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




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          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  




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          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  




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            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.