What You Need to Know About 2021 DDAs, QCTS

In the Sept. 24, 2020 Federal Register the U.S. Department of Housing and Urban Development (HUD) designated difficult development areas (DDAs) and qualified census tracts (QCTs) for 2021. Low-income housing tax credit (LIHTC) properties located in these areas are qualified to increase their eligible basis by up to 30 percent for new construction and rehabilitation costs (known as a boost). This increase allows for a correspondingly larger maximum LIHTC allocation. For this and other reasons, DDAs and QCTs are of great interest to developers.

Effective Date

The new designations apply to properties either receiving allocations of 9 percent LIHTCs, or using tax-exempt bonds issued (and buildings place in service), on or after Jan. 1, 2021. However, as noted below, there also is a way to preserve a boost which otherwise would expire after 2020.

QCT Definition

In a QCT at least half of the households have incomes less than or equal to 60 percent of area median income (AMI) or a poverty rate of greater than or equal to 25 percent. Also, QCTs may not exceed 20 percent of either any metropolitan statistical area (MSA) or non-MSA part of a state.

DDA Definition

DDAs are somewhat more complex. Following the Internal Revenue Code’s legislative history and principles of fair housing, HUD uses a ratio of fair market rents divided by the maximum income of eligible tenants. The higher quotient is a proxy for greater difficulty of development in terms of construction cost relative to area income.

DDA designations in metro areas apply to ZIP Code Tabulation Areas (known as a Small DDA or SDDA). Note SDDAs and ZIP codes do not always have the same boundaries. Non-metro area DDAs are based on counties. Together these designations are limited to 20 percent of the national population, as ranked using the ratio described above and with metropolitan areas ranked separately from non-metropolitan areas.

For more information on SDDAs, see “Important Aspects of the 2016 Difficult Development Areas and Qualified Census Tracts” from the January 2016 Novogradac Journal of Tax Credits.

2020-2021 Changes

There are multiple differences in QCT and DDA designations from 2020 to 2021. According to our analysis, the year-to-year changes in SDDAs and QCTs (excluding Puerto Rico) are as follows:

Note the population counts are based on the populations not located in 2020 QCTs. Most of these changes are due to evolving demographics shifting QCTs and updated QCTs.

Preserving a DDA/QCT Boost

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 steps are slightly different depending on if the property is a 9 percent development or has tax-exempt bond financing.

Preserving Boost - 9 Percent

Quoting the Federal Register notice:

If an area is not on a subsequent list of QCTs or DDAs, the 2021 lists are effective for the area if:

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

For a 9 percent development to persevere a DDA/QCT that is expiring on Dec. 31, 2020, the LIHTC allocating agency must

• receive a complete application prior to Dec. 31, 2020 and
• allocate LIHTCs within 730 days after the application is submitted.

Note there is no requirement to place the project in service within 730 days after the application. The Federal Register notice states the following concerning a complete application:

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.

Consider Case Study A from the Federal Register notice:

Project A is located in a 2021 DDA that is NOT a designated DDA in 2022 or 2023. A complete application for tax credits for Project A is filed with the allocating agency on November 15, 2021. Credits are allocated to Project A on October 30, 2023. Project A is eligible for the increase in basis accorded a project in a 2021 DDA because the application was filed BEFORE January 1, 2022 (the assumed effective date for the 2022 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.

The chart below illustrates the timing of the previous example. The key is that the LIHTC allocation must occur within 730 days after the application is submitted.

Preserving Boost - 4 Percent with Tax-Exempt Bonds

Quoting the Federal Register notice:

If an area is not on a subsequent list of QCTs or DDAs, the 2021 lists are effective for the area if:

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.

For a 4 percent development to preserve a DDA/QCT that is expiring on Dec. 31, 2020, it too must be the subject of a complete application. However, the submission is to the bond issuing agency as opposed to the LIHTC allocator, which may be different agencies in some states.  Subsequent to submitting the complete application the applicant must either place the building in service OR the bonds must be issued within 730 days of the application being submitted. Either the bonds must be issued or the property placed in service within 730 days after the complete application is submitted to the bond issuing agency. 

As mentioned in the 9 percent discussion, the Federal Register notice states the following concerning a complete application:

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.

Consider Case Study D from the Federal Register notice:

Project D is located in an area that is a DDA in 2021 but is NOT a DDA in 2022 or 2023. A complete application for tax-exempt bond financing for Project D is filed with the bond-issuing agency on October 30, 2021. Tax-exempt bonds are issued for Project D on April 30, 2023, but Project D is not placed in service until January 30, 2024. Project D is eligible for the increase in basis available to projects located in 2021 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 tax-exempt bonds issued and buildings placed in service) took place on April 30, 2023, 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 tax-exempt bonds and placement in service of Project D occurred after the application was submitted.

The chart below illustrates the timing of the previous example. The key is that the bonds need to be issued or the building(s) placed in service within the 730-day window after the application is submitted.

QCTs/DDAs and Construction Delays

On March 13, 2020, the administration issued major disaster declarations under the authority of the Stafford Act with respect to all 50 states, the District of Columbia, and five territories (American Samoa, Guam, Puerto Rico, Northern Mariana Islands and the U.S. Virgin Islands) to assist with additional needs identified under the nationwide emergency declaration for COVID-19. Since then several weather events have resulted in disaster declarations.

IRS Rev. Proc. 2014-19 provides temporary relief to state agencies and owners from certain requirements in IRC Section 42. Rev. Proc. 2014-19 allows state agencies to grant an extension to owners with carryover allocations for buildings located in a major disaster area. With this extension, the IRS treats the owner as if the property met the placed-in-service requirement as long as the building is placed in service by the expiration of that extension.

In the QCT/DDA Federal Register notice, HUD states the following concerning properties that have received this extension:

If an owner with a carryover allocation receives an extension under IRS Revenue Procedure 2014–49, the owner is eligible for the basis boost as long as (1) the building is placed in service before the expiration of the extension period, (2) the extension is granted within HUD’s 730- day grace period, and (3) the other conditions of the QCT/DDA eligibility rules were already met.

This relief appears to only apply to 9 percent properties. Therefore, developments with tax-exempt bonds experiencing delays will need to ensure the bonds are issued or the building is placed in service within the original 730 days.

Conclusion

Contact a Novogradac professional to assist with any basis boost related matter.  This topic will also be discussed during the Novogradac 2020 Tax Credit Housing Finance Virtual Conference, Dec. 3-4.