BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |AB 35 |Hearing | 7/1/15 |
| | |Date: | |
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|Author: |Chiu |Tax Levy: |Yes |
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|Version: |5/20/15 |Fiscal: |Yes |
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|Consultant|Grinnell |
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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
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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
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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
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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
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"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
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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
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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
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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
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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
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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
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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.