BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 523
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          ASSEMBLY THIRD READING
          AB 523 (Ammiano and Brown)
          As Amended May 24, 2013
          Majority vote 

           HOUSING             5-1         APPROPRIATIONS      12-5        
           
           ----------------------------------------------------------------- 
          |Ayes:|Torres, Atkins, Brown,    |Ayes:|Gatto, Bocanegra,         |
          |     |Chau, Mullin              |     |Bradford,                 |
          |     |                          |     |Ian Calderon, Campos,     |
          |     |                          |     |Eggman, Gomez, Hall,      |
          |     |                          |     |Ammiano, Pan, Quirk,      |
          |     |                          |     |Weber                     |
          |     |                          |     |                          |
          |-----+--------------------------+-----+--------------------------|
          |Nays:|Beth Gaines               |Nays:|Harkey, Bigelow,          |
          |     |                          |     |Donnelly, Linder, Wagner  |
          |     |                          |     |                          |
           ----------------------------------------------------------------- 
           SUMMARY  :  Allows the Department of Housing and Community  
          Development (HCD) to reduce or change the interest rate on loans  
          for affordable rental housing developments.  Specifically,  this  
          bill  :  

          1)Allows HCD to reduce the interest rate on loans for affordable  
            rental housing developments to as low as 0% 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. 

          1)Allows HCD to change the interest rate for any loan it  
            originates on or after January 1, 2014, to the applicable  
            federal rate most recently published by the United States  
            Internal Revenue Service. 








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          2)Provides that if the total amount of debt and accrued interest  
            at the end of the loan term with the applicable federal rate  
            interest rate is greater than it would have been with the  
            original interest rate, than HCD may forgive, whichever is  
            less, either an amount of accrued interest necessary to match  
            what the expected principal and interest would have been under  
            the original interest rate or the amount of interest accrued  
            at the time the sponsor requested the change.  

           FISCAL EFFECT  :  According to the Assembly Appropriations  
          Committee, possible cost from extending the terms of the  
          existing loans, potentially in the millions of dollars.  To the  
          extent that there are projects that cannot pay the state back  
          under the loan terms, the net cost of the bill is reduced.   
          Administrative costs are expected to be minor, approximately  
          $25,000.  \

           COMMENTS  :  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.  








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          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  
          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 0% 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. 


           Analysis Prepared by  :    Lisa Engel / H. & C.D. / (916) 319-2085  



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