BILL ANALYSIS                                                                                                                                                                                                    ”



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          ASSEMBLY THIRD READING


          AB  
          35 (Chiu and Atkins)


          As Amended  May 20, 2015


          Majority vote.  Tax levy


           ------------------------------------------------------------------- 
          |Committee       |Votes |Ayes                |Noes                  |
          |                |      |                    |                      |
          |                |      |                    |                      |
          |----------------+------+--------------------+----------------------|
          |Housing         |7-0   |Chau, Steinorth,    |                      |
          |                |      |Burke, Chiu, Beth   |                      |
          |                |      |Gaines, Lopez,      |                      |
          |                |      |Mullin              |                      |
          |                |      |                    |                      |
          |----------------+------+--------------------+----------------------|
          |Revenue &       |9-0   |Ting, Brough,       |                      |
          |Taxation        |      |Dababneh, Gipson,   |                      |
          |                |      |Roger HernŠndez,    |                      |
          |                |      |Mullin, Patterson,  |                      |
          |                |      |Quirk, Wagner       |                      |
          |                |      |                    |                      |
          |----------------+------+--------------------+----------------------|
          |Appropriations  |17-0  |Gomez, Bigelow,     |                      |
          |                |      |Bonta, Calderon,    |                      |
          |                |      |Chang, Daly,        |                      |
          |                |      |Eggman, Gallagher,  |                      |
          |                |      |                    |                      |
          |                |      |                    |                      |
          |                |      |Eduardo Garcia,     |                      |
          |                |      |Gordon, Holden,     |                      |








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          |                |      |Jones, Quirk,       |                      |
          |                |      |Rendon, Wagner,     |                      |
          |                |      |Weber, Wood         |                      |
          |                |      |                    |                      |
          |                |      |                    |                      |
           ------------------------------------------------------------------- 


          SUMMARY:  Modifies the existing Low-Income Housing Tax Credit  
          (LIHTC) program and increases the aggregate credit amount that may  
          be annually allocated to low-income housing projects by $300  
          million for the 2016 calendar year and each calendar year  
          thereafter, as provided.  Specifically, this bill:  


          1)Beginning in 2016 and each year thereafter, increases the amount  
            of state LIHTC by an additional $300 million, as adjusted for  
            inflation starting in 2017.


          2)Provides that a low-income housing building that has received an  
            award of 9% federal LIHTC is not eligible for an allocation from  
            the additional $300 million of state LIHTC, but shall remain  
            eligible for the existing $70 million allocation, as annually  
            adjusted.    


          3)Modifies the allocation of state LIHTC that may be awarded to a  
            federally subsidized low-income housing project receiving  
            federal 4% LIHTC as follows:


             a)   A new qualified low-income housing building is eligible  
               for a cumulative state LIHTC over four years of 50% of the  
               qualified basis of the building, provided that the building  
               is not located in a Difficult to Develop Area (DDA) or a  
               Qualified Census Tract (QCT).










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             b)   An existing qualified low-income housing building that is  
               not located in a DDA or a QCT is eligible for a cumulative  
               state LIHTC over four years of 13% of the qualified basis of  
               the building.    


             c)   A new or existing low-income housing building that is  
               located in a DDA or QCT may be awarded a cumulative state  
               LIHTC in an amount not to exceed 50% of the qualified basis  
               of the building, provided that the federal LIHTC is replaced  
               with state LIHTC, as specified. 


             d)   A qualified low-income building is eligible for a  
               cumulative state LIHTC of 95% of the qualified basis over  
               four years if it meets all of the following requirement:


               i)     Is at least 15 years old;


               ii)    Serves households with very-low income or extremely  
                 low-income residents, as specified; 


               iii)   Is restricted, for a period of not less than 55 years,  
                 to serving residents with the average targeted household  
                 income of no more than 45% of the area median income; and,


               iv)    It would receive insufficient state credits, due to  
                 the building's low appraised value, to complete substantial  
                 rehabilitation and the rehabilitation will be completed. 


          4)Revises the definition of a "taxpayer" for purposes of the state  
            LIHTC program to include members of a limited liability company.










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          5)Revises the definition of a "housing sponsor" for purposes of  
            the LIHTC program to include a limited liability company. 


          6)Adds the following definitions:


             a)   "Extremely low-income" has the same meaning as Health and  
               Safety Code (H&SC) Section 50053; and,


             b)   "Very low-income" has the same meaning as in H&SC Section  
               50053.   


          1)Makes technical, non-substantive changes to the provisions of  
            the LITHC program. 


          2)Takes effect immediately as a tax levy. 


          FISCAL EFFECT:  According to the Assembly Appropriations  
          Committee:


          1)Potentially significant General Fund costs to the California Tax  
            Credit Allocation Committee (TCAC), administrator of the LIHTC  
            program for the State Treasurer, to administer changes to the  
            program; minor and absorbable costs to Franchise Tax Board to  
            administer program changes.


          2)Estimated General Fund revenue decreases of $44 million, $150  
            million, and $180 million in Fiscal Year (FY) 2015-16, FY  
            2016-17, and FY 2017-18, respectively.


          COMMENTS:








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          1)Author's Statement.  The author has provided the following  
            statement in support of this bill:
               California's shortfall of 1.5 million affordable  
               rentals impedes our state's economic growth by slowing  
               job creation and driving Californians into poverty.   
               When housing costs are accounted for, the proportion  
               of people unable to meet their basic needs - food,  
               shelter, transportation - rises from 16 percent to 23  
               percent, the highest rate of poverty in the nation.


               A recent report from the California Housing  
               Partnership depicts a growing statewide crisis driven  
               by a growing divide between incomes and rents.   
               Statewide, median incomes have fallen 8 percent since  
               2000; meanwhile, rental prices have soared by 21  
               percent in the same timeframe.  There isn't a single  
               county in California with enough affordable rentals  
               for families struggling to make ends meet.


               Rising rents are locking broad swaths of Californians  
               - people who are key contributors to our communities -  
               out of San Francisco, San Diego and many other  
               California cities and crowding their families into  
               unsafe housing.  Twenty-one of the nation's least  
               affordable cities are in California; our home-health  
               aides, child-care workers, and teachers' assistants  
               have virtually nowhere to live in the communities  
               where they work, even if they work full-time.


               Small businesses and creators of entry-level jobs face  
               particular difficulties recruiting employees.  Closing  
               our communities to struggling workers reverberates  
               through our entire economy and impacts all taxpayers.'









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               California leaders must act to replace the $1.5  
               billion annual state investment wiped out when  
               voter-approved housing bonds were expended and  
               redevelopment funding was eliminated.  AB 35 would  
               take a step in the right direction by increasing the  
               California Low-Income Housing Tax Credit, a proven  
               public-private-partnership model, by $300 million per  
               year, and enable the state to attract $600 million in  
               additional federal funding that would otherwise not  
               come to California.


          2)State LIHTC Program.  In 1987, the Legislature authorized a  
            state LIHTC Program to augment the federal tax credit program.   
            State tax credits can only be awarded to projects that have also  
            received, or are concurrently receiving, an allocation of the  
            federal LIHTCs.  The amount of state LIHTC that may be annually  
            allocated by the TCAC is limited to $70 million, adjusted for  
            inflation.  In 2014, the total credit amount available for  
            allocation was $103 million (representing all four years of  
            allocation) plus any unused or returned credit allocations from  
            previous years.  
            Current state tax law generally conforms to federal law with  
            respect to the LIHTC, except that it is limited to projects  
            located in California.  While the state LIHTC program is  
            patterned after the federal LIHTC program, there are several  
            differences.  First, investors may claim the state LIHTC over  
            four years rather than the 10-year federal allocation period.   
            Second, the rates used to determine the total amount of the  
            state tax credit (representing all four years of allocation) are  
            30% of the qualified basis of a project that is not federally  
            subsidized and 13% of the qualified basis of a project that is  
            federally subsidized, in contrast to 70% and 30% (representing  
            all 10 years of allocation on a present-value basis),  
            respectively, for purposes of the federal LIHTCs.  Furthermore,  
            state tax credits are not available for acquisition costs,  
            except for previously subsidized projects that qualify as  
            "at-risk" of being converted to market rate. 








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            TCAC is authorized to replace federal LIHTC with state LIHTC of  
            up to 30% of a project's eligible basis if the federal LIHTC is  
            reduced in an equivalent amount.  This provision allows TCAC to  
            increase the number of projects funded with the limited federal  
            credits in a given year.  As discussed, the maximum federal tax  
            credit that can be awarded (the 9% credit) is generally equal to  
            70% (on a present-value basis) of a taxpayer's qualified basis  
            in the project, spread over a ten-year period.  Thus, a project  
            that receives the maximum in both state and federal credits  
            receives an amount equal to 100% of the taxpayer's qualified  
            basis over a 10-year period.


          3)DDAs and QCTs.  Federal LIHTCs can be used anywhere, but a  
            project is given an additional 30% on its eligible basis (a  
            "basis boost") if the project is located in a DDA or a QCT.   
            These areas, by definition, have a higher poverty level and a  
            higher concentration of extremely low-income or homeless  
            individuals and families, who typically need larger housing  
            subsidies.  Prior to 2014, TCAC was not allowed to award state  
            tax credits for projects located in DDAs and QCTs.  The  
            rationale for this prohibition was that projects in these areas  
            could qualify for more federal tax credits through a basis  
            "boost" and therefore are already advantaged.  State law,  
            however, was recently amended to authorize TCAC, in limited  
            cases, to award state LIHTCs for use in DDAs or QCTs, in  
            addition to the federal credits.  To qualify, a development must  
            restrict at least 50% of the units to special needs households.   
            Projects that serve special needs populations need greater  
            subsidy in order to offer deeply affordable rents.
          4)Deficiency in Current Law:  According to the California Housing  
            Partnership, California used more of the federal 4% LIHTC than  
            any other state during the early part of last decade.  However,  
            with the elimination of California's redevelopment agencies and  
            the exhaustion of state housing bond funding, developers of  
            low-income housing have been left with very few resources to  
            leverage the 4% credit.  As a result, the number of newly  








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            constructed LIHTC units that have been funded with the 4% credit  
            has plummeted in the last two years, from 4,000 in 2012 to fewer  
            than 2,000 in 2014.   


            Existing state law prescribes two different tax credit rates -  
            30% and 13% - to calculate the amount of the state LIHTC.  The  
            first one is allowed for projects that are not federally  
            subsidized and, thus, qualify for the higher 9% federal LIHTC.   
            In contrast, federally subsidized projects that qualify only for  
            the 4% federal LIHTC receive the state LIHTC in the amount equal  
            to 13% of the project's qualified basis.  Furthermore, no state  
            credit may be allocated to a low-income housing project located  
            in a DDA or QCT if the project has received a federal LIHTC  
            calculated on the 130% of eligible basis, unless the state LIHTC  
            is computed on 100% of the qualified basis or at least 50% of  
            the building's units are restricted to special need occupants.   
            Thus, existing state law limits the availability of the state  
            LIHTC to projects located outside a DDA or QCT, since they do  
            not receive a federal "basis boost" of 30% that is available to  
            projects located in those areas.  However, the bill's proponents  
            argue that developing housing in these areas is inherently more  
            expensive because of a higher concentration of extremely  
            low-income or homeless individuals and families.


          5)What Does This Bill Do?  This bill would increase the state  
            LIHTC allocation by $300 million per year, in addition to the  
            existing $70 million cap, as adjusted for inflation.  While  
            increasing the total amount of state LIHTC, this bill proposes  
            to limit the new funding only to projects that qualify for the  
            4% federal LIHTC.  The projects that receive the 9% federal  
            LIHTC would still qualify for the state LIHTC, albeit the annual  
            amount of those state credits would remain at $70 million, as  
            adjusted for inflation.  According to the California Housing  
            Partnership Corporation, the increase in the amount of state  
            LIHTC would allow the state to leverage an additional $200  
            million in federal 4% LIHTC and at least $400 million in federal  
            tax-exempt bond authority annually.  This additional funding is  








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            intended to be used exclusively for the construction,  
            rehabilitation and preservation of affordable rental homes for a  
            broad range of lower income households throughout the state.   
            The expectation is that an increase in the amount of state LIHTC  
            would help fill the gap in funding that was created by the loss  
            of redevelopment and the exhaustion of state voter-approved  
            bonds.  


            Furthermore, this bill would increase the amount of state tax  
            credits awarded to each qualified low-income housing project  
            from 13% to 50% of the qualified basis, provided the project is  
            also receiving a 4% federal tax credit.  This increase would  
            apply to new construction and rehabilitation costs of the  
            project and would more than triple the amount of equity that an  
            investor in the project would receive, which would bring the  
            return on 4% credits in line with 9% credits and would likely  
            result in greater affordability for the project.  The costs of  
            acquiring an existing low-income building would also be eligible  
            for the state LIHTC allocated from the new additional funding of  
            $300 million, but the applicable percentage used to calculate  
            the amount of that credit would be limited to 13% of the  
            project's qualified basis.  


            In addition, this bill would allow state tax credits to be  
            awarded to qualified projects without regard to DDA or QCT  
            status, with the main purpose of providing enough state tax  
            credits to match the value of a 9% federal tax credit.  However,  
            to ensure a level playing field between DDA/QCT areas and  
            non-DDA/QCT areas, this bill would explicitly allow TCAC to  
            adjust the new higher state credit percentage downward for  
            projects in DDAs or QCRs to equalize the value of the state  
            credit available in the different areas. 


            Finally, this bill would significantly increase an amount of  
            state LIHTC - 95% of the qualified basis - that may be awarded  
            to a qualified low-income housing building that houses very  








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            low-income or extremely low-income tenants and meets all  
            specified requirements, including the building's location, age,  
            and value. 




          Analysis Prepared by:                                               
                          Oksana Jaffe / REV. & TAX. / (916) 319-2098  FN:  
          0000641