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  




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          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  




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            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  




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            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.







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