BILL ANALYSIS
SENATE TRANSPORTATION & HOUSING COMMITTEE BILL NO: sb 1216
SENATOR ALAN LOWENTHAL, CHAIRMAN AUTHOR: cedillo
VERSION: 4/5/10
Analysis by: Carrie Cornwell FISCAL: yes
Hearing date: April 6, 2010
SUBJECT:
Low-income housing tax credits
DESCRIPTION:
This bill allows state low-income housing tax credits to be
substituted for federal low-income housing tax credits in
specified circumstances.
ANALYSIS:
Federal law enacted in 1986 created the federal low-income
housing tax credit (LIHTC) and required that each state
designate a state agency to administer the LIHTC program. SB 113
(Leroy Greene), Chapter 658, Statutes of 1987, assigned
responsibility for administering the federal LIHTC to the
California Tax Credit Allocation Committee (TCAC), which
consists of the three voting members: the State Treasurer, the
State Controller, and the Governor, or in the Governor's
absence, the Director of Finance. The Treasurer chairs TCAC,
staff for which is housed within the State Treasurer's Office.
The federal government assigns each state a ceiling on the
amount of LIHTC it can allocate each year. In 2010, the amount
is $2.10 per capita or $77 million total for
California.(Taxpayers claim federal credits each year for ten
years so this results in a total federal tax credit amount of
$770 million.) TCAC allocates these federal credits through a
competitive process to those who are developing qualified
affordable, rental housing. These developers then take on
investors as limited liability partners, who in exchange for the
tax credits provide funds in the form of equity for building the
SB 1216 (CEDILLO) Page 2
affordable housing.
In 1987, AB 53 (Klehs), Chapter 1138, created the state
low-income housing tax credit in recognition of the high cost of
housing in California. TCAC allocates state LIHTC to be used in
concert with federal credits. The annual state credit ceiling
for 2010 is approximately $89 million. Investors claim the state
LIHTC over a four-year period, rather than the ten-year federal
allocation period.
In determining the amount of LIHTC for which a project may be
eligible, first, total project cost is calculated. Secondly,
"eligible basis" is determined by subtracting non-depreciable
costs, such as land, permanent financing costs, rent reserves,
and marketing costs. If the development is located in a
HUD-designated Difficult to Develop Area (DDA) or Qualified
Census Tract (QCT), the eligible basis for federal tax credit
purposes receives a 30 percent adjustment or "basis boost" so
that it receives a credit equal to 130 percent of its eligible
basis.
As a general rule state credits go to projects outside DDAs and
QCTs so that they too can receive the 30 percent basis boost. In
the event that not enough projects need a basis boost to use all
of the state credits, TCAC, with the developer's consent, can
switch state LIHTC for federal LIHTC for the 30 percent of added
basis. This effectively stretches out the number of projects
that can be funded with the limited federal credits in a given
year. State law, however, caps the amount of state tax credit
for a project at 30 percent of the eligible basis.
This bill authorizes TCAC to award state tax credits to a
project in excess of the 30 percent of the eligible basis cap
and reduce the amount of federal credits accordingly to ensure
that the combined amount of state and federal credits does not
exceed the total credits allowable under state and federal law.
To substitute state tax credits in this way requires that:
TCAC have an excess of state LIHTCs to allocate in the
calendar year;
the developer agree to the substitution of state LIHTC for
federal; and
the state LIHTC does not exceed 80 percent of the eligible
basis.
COMMENTS:
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1.Purpose . The Low-Income Housing Tax Credit Program supports
the development, rehabilitation, and preservation of rental
housing that is affordable to very-low and extremely-low
income households. TCAC awards these tax credits to California
projects through a competitive process. The developers who
receive credits generally have limited tax liability of their
own. Therefore, they invite corporations or other private
investors to buy into their projects in order to take
advantage of state and federal tax credits.
Due to the recent economic downturn, the value of the tax
credits has decreased significantly, and many of the
affordable housing tax credits issued by the state and federal
government in recent years have gone unused. In order to
address this problem, the federal government has recently
allocated millions of dollars to TCAC under the American
Recovery and Reinvestment Act (ARRA) to enable developers to
sell back any unused state and federal tax credits.
Instead of simply applying for the cash provided under ARRA, a
few developers report that they have potential investors who
are interested in investing in projects with private dollars.
These investors, however, have a use at this time for state
tax credits over federal, due to their state tax liabilities.
Current law does not give TCAC the flexibility to change the
ratio of state and federal credits available to project
investors. This bill provides TCAC with that flexibility.
2.Enforcement concerns . TCAC monitors all housing projects that
have received LITHCs for the entire period that state and
federal law requires the housing developer to maintain the
resulting housing as affordable, typically 55 years. Existing
law requires TCAC to report any developer who has not complied
with the legal requirements associated with LIHTCs to the U.S.
Internal Revenue Service (IRS) and the California Franchise
Tax Board (FTB). The IRS has broad power, which it exercises
during the federal compliance period (i.e., the first 15
years), to both recapture the tax credits and impose penalties
in cases where the project developer does not abide by the
law. The FTB, however, possesses no similar statutory
authority.
Compliance with requirements of state LIHTC law thus depends
on fear of the IRS, plus demerits from TCAC in a developer's
future application for LITHCs and the potential that TCAC may
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bring a civil lawsuit against a non-complying housing
developer. It is important, therefore, to keep a major portion
of the tax credits in a LITHC project as federal credits to
engage the IRS in enforcement activities. This bill recognizes
that by requiring that in no case can the federal LIHTCs be
less than 50 percent of the eligible basis.
POSITIONS: (Communicated to the Committee before noon on
Wednesday,
March 31, 2010)
SUPPORT: Pacific West Communities (sponsor)
OPPOSED: None received.