What You Need to Know About 2022 DDAs and QCTs

Published by Sun-Ae Woo on Friday, December 3, 2021
Journal Cover Thumb December 2021

In the Sept. 9, 2021, Federal Register the U.S. Department of Housing and Urban Development (HUD) designated difficult development areas (DDAs) and qualified census tracts (QCTs) for 2022. Low-income housing tax credit (LIHTC) properties located in these areas are qualified to increase their eligible basis by up to 30% 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% LIHTCs or using tax-exempt bonds issued (and buildings placed in service) on or after Jan. 1, 2022. However, as noted below, there also is a way to preserve a boost which otherwise would expire after 2021.

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%. Also, QCTs may not exceed 20% 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 calculates a ratio of fair market rents (FMR) divided by the maximum income of eligible tenants. HUD used a modified fiscal year 2021 (FY 2021) two-bedroom small area FMR for metropolitan ZIP code tabulation areas (ZCTAs), a modified FY 2021 two-bedroom FMR for nonmetropolitan counties, and the FY 2021
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.

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.

2021-2022 Changes

There are multiple differences in DDA designations from 2021 to 2022. According to Novogradac’s analysis, the year-to-year changes in SDDAs and DDAs are as follows:

2021-2022 Changes in SDDAs and DDAs

Journal Graphic: 2021-2022 Changes in SDDAs and DDAs
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All designated DDAs in metropolitan areas (taken together) may not contain more than 20% of the aggregate population of all metropolitan areas and all designated areas not in metropolitan areas may not contain more than 20% of the aggregate population of all non metropolitan areas. For 2022, there are more areas being added to DDA designation than were lost. The areas that gained DDA designation had more areas that were smaller in population 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% development or has tax-exempt bond financing.

Preserving Boost–9%

Quoting the Sept. 9, 2021, Federal Register Notice (86 FR 50548):

If an area is not on a subsequent list of QCTs or DDAs, the 2022 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% development to persevere a DDA/QCT that is expiring Dec. 31, 2021, the LIHTC allocating agency must:

  • receive a complete application before Dec. 31, 2021, and
  • allocate LIHTCs within 730 days after the application is submitted.

Note there is no requirement to place the property 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 2022 DDA that is not a designated DDA in 2023 or 2024. A complete application for tax credits for Project A is filed with the allocating agency Nov. 15, 2022. Credits are allocated to Project A Oct. 30, 2024. Project A is eligible for the increase in basis accorded a project in a 2022 DDA because the application was filed before Jan. 1, 2023 (the assumed effective date for the 2023 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.

Timing for Case Study A

Journal Graphic: Timing for Case Study A
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Preserving Boost–4% 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 2022 lists are effective for the area if:

  1. 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
  2. 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, 2021, 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 to the bond-issuing agency, the applicant must either place the building in service or the bonds must be issued within 730 days of the application being submitted.

As mentioned in the 9% 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 2022 but is not a DDA in 2023 or 2024. A complete application for tax-exempt bond financing for Project D is filed with the bond-issuing agency Oct. 30, 2022. Tax-exempt bonds are issued for Project D April 30, 2024, but Project D is not placed in service until Jan. 30, 2025. Project D is eligible for the increase in basis available to projects located in 2022 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 April 30, 2024, 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.

Timing for Case Study D

Journal Graphic: Timing for Case Study D
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Conclusion

Contact a Novogradac professional to assist with any basis boost related matter.