BILL ANALYSIS SENATE TRANSPORTATION & HOUSING COMMITTEE BILL NO: SB 454 SENATOR ALAN LOWENTHAL, CHAIRMAN AUTHOR: Lowenthal VERSION: 12/17/09 Analysis by: Mark Stivers FISCAL: yes Hearing date: January 12, 2010 SUBJECT: Preservation of existing affordable housing DESCRIPTION: This bill deletes the sunset date on three sections of law requiring the owners of affordable housing to provide notice to tenants and governmental entities before converting a property to market rate and giving a limited priority to preservation purchasers in the event the owner wishes to sell. ANALYSIS: Since the 1960s, developers have constructed at least 425,000 units of affordable rental housing in California with the assistance of federal, state, and local subsidies that require owners to maintain rents at affordable levels for specified periods of time. Examples of such subsidy programs include project-based Section 8, Federal Housing Administration (FHA) mortgages, low-income housing tax credits, the state's Multifamily Housing and Farmworker Housing Grant Programs, and city and county redevelopment funds. The affordability restrictions on assisted units typically last 30 to 55 years, depending on the program. Once affordability obligations expire, owners may preserve the affordability of the units by renewing assistance or by refinancing with new public subsidies, or they may convert the development to market rate. Under some federal programs, owners can also terminate affordability restrictions early by prepaying the underlying mortgage or opting out of the rental assistance contract. According to the state-chartered California Housing Partnership Corporation, California has already lost more than 20,000 units of housing affordable to low-income households to such market rate conversions, and 82,000 more units are considered "at risk" of conversion in the next five years. Notice requirements SB 454 (LOWENTHAL) Page 2 Existing law requires that a property owner cannot convert an affordable property to market rate without first providing notice to tenants, local and state governments, and potential preservation purchasers (i.e., those who may wish to purchase the development in order to preserve the affordability restrictions). The owner must provide a first notice at least 12 months prior to conversion informing recipients of the possibility that the development will convert, that affordability restrictions may be lost, whether other governmental assistance will be available to tenants at the time of conversion, and that the owner will provide more detailed information at least six months prior to conversion. An owner may satisfy this 12-month notice requirement by providing recipients with a federally-required notice. At least six months prior to conversion, the owner must then provide these same recipients with a second, more detailed notice that includes: The anticipated date of conversion. The current rent and the anticipated rental rate for the first year after conversion. A statement of the owner's intention to participate in any replacement subsidy program. Contact information for the local government, the state Department of Housing and Community Development (HCD), and legal services organizations for tenants to obtain more information about their rights. In addition, the owner must provide HCD and the local government with information on the number of affected units, bedrooms, and tenants and on the ages and incomes of these tenants. Priority for preservation purchasers During this one-year notice period, current law also provides preservation purchasers with limited priority to purchase the property if the owner is inclined to sell. Prior to or concurrent with the delivery of the 12-month notice described above, the owner must notify prospective preservation purchasers who have contacted the owner directly or who are on a list maintained by HCD of the opportunity to submit a purchase offer. The owner is not required to accept any offer but may only accept offers from preservation purchasers for 180 days after the purchase offer notice. If the owner rejects a purchase SB 454 (LOWENTHAL) Page 3 offer during this time, the owner must give the preservation purchaser who made the offer an opportunity to match and preempt any offer from a non-preservation purchaser accepted during the second 180 days after the purchase offer notice. These requirements and priorities also apply if an owner seeks to sell or otherwise dispose of a property that is eligible for conversion in the next five years. In general, an owner is exempt from both the notice requirements and priority purchase provisions if he or she or a successor owner agrees to retain existing tenants and extend the affordability of the units for at least 30 years. Both the notice requirements and priority purchase provisions sunset on January 1, 2011. This bill deletes the sunset date on, and thereby makes permanent, these notice requirements and the priority purchase provisions. COMMENTS: 1.Purpose of the bill . According to the author, California has a dire shortage of affordable rental housing and faces the prospect of losing much of its existing stock as current affordability terms expire. Replacing lost affordable housing is much more expensive than preserving the affordability of existing units. By giving local governments and affordable housing developers both time and the opportunity to develop and execute a preservation strategy when a particular property is eligible for conversion, the current notice requirements and priority purchase provisions are the centerpiece of the state's preservation strategy. Equally important, the notice requirement ensures that tenants are informed of how they will be affected if the property does in fact convert to market rate. These provisions have proven beneficial in preserving existing affordable housing and have not raised concerns among affordable housing owners. Eliminating the sunset will ensure that the state, local governments, and affordable housing developers will have both the information and the opportunity to preserve current and future projects when they become eligible to convert to market-rate housing. 2.A delicate balance . The current notice and priority purchase provisions are the result of negotiations between tenant advocates and both for-profit and non-profit affordable SB 454 (LOWENTHAL) Page 4 housing owners and developers. They represent a balance between the rights of property owners, the rights of tenants, and the public interest. In order to develop their properties, owners of affordable housing received some form of public subsidy and committed to maintain affordability on that housing for some period of time. In recognition of this public subsidy that made the development possible, current law asks owners to give notice and priority for preservation when exiting subsidy programs. At the same time, the law does not obligate the owner to sell and maintains the owner's right to convert the units to market rate rentals when the affordability covenants expire. 3.Eliminating the sunset . The Legislature first enacted the priority purchase provisions in 1990 and the notice requirements in 1998, subject to sunset clauses. In 2000, the Legislature extended the sunset on each section for an additional ten years. Because developers have constructed affordable housing developments on a rolling basis over many decades and continue to do so today, the preservation issue will exist into the long-term foreseeable future. Given the on-going need, the proven benefits, and the lack of controversy, it makes sense to eliminate the sunset clauses and extend these statutes permanently. POSITIONS: (Communicated to the Committee before noon on Wednesday, January 6, 2010) SUPPORT: California Coalition for Rural Housing (sponsor) California Rural Legal Assistance Foundation (sponsor) California Housing Partnership Corporation Western Center on Law and Poverty OPPOSED: None received.