BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: AB 952 HEARING: 8/14/13
AUTHOR: Atkins FISCAL: Yes
VERSION: 6/26/13 TAX LEVY: Yes
CONSULTANT: Grinnell
LOW-INCOME HOUSING TAX CREDITS
Allows projects serving special needs additional state
LIHTCs; codifies current practice to swap state LIHTCs for
federal ones.
Background and Existing Law
Current federal law allows tax credits for investors that
provide project capital to low-income housing projects.
Taxpayers claim credits equal to either 9% or 4% of the
project's basis over 10 years, and start claiming the
credit in the taxable year in which the project is placed
in service. Projects must remain affordable to residents
for 55 years.
The California Tax Credit Allocation Committee (CTCAC),
comprised of the State Treasurer, the State Controller, the
Director of Finance, and three non-voting members,
allocates the federal credits as the entity designated by
the state under federal law. CTCAC awards federal credits
based on a formula in federal law, currently $2.25 per
capita for each state. Housing developers design projects,
and apply to CTCAC for credits. CTCAC then reviews the
application, and either denies it or grants credits. The
housing developer then forms partnership agreements with
taxpayers that provide project capital for the low-income
housing project in exchange for the credits at a discount
(see Comment #3). CTCAC may allocate federal tax credits
to any area of the state, but must conduct a feasibility
analysis to ensure that the amount of credits granted
doesn't exceed the amount of capital needed to build the
project.
Tax credits are generally equal to 100% of a project's
eligible basis, or its cost less non-depreciable items.
However, the eligible basis is reduced by the applicable
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percentage, a measure of the amount of affordable units of
floor space in the project as a share of the entire
project. For example, a project with $5 million in total
development costs but $1 million in land acquisition costs
has a $4 million basis. If half of the units will be
affordable, the total basis is $2 million, which is
multiplied by 9% to determine the annual amount of the
credit of $180,000, for a ten-year value of $1.8 million.
However, as credit supply usually exceeds demand,
developers typically must exchange credits at a discount,
so the $1.8 million in credits will usually draw
approximately $1.35 million in project capital from
investors at the general 75% discount rate.
However, federal law also allows credits equal to 130% of
eligible basis if the project is located in a Qualified
Census Tract (QCT) or a Difficult to Develop Area (DDA), a
so-called "basis boost." QCTs are designated by the
Secretary of the United States Department of Housing and
Urban Development (HUD) in which either 50% or more of the
households have an income that is less than 60% of the area
median gross income or has a poverty rate of 25%. The
Secretary of HUD also draws DDAs using a ratio of
construction, land, and utility costs to area median gross
income. This "basis boost" is significant. In the above
example, the housing developer instead has a $5.2 million
basis ($4 million * 130%) if the project is located in a
QCT or DDA, and would instead be able to raise $1.75
million in project capital ($5.2 million * 50% * 9% * 75% *
10 = $1.75 million).
California also allows its own tax credit against the Gross
Premiums Tax, Personal Income Tax, and Corporation Tax for
investments made in low-income housing constructed in
California, known as the Low-Income Housing Tax Credit
(LIHTC or "lee-tek") to complement the federal credit.
Credits are computed in modified conformity with federal
law, and allocated by CTCAC according to specified
criteria. CTCAC allocates credits up to a cap set in
statute, and may also allocate credits unused in previous
years. Housing developers exchange state tax credits for
project capital in partnership agreements too, but
potential investors generally have less appetite for state
credits than federal ones - CTCAC reports about $25 million
in unused credits per year. Generally, taxpayers receive
a state credit equal to a total of 30% of basis, but can
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only claim the credit of 9% of basis in years one through
three, and 3% in the fourth year.
CTCAC can award federal credits to a project, or state and
federal credits together, but it cannot award a project
state credits solely except for farmworker housing, because
a threshold amount of federal credits ensures that the
Internal Revenue Service's (IRS's) interest in maintaining
the project's affordability over the 55 year compliance
period. IRS may recapture credits, however, the Franchise
Tax Board (FTB) cannot; instead, a party may bring suit in
Superior Court to enforce the project's affordability.
State law prohibits CTCAC from allocating state credits in
QCTs or DDAs unless it swaps out federal credits willing to
forgo the "basis boost," so that the combined credit amount
doesn't exceed 130% of basis. Additionally, CTCAC
regulation allows CTCAC to swap state credits for federal
credits for any authorized project when the state has
unused credits at the end of the year; CTCAC subsequently
awards the swapped out federal credits to different
projects.
Proposed Law
Assembly Bill 952 modifies the current restriction against
awarding state LIHTCs to projects in DDAs and QCTs when the
project contains at least 50 percent of its occupants are
special needs households, currently defined in CTCAC
regulations as developmentally disabled, are survivors of
physical abuse, are homeless, have chronic illness such as
HIV and mental illness, are displaced teenage parents (or
expectant parents) or another group as designated by
CTCAC's executive director. The change would allow these
projects to receive state credits of 30% of basis in
addition to federal ones generated on 130% of basis.
The measure also codifies current practice under regulation
of swapping an equivalent amount of state credits for
federal ones in any project, and makes technical changes.
State Revenue Impact
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Franchise Tax Board estimates that the bill won't impact
state income tax
revenue.
Comments
1. Purpose of the bill . According to the author, "Under
current law, the California Tax Credit Allocation Committee
is authorized to award $90 million in California Low Income
Housing Tax Credits. California receives financing for
affordable housing projects when investors buy these
credits, and the investor receives a credit against their
tax liability. Unfortunately, due to restrictions on where
these credits can be used, as many as $25 million in state
credits have gone unused in recent years. AB 952 will
remove the restriction on using California Low Income
Housing Tax Credits in the areas that need them most.
Housing projects that wish to access this financing tool
will need to set aside 50% of their units to serve special
needs populations such as the homeless, pregnant and
parenting teens, and the disabled. Removing the
restriction on using California Low Income Housing Tax
Credits in the neediest areas makes sense from both a
business and humanitarian viewpoint. AB 952 will ensure
that no state tax credits go unused, while also benefiting
Californian's with the greatest need for housing."
2. Maximizing value . AB 952 builds on previous
legislative efforts to modify the state LIHTC to draw-in
additional capital for low-income housing projects by
codifying CTCAC practice of swapping state credits for
federal credits, and allowing state credits along with
boosted federal ones for projects serving special needs
populations in QCTs and DDAs. Given the need for these
projects, the abrupt loss of project capital for affordable
housing resulting from the demise of redevelopment
agencies, and the unused LIHTC balance due to a changes in
tax appetite from traditional LIHTC buyers, AB 952 will
likely help enhance the return on investment for low-income
housing, leading to more projects.
3. A different kind of credit . The LIHTC induces
investment into low-income housing by providing a tax
shelter for investors that helps compensate private
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investors for allocating capital to an asset class with a
relatively poor rate of return. In return for providing
the tax shelter, the state gets more low-income housing
that it otherwise would have. Low-income housing projects
face many barriers in California: high costs of land,
labor, and capitol; NIMBYism (Not In My Back Yard); and
state and local laws and policies protecting the
environment, among others. Because the credit is capped
and allocated, CTCAC awards tax credits to projects on a
competitive process based on an evaluation of the most
effective use of the tax credits. This program is much
different than other tax credits, where any individual or
businesses can qualify for a credit by virtue of incurring
specific costs such as research and development or hiring
specific individuals.
Currently, housing sponsors form partnership agreements
with investors, who provide capital to fund the housing
construction in exchange for the allocated tax credits.
The tax credits exceed the value of the investment because
demand for the tax credits does not meet supply. For
example, a partnership agreement may allocate 100% of tax
credits to an investor that provides 75% of the necessary
project funding; the value of the discounted tax credits is
sufficient for investors to participate. Investors claim
the credit until exhausted, then walk away from the
partnership, and deduct the amount paid to the partnership
in exchange for the tax credits as a capital loss. State
law allows the partnership agreement to allocate the state
tax credit to investors in a manner that differs from the
proportional division of the federal credit (SB 585,
Lowenthal, 2008).
Assembly Actions
Assembly Housing and Community Development7-0
Assembly Revenue and Taxation 9-0
Assembly Appropriations 17-0
Assembly Floor 78-0
Senate Transportation and Housing 9-0
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Support and Opposition (08/08/13)
Support : State Treasurer Bill Lockyer (Sponsor), Bridge
Housing, California Housing Consortium, California Housing
Partnership Corporation, Housing California, Non Profit
Housing Association of Northern California, Tenderloin
Neighborhood Development Corporation, Westside Center for
Independent Living; Western Center on Law and Poverty.
Opposition : Unknown.