BILL ANALYSIS Ó
AB 523
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Date of Hearing: April 3, 2013
ASSEMBLY COMMITTEE ON HOUSING AND COMMUNITY DEVELOPMENT
Norma Torres, Chair
AB 523 (Ammiano) - As Introduced: February 20, 2013
SUBJECT : Department of Housing and Community Development:
loans
SUMMARY : Allows the Department of Housing and Community
Development (HCD) to reduce the interest rate on loans for
affordable rental housing developments to as low as zero
percent. Specifically, this bill :
1)Allows HCD to reduce the interest rate on loans for affordable
rental housing developments to as low as zero percent if the
following conditions are met:
a) There is no other debt or regularly amortized debt
service payments on the development;
b) The development is using low-income housing tax credits;
and
c) The sponsor of the development can prove that a
reduction in the interest rate is necessary for the HCD
loan to be treated as debt for federal or state low-income
housing tax credit purposes.
EXISTING LAW
1)Establishes the Multifamily Housing Program (MHP) to provide
deferred payment loans for the acquisition, construction, or
rehabilitation of housing affordable to low and very-low
income families and individuals.
2)Requires MHP loans to be for a term of not less than 55 years
and at 3% simple interest with payments due at the end of the
term of the loan.
(Health and Safety Code 50675.6 et. al.)
FISCAL EFFECT : Unknown.
COMMENTS :
AB 523
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Rental housing developments that are affordable to low- and
very-low income families and individuals typically require
multiple sources of construction financing. Two key sources of
funding are the Multifamily Housing Program (MHP) and the
Low-Income Housing Tax Credit (LIHTC). The Tax Credit Allocation
Committee (TCAC) administers the LIHTC program and awards
credits to qualified developers who can then sell those credits
to private investors who use the credits to reduce their federal
tax liability. The developer in turn invests the capital into
the affordable housing project. MHP provides deferred payment
loans to developers for the construction of affordable housing
to low- and very-low income residents. All loans are for
fifty-five years at 3% simple interest and payments of principal
and the accumulated interest are due at the end of the loan
period. There is approximately $51 million currently available
in MHP and $7 million available in the supportive housing
component of MHP for funding.
Federal law requires TCAC to conduct a feasibility study on
every project to ensure that the amount of tax credits allocated
do not exceed the amount required for the project to make the
project feasible. To calculate the amount of credits a project
may receive, TCAC first determines the total project cost and
then determines the "eligible basis" by subtracting the
non-depreciable costs, such as land permanent financing costs,
rent reserves, and marketing costs.
Under Federal Internal Revenue Service Law, a developer
receiving LIHTC must demonstrate that all loans on a project can
be repaid. Because MHP loans carry a 3% deferred interest rate,
this can create a conflict for projects that receive an MHP loan
and reduce the amount of "eligible basis" reducing the amount of
federal tax credits for which a project can qualify.
Purpose of this bill: AB 523 would give HCD discretion in
limited circumstances to reduce the interest rate on a project
that receives an MHP loan is also awarded LIHTC. To qualify a
sponsor would have to prove to the satisfaction of HCD that
without the reduction in the interest rate on the MHP loan the
amount of tax credit the project could qualify for would be
reduced and there are no other loans on the development that
require ongoing debt payments. MHP loans are considered "soft"
debt because they are deferred and do not require debt and
interest payments until the end of the term of the 55-year loan.
Under federal law, a sponsor of a development that receives
AB 523
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LIHTC must demonstrate a plausible set of circumstance under
which the MHP loan could be repaid. The sponsor and/or investor
will run a "true debt" analysis showing the project could
conceivably generate enough net operating income to repay all
debt, typically by showing the market rents the project could
charge after the 55-year regulatory period ends. If a project
fails this true debt test, loans are treated as grants for tax
purposes and the project loses an equivalent amount of tax
credits.
By reducing the interest rate on these loans to zero percent the
program will not recover the 3% interest payments at the end of
the 55-years; however, the principal will be due on the loan at
the end of the term.
REGISTERED SUPPORT / OPPOSITION :
Support
BRIDGE Housing
California Rural Legal Assistance Foundation
Californian Housing Consortium
Community Economics
EAH Housing
Housing California
LeadingAge California
MidPen Housing Corporation
Non-Profit Housing Association of Northern California
Western Center on Law & Poverty
Opposition
None on file.
Analysis Prepared by : Lisa Engel / H. & C.D. / (916) 319-2085