25 percent of the areas in 2018 will not be DDAs in 2019. Similar to metro DDAs, there are areas with a large change in their DDA ratio. For example, Williams County, N.D. was in the top 15th percentile and fell to the 51th percentile.
Potential Impact of Affordable Housing Credit Improvement Act of 2017
As discussed in a Notes from Novogradac blog post titled Basis Boost Provisions Could Lead to More 4 Percent Developments and More Investment in High Cost Areas, the Affordable Housing Credit Improvement Act of 2017 (AHCIA) has various provisions that would impact the number of DDAs. If the AHCIA was passed as currently proposed, the population cap for DDAs would be increased to 30 percent, which result in almost 1,593 additional metro areas designated as SDDAs and 201 non-metro counties designated as DDAs.
Preserving a DDA/QCT Boost
As detailed in the post New Novogradac Mapping Tool Illustrates DDA, QCT Changes for 2017, developers working on a potential LIHTC property in a location losing its designation may still be able preserve the 30 percent boost. HUD describes this approach as extending the effective date. The main requirement is the proposal must have been the subject of a “complete” application, meaning no more than de minimis clarification was required for the allocating agency to make a decision. The agency will decide what counts as a complete application for this purpose. There are additional subsequent deadlines later in the process.