HUDs 2013 QCTs Increased 34 Percent

Published by James R. Kroger on Friday, June 1, 2012
Journal thumb June 2012

The U.S. Department of Housing and Urban Development (HUD) recently published in the April 20, 2012 Federal Register a revised list of qualified census tracts (QCTs) for the Low-Income Housing Tax Credit (LIHTC) program effective January 1, 2013. According to Internal Revenue Code Section 42(d)(5)(B), a QCT is defined as any census tract in which:
at least half of its households have incomes of less than 60 percent of the area median gross income; or
at least 25 percent of the population are living below the poverty line.

The number of QCTs in a Metropolitan Statistical Area (MSA) cannot exceed 20 percent of the MSA’s population. An LIHTC project located in a QCT can increase its eligible basis by up to 30 percent. For example, if a project has $10 million in eligible basis, it can receive an eligible basis boost of $3 million for a total eligible basis of $13 million. The QCTs designated for 2013 mark the first year that HUD is using the data from the 2010 census. For the previous 10 years, HUD used data from the 2000 census.

Increase in QCTs
The data published in the 2010 census, when compared to the census data collected in 2000, reflects the changed state of the economy. The number of 2013 QCTs is 34 percent higher than the number of 2012 QCTs. This correlates with the percentage increase of the population living below the poverty threshold, which also increased by 34 percent between 2000 and 2010. In 2012, 15.5 percent of all census tracts qualified; this compares to 18.6 percent in 2013. This 20 percent increase in the percentage of census tracts that are qualified does not equal the 34 percent increase in the number of QCTs because the total number of census tracts also increased. Therefore, part of the increase in QCTs is due to the increase in census tracts, but the majority of the increase is due to the worsened state of the economy.

Effective Date
Despite the 34 percent increase of QCTs in 2013, many census tracts designated as QCTs in 2012 are not designated as QCTs in 2013. This could affect properties under development. It is important for LIHTC developers to understand how to lock in the 30 percent eligible basis boost for a project located in a 2012 QCT that has been eliminated in 2013, as well as how to qualify for the 30 percent eligible basis boost for QCTs that are added in 2013.

The 2013 QCTs are effective as follows:

  • 9 percent credit: for allocations of credit after December 31, 2012; or
  • 4 percent credit: for purposes of tax-exempt bond projects if the bonds are issued and the building is placed in service after December 31, 2012.

If an area is a QCT in 2012 but not a QCT in 2013, the 2012 QCT list is still effective for the area if:

  • 9 percent credit: 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 January 1, 2013; or
  • 4 percent credit: for purposes of tax-exempt bond projects, if:
    1. 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
    2. The submission is made before January 1, 2013, 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).

Effective Date for Multiphase Projects
In the case of a multiphase project, the QCT status that applies for all phases of the project is that which applied when the project received its first allocation of LIHTCs. For purposes of tax-exempt bond projects, the QCT status that applies for all phases of the project is that which applied when the first of the following occurred:

  1. The building(s) in the first phase was placed in service, or
  2. The bonds were issued.

The exceptions discussed previously that allow single-phase projects to receive an eligible basis boost if the 2012 QCT loses its QCT designation in 2013 also apply to multiphase projects. For example, if a multiphase 9 percent credit project is located in a 2012 QCT that is not in a 2013 QCT, it can still get 2012 QCT status if the multiphase project submits an application in 2012 and receives an allocation no later than the end of the 365-day period after the submission; the 2012 QCT designation will apply to all phases of the project provided that the project meets the definition of a multiphase project.

A multiphase project is defined as a set of buildings to be constructed or rehabilitated under the rules of the LIHTC program and meeting the following criteria:

  1. The multiphase composition of the project (i.e., total number of buildings and phases in the 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 credit application for any building in the project, and that the applicant identifies the buildings in the project for which credit is being (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 LIHTC-allocating agency’s qualified allocation plan, or the LIHTC-allocating agency’s annual per-capita credit authority and is the reason the applicant must request multiple allocations over two or more years; and
  3. All applications for LIHTCs for buildings on the site are made in immediately consecutive years.

Future Designations
It is possible that future changes to the U.S. Census Bureau’s definition of poverty threshold could either lead to an increase or decrease in the number of QCTs. In the 1960s, families of three or more spent an average  of one-third of their after tax income on food. This observation was used to define the poverty threshold as three times the annual cost of a minimally nutritious diet for a household, based on the U.S. Department of Agriculture’s standards. While the poverty threshold is updated with changes to the Consumer Price Index, it is not updated with increased standards of nutrition. This definition does not accommodate rising medical, energy and housing costs, or geographical variations, and could lead HUD to rely on a different definition for the poverty threshold. In 2011 the U.S. Census Bureau released a supplemental poverty measure that increased the number of Americans living below the poverty threshold by 6 percent. If a supplemental poverty measure is adopted, it could either lead to an increase or a decrease in the number of QCTs if HUD relies on this supplemental definition for QCTs.