BILL ANALYSIS Ó SENATE TRANSPORTATION & HOUSING COMMITTEE BILL NO: ab 523 SENATOR MARK DESAULNIER, CHAIRMAN AUTHOR: Ammiano VERSION: 5/24/13 Analysis by: Mark Stivers FISCAL: yes Hearing date: June 18, 2013 SUBJECT: Department of Housing and Community Development loans DESCRIPTION: This bill allows the Department of Housing and Community Development (HCD) to reduce or eliminate the interest rate on any loan it has issued to a rental housing development under specified conditions. ANALYSIS: Under existing law, HCD makes loans to the developers of affordable rental housing. As a general rule, HCD makes these loans with the proceeds of general obligation bonds or federal funds. The terms of these loans differ somewhat by program and in some cases are established in statute. For example, the statute for HCD's Multifamily Housing Program (MHP) states that loans shall have 55-year terms, carry a 3% simple interest rate, and defer principal and interest payments until loan maturity, except for nominal annual interest payments to cover HCD's on-going monitoring costs. These deferred loans significantly lower the developer's debt service expenditures, allowing the developer to offer rents at an affordable level to lower-income households. Federal law creates the Low-Income Housing Tax Credit Program, which the California Tax Credit Committee (TCAC) administers in California. TCAC also administers a small State Low-Income Housing Tax Credit Program, which largely follows rules for the federal program. Federal law counts towards the "eligible basis" on which the credit is based, development costs supported by debt (i.e., a loan) but not those supported by a grant. In addition, federal tax law defines as debt only those amounts that the developer can reasonably expect to repay by the end of the loan term. If the debt cannot be shown to be supportable by the project, federal tax law considers it a grant, which a AB 523 (AMMIANO) Page 2 taxpayer therefore cannot count towards a project's eligible basis for purposes of claiming a low-income housing tax credit. In addition, when a developer seeks low-income housing tax credits to acquire and rehabilitate an existing affordable housing development, federal tax rules provide that he or she must reduce the eligible basis by the difference between the long-term cost of below-market-rate debt (e.g., the HCD loan) and the long-term cost of the loan assuming use of the federally determined "applicable federal rate" (AFR). When the AFR is above HCD's rate, the developer still owes the full amount of the HCD loan but may only count a portion of it towards the eligible basis. If HCD's rate is equal to or less than the AFR, there is no reduction in the eligible basis. This bill allows HCD to reduce or eliminate the interest rate on any loan it has issued to a rental housing development under the following conditions: The development has no other debt with regularly scheduled or amortizing debt service payments. The development will utilize low-income housing tax credits. The sponsor provides evidence acceptable to HCD that demonstrates that the loan is not eligible to be treated as debt for federal or state low income housing tax credit purposes without a reduction in the interest rate of the loan. The bill also allows HCD to change the current interest rate for any loan it originates on or after January 1, 2014 to the federally determined AFR. In cases where doing this will make the total amount of debt and accrued interest at the end of the loan term greater than it would be under the original interest rate, HCD may forgive some or all of the interest accrued on the existing loan in order to make the ultimate amount of principal and interest owed the same as it would be using the original interest rate. COMMENTS: 1.Purpose of the bill . HCD's loans for affordable rental housing are "soft" loans, meaning that most interest and principal payments are deferred to the end of the loan term rather than due on a monthly basis. For such soft loans to be considered a loan and not a grant for low-income housing tax purposes, a project sponsor must be able to demonstrate some AB 523 (AMMIANO) Page 3 plausible set of circumstances under which it could repay the loan. To do this, a project sponsor will run a "true debt" analysis showing the project could conceivably generate enough net operating income to repay all debt, typically by showing the rents the project could charge after the 55-year regulatory period ends, when rents are no longer restricted. If a project fails this true debt test, the loan is treated as a grant for tax credit purposes and the project loses an equivalent amount of tax credit basis, which makes the loan worth very little to the project. According to the sponsor of the bill, it is extremely rare for a project to fail the true debt analysis, but supportive housing developments that serve extremely low-income residents have such minimal cash flow from rents that they may not be able to pass the test. In such cases, the difference between a 3% and 0% interest rate accruing on the soft loan is the difference between the project passing and failing its true debt analysis, and therefore the difference between the project moving forward and stalling. This bill is narrowly drawn to only allow a rate reduction when it makes the difference in terms of a project passing or failing the true debt test. As a result, this bill allows projects in such situations to move forward and realize the social benefits for which HCD awarded the projects funds. 2.Using AFRs . With interest rates at such historic lows, the federal AFR has dipped below HCD's 3% interest rate for its standard Multifamily Housing Program. As a result, an applicant who seeks to extend an existing HCD loan as part of an acquisition and rehabilitation project that also uses low-income housing tax credit financing cannot count the full loan amount for tax credit purposes, thereby reducing the amount of tax credits the project may receive. This situation may make the project financially infeasible. Moreover, because HCD's interest rate is applied only to the actual loan amount (i.e., simple interest) and the AFR applies to the loan and deferred interest (i.e., compound interest), the repayment burden under the AFR may actually be higher even though the rate is lower. This bill gives HCD authority to address both problems. It allows HCD to use the AFR rate so that a developer may count the full loan amount for tax credit purposes and allows HCD to reduce the amount of interest accrued to date on the loan so that the total future payments are ultimately the same. In no case is HCD required to AB 523 (AMMIANO) Page 4 utilize these authorities. 3.Other programs allow similar assistance . This bill does not convert any loan into a grant. It only allows for a reduction in the interest rate as needed for the loan to be useful. Even if HCD reduces an interest rate to zero percent under this bill, the project sponsor will still owe the full principal amount at the end of the loan term. HCD administers other programs, such as the Farmworker Housing Grant Program and the Emergency Housing Assistance Program, in which it offers grants to the developers of farmworker housing or emergency shelters due to the extremely low incomes of the intended residents and the inability of sponsors to repay the assistance. These programs receive general obligation bond funding as well. 4.Technical amendment . On page 2, line 19 strike "it originates" and insert "for which it receives a loan extension request associated with an award of federal or state low-income housing tax credits made" Assembly Votes: Floor: 53-24 Appr: 12-5 H&CD: 5-1 POSITIONS: (Communicated to the committee before noon on Wednesday, June 12, 2013.) SUPPORT: Non-Profit Housing Assn. of Northern CA (sponsor) California Housing Consortium California Housing Partnership Corporation City and County of San Francisco Community Economics EAH Housing Housing California Leading Age California MidPen Housing San Diego Housing Federation Western Center on Law and Poverty OPPOSED: None received. AB 523 (AMMIANO) Page 5