BILL ANALYSIS Ó
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THIRD READING
Bill No: AB 523
Author: Ammiano (D) and Brown (D), et al.
Amended: 9/3/13 in Senate
Vote: 21
SENATE TRANSPORTATION & HOUSING COMMITTEE : 8-2, 6/18/13
AYES: DeSaulnier, Beall, Galgiani, Hueso, Lara, Liu, Pavley,
Roth
NOES: Gaines, Wyland
NO VOTE RECORDED: Cannella
SENATE APPROPRIATIONS COMMITTEE : 5-2, 8/30/13
AYES: De León, Hill, Lara, Padilla, Steinberg
NOES: Walters, Gaines
ASSEMBLY FLOOR : 53-24, 5/29/13 - See last page for vote
SUBJECT : Department of Housing and Community Development
loans
SOURCE : Non-Profit Housing Association of Northern
California
DIGEST : This bill allows the Department of Housing and
Community Development (HCD) to reduce 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
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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
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 the interest rate on any loan it
has issued to a rental housing development to as low as 0.42%
per annum, or a rate determined by HCD that is sufficient to
cover the costs of project monitoring, whichever is greater,
under the following conditions:
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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.
This bill also allows HCD to change the current interest rate
for any loan for which it receives a loan extension request
associated with an award of federal or state low-income housing
tax credits made 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. Authorizes the HCD to charge a fee in an amount
sufficient to cover administrative costs associated with a loan
modification requested by a borrower pursuant to this bill.
Comments
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 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.
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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 utilize these authorities.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee:
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
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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
Housing Rehabilitation Loan Fund). Most accrued interest is
paid at the end of the loan term.
SUPPORT : (Verified 6/11/14)
Non-Profit Housing Association of Northern California (source)
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
ARGUMENTS IN SUPPORT : According to this bill's sponsor,
Non-Profit Housing Association of Northern California, 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.
ASSEMBLY FLOOR : 53-24, 5/29/13
AYES: Alejo, Ammiano, Atkins, Bloom, Blumenfield, Bocanegra,
Bonilla, Bonta, Bradford, Brown, Buchanan, Ian Calderon,
Campos, Chau, Chesbro, Cooley, Daly, Dickinson, Eggman, Fong,
Fox, Frazier, Garcia, Gatto, Gomez, Gonzalez, Gordon, Gray,
Hall, Roger Hernández, Jones-Sawyer, Levine, Lowenthal,
Medina, Mitchell, Mullin, Muratsuchi, Nazarian, Pan, Perea, V.
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Manuel Pérez, Quirk, Quirk-Silva, Rendon, Salas, Skinner,
Stone, Ting, Weber, Wieckowski, Williams, Yamada, John A.
Pérez
NOES: Achadjian, Allen, Bigelow, Chávez, Conway, Dahle,
Donnelly, Beth Gaines, Gorell, Grove, Hagman, Harkey, Jones,
Logue, Maienschein, Mansoor, Melendez, Morrell, Nestande,
Olsen, Patterson, Wagner, Waldron, Wilk
NO VOTE RECORDED: Holden, Linder, Vacancy
JA:k 6/11/14 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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