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  




          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










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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.