BILL ANALYSIS Ó
Senate Appropriations Committee Fiscal Summary
Senator Kevin de León, Chair
AB 523 (Ammiano) - Department of Housing and Community
Development loans.
Amended: June 24, 2013 Policy Vote: T&H 8-2
Urgency: No Mandate: No
Hearing Date: August 12, 2013
Consultant: Mark McKenzie
This bill meets the criteria for referral to the Suspense File.
Bill Summary: AB 523 would authorize the Department of Housing
and Community Development (HCD) to reduce or eliminate the
interest rate on loans for affordable housing developments that
meet specified criteria. HCD would also be authorized to change
the interest rate and forgive accrued interest on specified
loans if it receives a loan extension request associated with
the award of low-income housing tax credits made after January
1, 2014.
Fiscal Impact:
One-time HCD costs of up to $50,000 to revise regulations
for existing loan programs.
Unknown annual HCD administrative costs, likely in hundreds
of thousands annually, to perform loan modifications on
existing loans. Costs would be approximately $400,000 in a
year in which HCD restructured ten loans. (various funds,
primarily Housing Rehabilitation Loan Fund).
Unknown, significant loss of interest revenues, the
proceeds of which are used to fund HCD loan administration
costs and future loans (various funds, primarily Housing
Rehabilitation Loan Fund). For each $1 million in loan
proceeds for which the simple interest rate is reduced from
3% to 0%, there would be a loss of $1.65 million over the
life of a 55-year loan ($30,000 per year).
Unknown future loss of interest repayments as a result of
forgiveness of accrued interest on specified loans for which
a developer requests an extension associated with an award
of low-income housing tax credits (various funds, primarily
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Housing Rehabilitation Loan Fund). Most accrued interest is
paid at the end of the loan term.
Background: HCD administers several programs that provide loans
to developers of affordable rental housing. HCD provides
deferred payment loans under the Multifamily Housing Program
(MHP) for the acquisition, construction, or rehabilitation of
housing affordable to low and very-low income families and
individuals. MHP loans have a term of not less than 55 years at
a 3% simple interest rate, and principle and interest payments
are deferred until loan maturity, although HCD collects residual
payments to cover costs of administering the loan.
Federal law establishes the Low-Income Housing Tax Credit
Program, which is administered in this state by the California
Tax Credit Committee (TCAC) in conjunction with a State
Low-Income Housing Tax Credit Program. Federal law counts
towards the "eligible basis" on which the credit is based,
development costs supported by debt 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. To do this, developers run a "true debt"
analysis showing the project could conceivably generate enough
net operating income to repay all debt, typically by showing the
rents that can be charged at market rate at the end of the loan
term. If the debt cannot be shown to be supportable by the
project after running this test, federal tax law considers the
loan a grant, and the project loses an equivalent amount of tax
credit basis.
In addition, when a developer seeks low-income housing tax
credits to acquire and rehabilitate an existing affordable
housing development, federal tax rules require that the eligible
basis be reduced by the difference between the long-term cost of
below-market-rate debt, such as an 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.
Proposed Law: AB 523 would authorize HCD to reduce the interest
rate on any loan issued to a rental housing development to as
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low as zero percent if:
The development will utilize low-income housing tax credits;
The development has no other debt with regularly scheduled or
amortizing debt service payments; and
The sponsor provides evidence that the loan is not eligible to
be treated as debt for low-income housing tax credit purposes
without the reduction in interest.
The bill would also authorize HCD to change the current interest
rate to the applicable federal rate (AFR) on a loan for which it
receives a loan extension request associated with an award of
federal or state low-income housing tax credits made after
January 1, 2014. If the amount of debt and accrued interest at
the end of the loan term would increase as a result of the
change, HCD would be authorized to forgive accrued interest
equal to the lesser of either the total amount at the time of
the request or the amount that would make the expected principal
and accrued interest the same as it would have been at the
original rate.
Related Legislation: SB 77 (Leno), which died in Senate Rules
Committee last year, was identical to the introduced version of
this bill. SB 77 was originally a budget trailer bill, but was
amended in the Assembly to delete the budget-related contents
and add the housing provisions. That bill was never heard in a
policy committee.
Staff Comments: This bill is intended to expand the availability
of affordable rental housing by allowing a reduced interest rate
when it makes the difference in terms of a project passing the
"true debt" tests in federal law, to maximize the amount of
low-income housing tax credits that may be claimed.
HCD indicates that the costs to perform underwriting and closing
activities associated with a loan modification are $39,280 per
loan. Although this bill is not expected to authorize reduced
interest rates in many cases, if only ten loans per year are
modified in a year, administrative costs would be nearly
$400,000. In addition, HCD's ongoing monitoring activities
related to a particular loan are paid for out of the residual
simple interest that is collected, which is the equivalent of
0.42% interest rate. As such, any reduction of interest below
that amount would have to be paid from increased collection of
residual interest on other loans, where it is authorized.
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This bill would create future cost pressures to increase funding
for affordable housing loan programs to the extent that reduced
interest payments and forgiveness of accrued interest
significantly reduces the amounts available for future loans.
Reductions in interest payments that would otherwise be used to
capitalize new loans inhibits the ability of HCD to maintain
programs at current levels.