BILL ANALYSIS Ó AB 523 Page 1 CONCURRENCE IN SENATE AMENDMENTS AB 523 (Ammiano and Brown) As Amended June 23, 2014 Majority vote ----------------------------------------------------------------- |ASSEMBLY: |53-24|(May 29, 2013) |SENATE: |25-10|(June 30, | | | | | | |2014) | ----------------------------------------------------------------- Original Committee Reference: H. & C.D. SUMMARY : Allows the Department of Housing and Community Development (HCD) to reduce 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 0.42% per annum if the following conditions are met: a) There is no other debt or regularly amortized debt service payments on the development; b) The development has no debt in a senior lien position to HCD's debt; c) Thirty-five percent or more of the total units must serve households with income not exceeding 30% of the area median income; d) HCD's new loan cannot be used to supplement or replace an existing department loan; e) The development is using low-income housing tax credits; and f) 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 AB 523 Page 2 Internal Revenue Service. 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, for a loan extension request associated with an award of federal or state low-income housing tax credits made, 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. The Senate amendments : 1)Change the minimum amount of interest that HCD is authorized to reduce a loan to from 0% to 0.42%. 2)Adds the following requirements that a development must meet in order to qualify for a reduced interest rate: a) The development can have no debt in a senior lien position to HCD's debt; b) Thirty-five percent or more of the total units must serve households with income not exceeding 30% of the area median income; and c) HCD's new loan cannot be used to supplement or replace an existing department loan. 1)Gives HCD the authority to impose a default interest rate of 3% if any amortizing debt is placed on the project after the interest rate is lowered. 2)Gives HCD the authority to contract with a third-party tax professional to verify that the department's loan is not eligible to be treated as debt for federal or state low-income housing tax credit purposes and in order for it to qualify the interest rate on the loan must be reduced. 3)Allow HCD to charge a fee to cover the administrative costs associated with modifying a loan. 4)Limit the project to which HCD can reduce the interest rate to AB 523 Page 3 the applicable federal rate to those that have received a state or federal low-income housing tax credits. FISCAL EFFECT : According to the Senate Appropriations Committee: 1)One-time HCD costs of up to $50,000 to revise regulations for existing loan programs. 2)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 10 loans (various funds, primarily Housing Rehabilitation Loan Fund). 3)Unknown, significant loss of interest revenues, the proceeds of which are used to fund HCD loan administration costs of 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). 4)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 Housing Rehabilitation Loan Fund). Most accrued interest is paid at the end of the loan term. 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 55 years at 3% simple interest and payments of principal and the accumulated interest are due at the end of the AB 523 Page 4 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. 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: This bill would give HCD discretion in limited circumstances to reduce the interest rate on a project that receives an MHP loan that 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 0.42% 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. AB 523 Page 5 Analysis Prepared by : Lisa Engel / H. & C.D. / (916) 319-2085 FN: 0004197