BILL ANALYSIS Ó SENATE COMMITTEE ON GOVERNANCE AND FINANCE Senator Robert M. Hertzberg, Chair 2015 - 2016 Regular ------------------------------------------------------------------ |Bill No: |AB 35 |Hearing | 7/1/15 | | | |Date: | | |----------+---------------------------------+-----------+---------| |Author: |Chiu |Tax Levy: |Yes | |----------+---------------------------------+-----------+---------| |Version: |5/20/15 |Fiscal: |Yes | ------------------------------------------------------------------ ----------------------------------------------------------------- |Consultant|Grinnell | |: | | ----------------------------------------------------------------- INCOME TAXES: CREDITS: LOW-INCOME HOUSING: ALLOCATION INCREASE Increases the amount if tax credits CTCAC can allocate for low-income housing; revises percentages and establishes new categories Background and Existing Law Current federal law allows tax credits against the Personal Income Tax, Corporation Tax, and Gross Premiums Tax for investors who provide project capital to low-income rental housing projects. Taxpayers claim Low-Income Housing Tax Credits (LIHTCs) equal to either 9% annually of the basis in a new building (not federally subsidized), or 4% annually of the basis of an existing building (federally subsidized) over 10 years, and can begin applying the credit in the taxable year in which the project is placed in service. Projects must remain affordable to residents for 15 years. California also allows its own LIHTCs against the Gross Premiums Tax, Personal Income Tax, and Corporation Tax for investments made in low-income housing constructed in California to complement the federal credit. Credits are computed in modified conformity with federal law, but can only be claimed in fixed percentages equal 30% of qualified basis over four years. Under the state credit, projects must remain affordable for 30 years. AB 35 (Chiu) 5/20/15 Page 2 of ? 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 both federal and state credits. CTCAC awards federal 9% credits for projects up to a cap set by federal law, currently $2.30 per capita for each state; CTCAC can allocate 4% credits without limit. CTCAC also allocate state credits of 30% of basis over four years to 9% credit projects up to an amount equal to inflation adjusted of the $70 million initially set in statute in 2001, plus any unallocated credits from previous years, which equaled $103 million in 2014. CTCAC can allocate credits of 13% of basis over four years for 4% credit projects, but can only do some out of the same authorized amount as the 9% credits. Housing developers design projects, and apply to CTCAC for both credits. Should CTCAC approve the application and grant the developer credits, he or she forms partnership agreements with taxpayers that provide project capital in exchange for the credits at a discount. CTCAC can award federal credits to a project, or state and federal credits together, but cannot solely award state credits to a project except for farmworker housing, because a threshold amount of federal credits ensures that the Internal Revenue Service's (IRS's) interest in enforcing the project's affordability over the compliance period. IRS may recapture credits; however, the Franchise Tax Board (FTB) cannot. Instead, CTCAC maintains an enforcement staff to monitor affordability, and a party can bring suit in Superior Court to enforce the project's affordability. Combining federal 9% credits with state credits generally equals 100% of a project's eligible basis, or its cost less non-depreciable items. However, the eligible basis is reduced by the applicable 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, federal law also allows credits equal to 130% of eligible basis if the project is AB 35 (Chiu) 5/20/15 Page 3 of ? 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. State law restricts 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. Recently, the Legislature modified this restriction to allow CTCAC to allocate state credits when the project contains at least 50% 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 (AB 952, Atkins, 2013). The change allows these projects to receive state credits of 30% of basis in addition to federal ones generated on 130% of basis. That measure also codified CTCTAC regulation to swap an equivalent amount of state credits for federal ones in any project, and makes technical changes. Given the demise of redevelopment agencies and the depletion of general obligation bond funds for housing, the author wants to increase the state's usage of 4% credits by increasing both the state credit percentages, and the overall amount that CTCAC can allocate to projects qualifying for the 4% credits. Proposed Law Assembly Bill 35 makes several changes to the state LIHTC to establish a new category for LIHTC projects, modify credit percentages, and additionally authorize CTCAC to allocate $300 million in additional credits. AB 35 (Chiu) 5/20/15 Page 4 of ? First, the measure increases credit percentages for new buildings that are federally subsidized, and not in QCTs or DDAs, from the current 4% of qualified basis over the first three years, and 3% in the fourth year, for a total of 15% to 15% for each of the first three years, and 5% in the fourth year, for a total of 50%, an increase of more than three times. Second, the bill allows CTCAC to allocate state credits for new or existing buildings in QCTs and DDAs up to 50% of basis, but must replace federal credits with state ones when doing so. Lastly, AB 35 establishes a new, targeted category for existing buildings at least fifteen years old that are eligible for a credit of 30% in the first three years, and 5% in the fourth, for a total of 95%, if: The project serves households of very-low and extremely-low income such that its average maximum household income is not more than 45% of the area median gross income, The project is subject to a regulatory agreement restricting the average maximum household income to the above standard for 55 years, The project would have insufficient credits under current categories to complete substantial rehabilitation, The credit allocation results in the completion of the project The measure authorizes CTCAC to allocate up to $300 million in credits in the 2016-17 fiscal year, plus $300 million each fiscal year thereafter plus an inflation adjustment for projects under the new category, or for projects only eligible for the 4% credit. CTCAC can allocate credits to developers eligible for the 9% credit from the current $75 million authorization, but developers of these projects are ineligible for allocations from the new $300 million. The measure deletes provisions allowing CTCAC to allocate state credits when the project contains at least 50 percent of its occupants are special needs households. AB 35 also imports current definitions in the Health and Safety Code for CTCAC to sue when determining "low-income" and AB 35 (Chiu) 5/20/15 Page 5 of ? "extremely low-income." The measure applies it changes to LIHTC sections in the Gross Premiums Tax, Personal Income Tax, and Corporation Tax. The bill also makes conforming changes. State Revenue Impact According to FTB, AB 35 results in revenue losses of $190 million in 2015-16, and $180 million each fiscal year thereafter. Comments 1. Purpose of the bill . According to the author "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.' 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 AB 35 (Chiu) 5/20/15 Page 6 of ? year, and enable the state to attract $600 million in additional federal funding that would otherwise not come to California." 2. Bigger and better . Federal law allows CTCAC to allocate 9% credit for projects that are not "federally subsidized," but 4% for ones that are. Developers that obtain federal 9% credits and combine them with state credits generally have a sufficient subsidy to construct a low-income housing project; however, CTCAC can only allocated these credits up to a cap set by federal law. While the 4% credits aren't subject to a similar cap, they often do not have the value necessary to generate sufficient project capital for a project to pencil out in a post-redevelopment world. AB 35 seeks to fill this gap by increasing the value of state credits to hopefully secure more interest in 4% projects to generate sufficient subsidy amounts to construct projects. Another vital component is the federal subsidy, which isn't a direct monetary subsidy, but instead the issuance of mortgage revenue bonds, where the subsidy is the federal and state income tax exclusion for interest payments. Local housing authorities apply to the California Debt Limit Allocation Committee (CDLAC) for an allocation of tax-exempt private activity bond ceiling. If approved, the local housing authority sells the bonds, loans the proceeds to housing developers, who combine these funds with capital raised from state and federal LIHTCs to construct the project, and then repay the bonds out of rents. Last year, CDLAC allocated $1.25 billion in ceiling for multifamily projects, an amount that should increase if AB 35 is enacted. 3. A different kind of credit . The LIHTC induces investment in low-income housing by providing a tax shelter for 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 than it otherwise would have. Low-income housing projects face many barriers in California: high costs of land, labor, and capital; resistance from local residents 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, AB 35 (Chiu) 5/20/15 Page 7 of ? 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. 4. Who pays ? In addition to LIHTC, the state's response to its lack of affordable housing has been to fund projects through general obligation bonds, and until recently, authorizing redevelopment agencies to fund projects by securitizing future property tax growth within redevelopment project areas. Both responses are premised on the idea that the lack of affordable housing is a statewide responsibility that should be paid for by the general public in the form of general obligation debt service or foregone revenue from tax expenditures. However, local agencies may also use inclusionary zoning ordinances, which require developers of market rate housing to set aside units as part of a project that are affordable for to residents across the income spectrum. Despite legal challenges from the construction industry, the California Supreme Court recently unanimously upheld the City of San Jose's inclusionary zoning ordinance which required developers of projects of 20 or more units to set aside 15% of units for individuals earning no more than 120% of the Santa Clara County area median income to purchase in California Building Industry Association v. City of San Jose (Case #S212072). Developers could also pay an in-lieu fee, construct off-site units, dedicate land, or acquire and rehabilitate other units. However, this case only spoke to housing for sale; state law does not yet clearly authorize inclusionary zoning for rental units. 5. Related Legislation . Earlier this year, the Committee approved SB 377 (Beall), which allowed developers receiving LIHTC credit reservations to sell credits to unrelated parties under specified conditions. That bill is awaiting hearing in the Assembly Revenue and Taxation Committee. 6. Coming and going . Senate Rules Committee ordered a AB 35 (Chiu) 5/20/15 Page 8 of ? double-referral for AB 35 to the Committees on Governance and Finance and Transportation and Housing. Assembly Actions Assembly Floor 78-0 Assembly Appropriations 17-0 Assembly Revenue and Taxation 9-0 Assembly Housing and Community Development 7-0 Support and Opposition (6/23/15) California State Treasurer, John Chiang; California State Controller, Betty T. Yee; A Community of Friends; Adobe Community; Affirmed Housing; Affordable Housing, Inc.; Affordable Housing Association-Pacific Southwest; Alameda County Development Disabilities Council; Alameda County Housing Authority; Alpha Construction Co., Inc.; American Association of Retired Persons (AARP); American Planning Association, California Chapter; Amy Hiestand Consulting; Angelus Plaza, a Retirement Housing Foundation; Aspira Net; Association of Bay Area Governments; Bay Area Council; Be.group; Beacon Communities/ABHOW; Bridge Housing; Burbank Housing Corporation; Burbank Housing Development Corporation; Cabrillo Economic Development Corporation; California Alliance for Retired Americans; California Apartment Association; California Association of Housing Authorities; California Association of Local Housing Finance Agencies; California Bankers Association; California Building Industry Association; California Center for Cooperative Development; California Chamber of Commerce; California Community Loan Fund; California Coalition for Rural Housing; California Coalition for Youth; California Council for Affordable Housing; California Council of Community Mental Health Agencies; California Housing Consortium; California Housing Partnership Corporation; California Infill Builders Federation; California Institute for Rural Studies; California Partnership to End Domestic Violence; California Political Consulting Group; California Special Districts Association; California State Association of Counties; Capitol Area Development Authority; Christian Church Homes; Christian Church Pacific Southwestern AB 35 (Chiu) 5/20/15 Page 9 of ? Region; Cities Association of Santa Clara County; City and County of San Francisco; City of Alameda; City of Banning; City of Berkeley; City of Burbank; City of Camarillo; City of Chowchilla; City of Concord; City of Culver City; City of Danville; City of Dublin; City of El Centro; City of Emeryville; City of Eureka; City of Fairfield; City of Fremont; City of Glendale; City of Lakeport; City of Lakewood; City of Lafayette; City of Livermore; City of Lodi; City of Los Angeles; City of Merced; City of Morgan Hill; City of Napa; City of Rocklin; City of Sacramento; City of San Carlos; City of San Diego; City of Santa Barbara; City of San Jose; City of Santa Monica; City of Santa Rosa; City of South San Francisco; City of Taft; City of Thousand Oaks; City of Torrance; City of Tulare; City of Turlock; City of Union City; City of Vista; City of West Hollywood; Community Action North Bay; Community Corporation of Santa Monica; Community Economics, Inc.; Community Housing Opportunities Corporation; Community Housing Partnership; Community Housing Works; Community Land Trust Association; Community Leadership Association; Community Overcoming Relationship Abuse; Contra Costa Interfaith Housing; Core Affordable Housing; Corporation for Supportive Housing; County of Santa Clara; County Welfare Directors Association; Disability Rights California; Domus Development; Downtown Women's Center; EAH Housing; East Bay Developmental Disabilities Legislative Coalition; East B ay Legislative Coalition; Eden Housing; Episcopal Diocese of Los Angeles; First Community Housing; Goldfarb & Lipman LLP; Habitat for Humanity; HCEB; Highridge Costa Housing Partners, LLC; Highridge Costa Investors, LLC; HIP Housing, Inc.; HKIT Architects; Hollywood Adventist Church; Hope Home Ownership for Personal Empowerment, LLC; Housing Authority, City of San Buenaventura; Housing Authority, City of Santa Barbara; Housing Authority, City of Santa Clara; Housing California; Housing Choices Coalition; Housing Element of the City of Emeryville; Housing Leadership Council of San Mateo County; Housing Trust Silicon Valley; Hudson Housing Capital; Hunger Advocacy Network; Irvine Community Land Trust; Jamboree Housing Corporation; Kennedy Commission; Korean Resource Center; Larkin Street Youth Services; Laurin Associates; Law Foundation of Silicon Valley; Leadership Counsel for Justice and Accountability; LeadingAge California; League of Cities; LINC Housing; Linda M. Nelson DBA Nelson Rental Consultant; Little Tokyo AB 35 (Chiu) 5/20/15 Page 10 of ? Service Center CDC; Loaves and Fishes; Los Angeles Area Chamber of Commerce; Los Angeles Community Action Network; Many Mansions; Marin County Board of Supervisors; Mental Health America of California; Mercy Housing California; MidPen Housing; Monterey County Board of Supervisors; Nancy Lewis Associates, Inc. ; Napa Valley Community Housing; National Association of Social Workers, California Chapter; National Housing Law Project; NeighborWorks Orange County; Newman Garrison and Partners, Inc.; Non-Profit Housing Association of Northern California; North Bay Leadership Council; North Los Angeles County Regional Center; Northern California Community Loan Fund; Northern California Presbyterian Homes and Services; Onyx Architects; Orange Coast Interfaith Shelter; Pacific West Communities; PATH; Palm Communities; People's Self Help Housing Corporation; PEP Housing; Powell & Partners, Architects; Project Access, Inc.; Promise Energy; Resources for Community Development; Retirement Housing Foundation; Rural Communities Housing Development Corporation; Rural Community Assistance Corporation; Sacramento Housing Alliance; Sacramento Homeless Organizing Committee; Sacramento Loaves and Fishes; San Diego County Apartment Association; San Diego Housing Commission; San Diego Housing Federation; San Diego Organizing Project; San Diego Regional Chamber of Commerce; San Diego Tenant Association; San Francisco Housing Action Coalition; San Francisco Unified School District; San Joaquin Valley Housing Collaborative; San Luis Obispo County Housing Trust Fund; Santa Clara County Board of Supervisors; Satellite Affordable Housing Associates; Self-Help Enterprises; Seventy Day Adventist Church; Sierra Business Council; Shelter Partnership, Inc.; Shelter, Inc.; Silicon Valley Bank; Silicon Valley Leadership Group; Skid Row Housing Trust; Sonoma County Housing Advocacy Group; Southern California Association of Non-Profit Housing; Southern California Legislative Council; St. Anthony Foundation; St. Vincent's; AB 35 (Chiu) 5/20/15 Page 11 of ? TELACU Residential Management; Tenemos que Reclamar y Unidos Salvar La Tierra (T.R.U.S.T. South LA); Thomas Safran & Associates; Trinity Center Walnut Creek; United Ways of California; Urban Habitat; Venice Community Housing Corporation; Walkland Housing and Development Corporation; Ward Economic Development Corporation; Western Seniors Housing, Inc.; WORKS; Yolo Housing; Nineteen private individuals Opposition: Unknown.