What You Need to Know About 2024 DDAs and QCTs

Sept. 21, 2023, was an important day for many affordable housing owners and developers.

That’s when the U.S. Department of Housing and Urban Development (HUD) designated difficult development areas (DDAs) and qualified census tracts (QCTs) for 2024.

Low-income housing tax credit (LIHTC) properties located in these areas are allowed to increase their eligible basis by 30% for new construction and rehabilitation costs. This increase allows for a correspondingly larger maximum LIHTC allocation.

Effective Date

The new designations apply to properties either receiving allocations of 9% LIHTCs or using tax-exempt bonds issued (and buildings place in service) on or after Jan. 1, 2024. However, as noted below, if an area was designated as a QCT of DDA in 2023 but is not on the 2024 list there also is a way to preserve a boost which otherwise would expire after 2023.

QCT Definition

In a QCT, at least half of the households have incomes less than or equal to 60% of area median income (AMI) or a poverty rate of greater than or equal to 25%. However, it is possible for an area to meet the criteria of a QCT but not receive the designation due to the cap on population. QCTs may not exceed 20% of the population of either any metropolitan statistical area (MSA) or non-MSA part of a state.

DDA Definition

In determining DDAs, HUD calculates a ratio of fair market rents (FMRs) divided by the maximum income of eligible tenants. HUD used a modified fiscal year (FY) 2022 two-bedroom small area FMR for metropolitan ZIP code tabulation areas (ZCTAs), a modified FY 2022 two-bedroom FMR for nonmetropolitan counties, and the FY 2022 four-person HUD income limits for very low-income households, which are based on 50% of area median gross income by counties, for this calculation. 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% of the national population is in DDAs. HUD sorts and designates metropolitan areas and non-metropolitan areas separately.

DDA designations in metro areas apply to ZIP code tabulation areas (known as a Small DDA or SDDA). Non-metro area DDAs are based on counties. It’s important to note ZCTAs (SDDAs) and ZIP codes do not always have the same boundaries. ZCTAs stay constant over the course of a decennial census, while ZIP codes change to reflect the United States Postal Service’s needs.

Unfortunately, this discrepancy creates a possible source of confusion. ZCTAs must be used, not ZIP codes, when searching for DDA status on HUD’s list. Developers, agency staff and others should also consider using the HUD’s mapping tool to double-check status for the exact areas.

2023-2024 Changes

Every year, areas will lose their designation and other areas will gain a designation. For DDAs, the number of areas may change each year, but the DDAs will always cover 20% of the U.S. population. However, due to how QCTs are designated, the population covered by QCTs will change each year.

According to Novogradac’s analysis, the year-to-year changes in SDDAs, DDAs and QCTs are as follows:

For 2023, there are fewer areas being added to SDDA designation than were lost. The areas that gained DDA designation had higher populations than the areas that lost DDA designation, and therefore, the 20% of the aggregate population limit for both metropolitan areas and non-metropolitan areas was still maintained.

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% boost. HUD describes this approach as extending the effective date. The steps are slightly different depending on if the property is a 9% LIHTC development or has tax-exempt bond financing and 4% LIHTCs.

Preserving Boost–9% LIHTC

Quoting the Federal Register notice:

If an area is not on a subsequent list of QCTs or DDAs, the 2024 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% LIHTC development to persevere a DDA/QCT that is expiring Dec. 31, 2023, the LIHTC allocating agency must:

• receive a complete application before Dec. 31, 2022, and
• allocate LIHTCs within 730 days after the application is submitted.

Note there is no requirement to place the development 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 2024 DDA that is NOT a designated DDA in 2025 or 2026. A complete application for tax credits for Project A is filed with the allocating agency on November 15, 2024. Credits are allocated to Project A on October 30, 2026. Project A is eligible for the increase in basis accorded a project in a 2024 DDA because the application was filed BEFORE January 1, 2025 (the assumed effective date for the 2025 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% LIHTC with Tax-Exempt Bonds

Quoting the Federal Register notice:

If an area is not on a subsequent list of QCTs or DDAs, for purposes of IRC Section 42(h)(4), the 2024 lists are effective for the area 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% development to preserve a DDA/QCT that is expiring Dec. 31, 2023, it too must submit 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% LIHTC 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 2024 but is NOT a DDA in 2025 or 2026. A complete application for tax-exempt bond financing for Project D is filed with the bond-issuing agency on October 30, 2024. Tax-exempt bonds are issued for Project D on April 30, 2026, but Project D is not placed in service until January 30, 2027. Project D is eligible for the increase in basis available to projects located in 2024 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, 2026, 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.

Development on the 2024 List, But Not on the 2023 List

In addition to cases when a development is not on a subsequent list, there are also times when property owners may be working on a development that is on the 2024 list but not on the 2023 list.  In this case if the bonds are issued or the development is placed in service (or the credits are allocated on a 9% development) in 2023, the development would be ineligible to qualify for the boost. To qualify for the boost, an owner would need to avoid placing in service or issuing the bonds (or having the credits allocated for a 9% development) in 2023.

It may be the case that a development has received a reservation of tax-exempt bonds and the bond issuer was planning to issue the bonds before the close of the year.  If a development is on the 2024 list but not the 2023 list, wait until 2024 to issue the bonds and place the development in service after 2023 to qualify for the boost.  Owners will need to weigh the benefits of the 30% boost in credits vs the additional cost of delaying the issuance of the bonds to the following year.  In addition, state agencies may require you to issue the bonds within a certain time period. Be sure to check with your state agency and tax advisor before delaying the issuance of the bonds.

Contact a  Novogradac professional to assist with any basis boost related matter. This topic will also be discussed during the Novogradac 2023 Housing Tax Credit Finance Conference, Nov. 30-Dec. 1.