BILL ANALYSIS                                                                                                                                                                                                    



          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.