BILL ANALYSIS Ó 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 AB 952 - 5/2/13 -- Page 2 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 AB 952 - 5/2/13 -- Page 3 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 AB 952 - 5/2/13 -- Page 4 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 AB 952 - 5/2/13 -- Page 5 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 AB 952 - 5/2/13 -- Page 6 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.