Changes in Area Designations Help Promote New Development

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The Low-Income Housing Tax Credit (LIHTC), a tax incentive for the development or rehabilitation of affordable rental housing, is a key resource that is helping to create an adequate supply of affordable housing. Since its inception in 1986, the LIHTC program has contributed to the production of nearly 1.3 million housing units. LIHTC projects in Difficult Development Areas (DDAs) and Qualified Census Tracts (QCTs) are eligible for additional incentives to create affordable housing in high-cost areas.

The Internal Revenue Code defines a DDA as “any area designated by the Secretary of Housing and Urban Development as an area which has high construction, land, and utility costs relative to area median gross income.” QCTs are census tracts in which one-half or more of the households have incomes below 60 percent of area median income or the poverty rate is 25 percent or higher. A 20-percent population cap in each metropolitan area or nonmetropolitan part of a state limits the designation of eligible census tracts as QCTs.

The overwhelming majority of Qualified Census Tracts (QCTs) maintained their designation in 2007.

For 2007, the Department of Housing and Urban Development (HUD) changed the designations of both DDA and QCT areas. In a recent interview with Dr. Kurt Usowski, Associate Deputy Assistant Secretary for Economic Affairs in HUD’s Office of Policy Development and Research (PD&R), ResearchWorks learned about changes to the DDAs and QCTs and their effect on future development.

RW: Dr. Usowski, how do DDAs promote development?

Usowski: LIHTC projects in DDAs qualify for an additional subsidy to encourage their location where development costs are high relative to rents that can be collected on units in the project. LIHTC unit rents are set according to area median income, (Section 8 very-low-income limits that are based on 50 percent of an area’s median family income). LIHTC projects in DDAs are eligible for an additional tax-credit subsidy of up to 30 percent.

Because there are no uniform national measures of construction, land, and utility costs, HUD uses the two-bedroom Fair Market Rent (FMR) as a summary measure of these costs. To designate DDAs, HUD uses the ratio of FMR to the HUD very-low-income limit (which forms the basis of the LIHTC maximum rent) to rank areas of the country from most to least expensive, relative to area income. The highest ranked (most expensive) areas totaling 20 percent of the population of all metropolitan areas and, separately, nonmetropolitan counties, are designated DDAs.

RW: How do QCTs promote development?

Usowski: LIHTC projects in QCTs are eligible for an additional tax-credit subsidy of up to 30 percent. This encourages the improvement of rental housing conditions in low-income areas by providing a larger subsidy for rehabilitating existing units or constructing new units in these neighborhoods.

RW: How have DDA and QCT designations promoted development in the past?

More detailed census tract-level household income distribution and revised metro area definitions resulted in 249 additional QCTs in 2007.

Usowski: Statistics in PD&R’s report Updating the Low-Income Housing Tax Credit Database: Projects Placed in Service Through 2003 show that QCTs do influence the development of LIHTC projects and units. Although less than 13 percent of the population resides in designated QCTs, more than 26 percent of LIHTC units were produced within these areas between 1995 and 2003.

Developing any kind of rental housing, whether subsidized or unsubsidized, is difficult in high-cost DDA housing markets. While DDAs do not capture a disproportionate share of LIHTC development relative to their populations, they do contain a higher than expected share of LIHTC development when measured against multifamily building permits. Although DDAs constitute 20 percent of the population, they accounted for only about 14  percent of the multifamily building permits issued between 1994 and 2002. However, about 19 percent of LIHTC units were constructed in DDAs between 1995 and 2003.

RW: How did the DDAs and QCTs change between 2006 and 2007, and what will the impact of those changes be?

Usowski: Both designations were changed for 2007, largely because metropolitan area boundaries were redrawn following the 2000 Census. The boundaries for the DDAs match the areas for FMRs and very-low-income limits, which are the bases for their determination. Because the 2006 FMRs were determined using revised metropolitan area geography, the 2007 DDAs were changed to coincide with the 2006 FMR areas. This means that some areas previously identified as metropolitan or nonmetropolitan changed and some areas lost or gained designation as a DDA.

The 2007 QCT designation process uses a more detailed census tract-level household income distribution from the 2000 Census tabulation that allows for a more accurate determination of the percentage of households below 60 percent of area median income. This new data, combined with some new higher population caps in redefined metropolitan areas, resulted in the net addition of 249 QCTs.

The overwhelming majority of the QCTs maintain their designation in 2007.

RW: Who will benefit from these changes?

Usowski: Clearly, the 477 newly designated QCTs should benefit, whereas the 228 tracts that lost QCT status may be hurt. The intent, however, is to conform the designations to the requirements of the statute.

RW: In addition to the HUD USER data sets, what other information would be valuable to ResearchWorks readers?

Usowski: Anyone interested in the LIHTC should read the report Updating the Low-Income Housing Tax Credit Database: Projects Placed in Service Through 2003 to get a thorough grounding in how the program is producing rental housing across the nation. The report has a wealth of national, state, and metropolitan-level statistics, as well as some interesting geographic analysis.

QCT and DDA tables for areas and links to QCT maps are available through the HUD USER website at qct.huduser.org/. Updating the Low-Income Housing Tax Credit Database: Projects Placed in Service Through 2003 is available for free online at www.huduser.org/Datasets/lihtc/report9503.pdf or in print from HUD USER for a nominal fee by calling 800.245.2691 and selecting option 1.