BILL ANALYSIS Ó SENATE TRANSPORTATION & HOUSING COMMITTEE BILL NO: ab 952 SENATOR MARK DESAULNIER, CHAIRMAN AUTHOR: atkins VERSION: 5/2/13 Analysis by: Carrie Cornwell FISCAL: yes Hearing date: June 25, 2013 SUBJECT: Low-income housing tax credits DESCRIPTION: This bill allows the state's Tax Credit Allocation Committee to allocate state low-income housing tax credits to housing projects in federally designated areas in which it is difficult to develop housing as long as the housing built is restricted so that 50 percent of the occupants will be special needs households. ANALYSIS: Federal law enacted in 1986 created the federal low-income housing tax credit (LIHTC) and required that each state designate a state agency to administer the LIHTC program. SB 113 (Leroy Greene), Chapter 658, Statutes of 1987, assigned responsibility for administering the federal LIHTC to the California Tax Credit Allocation Committee (TCAC), which consists of three voting members: the State Treasurer, the State Controller, and the Governor, or in the Governor's absence, the Director of Finance. The Treasurer chairs TCAC, and the committee's staff is housed within the State Treasurer's Office. The federal government assigns each state a ceiling on the amount of LIHTC it can allocate each year. In 2013, the amount is $2.25 per capita or $86 million total for California. (Taxpayers claim federal credits each year for 10 years so this results in a total federal tax credit amount of $860 million for this year's awards.) TCAC allocates these federal credits through a competitive process to those who are developing qualified affordable rental housing. These developers then take on investors as limited liability partners, who in exchange for the tax credits provide funds in the form of equity for building the affordable housing. AB 952 (ATKINS) Page 2 In 1987, AB 53 (Klehs), Chapter 1138, created the state low-income housing tax credit in recognition of the high cost of housing in California. TCAC allocates state LIHTC to be used in concert with federal credits. The annual state credit ceiling for 2012 is approximately $92 million. Investors claim the state LIHTC over a four-year period, and the credit amount is divided over these four years, unlike the federal credit amount which is multiplied over its ten-year allocation period. In determining the amount of LIHTC for which a project may be eligible, first, total project cost is calculated. Secondly, "eligible basis" is determined by subtracting non-depreciable costs, such as land, permanent financing costs, rent reserves, and marketing costs. If the development is located in a HUD-designated Difficult to Develop Area (DDA) or Qualified Census Tract (QCT), the eligible basis for federal tax credit purposes receives a 30 percent adjustment or "basis boost" so that it receives a credit equal to 130 percent of its eligible basis. As a general rule state credits go to projects outside DDAs and QCTs so that they too can receive the 30 percent basis boost. Pursuant to regulations that TCAC has adopted, however, when not enough projects need a basis boost to use all of the state credits, then TCAC, with the developer's consent, can switch state LIHTC for federal LIHTC for the 30 percent of added basis. This effectively stretches out the number of projects that TCAC can help to fund with the limited federal credits in a given year. State law, however, caps the amount of state tax credit for a project at 30 percent of the eligible basis. This bill : 1.Allows TCAC to allocate state LIHTCs to projects in DDAs and QCTs that are subject to restrictions ensuring that 50 percent of the occupants will be special needs households, as defined in TCAC's regulations, and in which the state credits do not exceed 30 percent of the eligible basis. 2.Provides statutory authority for TCAC to replace federal LIHTC with state LIHTC of up to 30 percent of a project's eligible basis if the federal LIHTC is reduced in an equivalent amount and allows TCAC to do this without developer consent. TCAC AB 952 (ATKINS) Page 3 determines what constitutes an equivalent amount of state LIHTC necessary to replace the federal LIHTC a taxpayer would have received. 3. Is a tax levy that takes effect immediately. COMMENTS: 1.Purpose . The Low-Income Housing Tax Credit Program supports the development, rehabilitation, and preservation of rental housing that is affordable to very-low and extremely-low income households. Federal tax credits can be used anywhere in the state, but projects are given an additional 30 percent on their eligible basis if the project is located in a DDA or a QCT. Because these areas by definition have a higher-poverty level and a higher concentration of extremely low-income or homeless individuals and families, housing in them typically needs larger subsidies to make it affordable. Existing state law does not allow TCAC to award state tax credits in DDAs and QCTs. The rationale for this prohibition is that projects in these areas can qualify for more federal tax credits through a basis boost and therefore are already advantaged. This bill allows, in limited cases, for TCAC to award state credits for use in DDAs or QCTs, which would be in addition to the federal credits. To qualify, a development must restrict at least 50 percent of the units to special needs households. Projects that serve special needs populations need greater subsidy in order to offer deeply affordable rents. This bill also clarifies TCAC's authority to swap out state LIHTC for federal LIHTC if the sponsor agrees when making the application. TCAC awards project sponsors additional points in their applications if they agree to accept a swap. This practice is authorized in TCAC's regulations. This bill would confirm that authority in statute. 2.An example . By allowing state credits to be used in DDAs and QCTs, this bill will increase the equity these projects can generate from tax credits because the projects qualify already for a basis boost that results in more federal tax credits than projects outside of a DDA or a QCT. Under existing federal law, projects can receive 30 percent more federal LIHTC if they locate in a DDA or QCT. This bill would allow projects to receive state tax credits of up to an additional AB 952 (ATKINS) Page 4 30 percent of the project's eligible basis. As an example, if a project qualifies for $10 million in eligible basis in a DDA or QCT, the project could get up to 130 percent of that basis in federal tax credits, which means the project sponsor would have $13 million in federal credits to offer to investors who buy into the project. This bill would allow that project to get an additional 30 percent in state tax credits against the $10 million in eligible basis, which would create an additional $3 million in state tax credits. 3.No change in amount, just use . This bill does not change the amount of state low-income housing tax credits that TCAC can award each year. It does, however, allow TCAC to use the existing credits to more deeply subsidize housing targeted to Californians with special needs, such as mental or physical disabilities. 4.Double-referral . The Rules Committee has referred this bill to both this committee and the Governance and Finance Committee. Therefore, if this bill passes this committee, it will be referred to the Committee on Governance and Finance. 5.Technical amendments . On page 4, line 37, strike "(iii)(I)" and insert "(G)(i)" On page 5, line 3, strike "(II)" and insert "(ii)" On page 15, line 3, strike "(iii)(I)" and insert "(G)(i)" On page 15, line 9, strike "(II)" and insert "(ii)" On page 25, line 33, strike "(iii)(I)" and insert "(G)(i)" On page 26, line 1, strike "(II)" and insert "(ii)" Assembly Votes: Floor: 78-0 Appr: 17-0 R&T: 9-0 H&CD: 7-0 POSITIONS: (Communicated to the committee before noon on Wednesday, June 19, 2013.) SUPPORT: State Treasurer Bill Lockyer (sponsor) California Housing Partnership Corporation AB 952 (ATKINS) Page 5 OPPOSED: None received.