BILL ANALYSIS Ó
SENATE COMMITTEE ON TRANSPORTATION AND HOUSING
Senator Jim Beall, Chair
2015 - 2016 Regular
Bill No: AB 35 Hearing Date: 7/14/2015
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|Author: |Chiu |
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|Version: |5/20/2015 |
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|Urgency: |Yes, Tax Levy |Fiscal: |Yes |
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|Consultant|Alison Dinmore |
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SUBJECT: Income taxes: credits: low-income housing:
allocation increase
DIGEST: This bill increases the amount of state tax credits the
California Tax Credit Allocation Committee (TCAC) can allocate
for low-income housing and makes other changes to the state
low-income housing tax credit (LIHTC) program.
ANALYSIS:
Existing law:
1) Provides that a low-income housing development that is a
new building and is receiving 9% federal LIHTC credits is
eligible to receive state LIHTC over four years of 30% of
the eligible basis of the building.
2) Provides that a low-income housing development that is a
new building that is receiving federal LIHTC and is "at risk
of conversion" to market rate is eligible to receive state
LIHTC over four years of 13% of the eligible basis of the
building.
3) Allows TCAC to award state LIHTCs to developments in a
qualified census tract (QCT) or a difficult to designated
difficult development area (DDA) if the project is also
receiving federal LIHTC, under the following conditions:
a) Developments restrict at least 50% of the units to
AB 35 (Chiu) Page 2 of ?
special needs households; and
b) The state credits do not exceed 130% of the eligible
basis of the building.
1) Allows TCAC to replace federal LIHTC with state LIHTC of
up to 130% of a project's eligible basis if the federal
LIHTC is reduced in an equivalent amount.
2) Defines a QCT as any census tract designated by the U.S.
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 that has a
poverty rate of at least 25%.
3) Defines a DDA as an area designated by HUD on an annual
basis that has high construction, land, and utility costs
relative to area median gross income.
This bill:
1) Modifies the allocation of state LIHTC that may be awarded
to a federally subsidized low-income housing project
receiving federal 4% LIHTC so that:
a) A new qualified low-income housing building is
eligible for a cumulative state LIHTC over four years of
50% of the eligible basis of the building, provided that
the building is not located in a DDA or a QCT.
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
eligible 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
eligible basis of the building, provided that the federal
LIHTC is replaced with state LIHTC, as specified.
d) A qualified existing, low-income building that is at
least 15 years old is eligible for a cumulative state
LIHTC of 95% of the eligible basis over four years if it
meets all of the following requirements:
AB 35 (Chiu) Page 3 of ?
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; and
The credit allocation results in the completion
of the project.
1) Authorizes TCAC 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. TCAC 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.
2) Imports current definitions for "low-income" and
"extremely low-income" and makes other conforming changes.
3) Takes effect immediately as a tax levy.
COMMENTS:
1) Purpose of the bill. According to the author,
California's shortfall of 1.5 million affordable rental
units impedes its 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% to 23%, the highest rate of poverty in the nation.
Additionally, 21 of the nation's least affordable cities are
in California.
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% since 2000; meanwhile, rental prices have
risen to 21% in the same timeframe. Further, no county in
California has sufficient affordable rental units for
AB 35 (Chiu) Page 4 of ?
low-income individuals.
With the loss of redevelopment and expenditure of the last
voter-approved housing bonds, $1.5 billion of annual state
investment dedicated to housing has been eliminated. AB 35
would reverse that by increasing the California LIHTC, a
proven public-private-partnership model, by $300 million per
year, and enable the state to attract $600 million in
additional federal funding.
2) Background of the federal LIHTC program. The LIHTC is an
indirect federal subsidy developed in 1986 to incentivize
the private development of affordable rental housing for
low-income households. The federal LIHTC program enables
low-income housing sponsors and developers to raise project
equity through the allocation of tax benefits to investors.
TCAC administers the program and awards credits to qualified
developers who can then sell those credits to private
investors who use the credits to reduce their federal tax
liability. The developer in turn invests the capital into
the affordable housing project.
Two types of federal tax credits are available: the 9% and
4% credits. These terms refer to the approximate percentage
of a project's "eligible basis" a taxpayer may deduct from
his/her annual federal tax liability in each of 10 years.
"Eligible basis" means the cost of development excluding
land, transaction costs, and costs incurred for work outside
the property boundary. For projects that are not financed
with a federal subsidy, the applicable rate is 9%. For
projects that are federally subsidized (including projects
financed more than 50% with tax-exempt bonds), the
applicable rate is 4%. Although the credits are known as
the "9% and 4% credits," the actual tax rates fluctuate
every month, based on the determination made by the Internal
Revenue Service on a monthly basis. Generally, the 9% tax
credit amounts to 70% of a taxpayer's eligible basis and the
4% tax credit amounts to 30% of a taxpayer's eligible basis,
spread over a 10-year period.
Each year, the federal government allocates funding to the
states for LIHTCs on the basis of a per-resident formula.
In California, TCAC is the entity that reviews proposals
submitted by developers and selects projects based on a
variety of prescribed criteria. Only rental housing
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buildings, which are either undergoing rehabilitation or
newly constructed, are eligible for the LIHTC programs. In
addition, the qualified low-income housing projects must
comply with both rent and income restrictions.
Each state receives an annual ceiling of 9% federal tax
credits and they are oversubscribed by a 3:1 ratio. Unlike
9% LIHTC, federal 4% tax credits are not capped; however,
they must be used in conjunction with tax-exempt private
activity mortgage revenue bonds which are capped and are
administered by the California Debt Limit Allocation
Committee. In 2015, the state ceiling for private activity
bonds is set at $5.61 billion.
The value of the 4% tax credits is less than half of the 9%
tax credits and, as a result, 4% federal credits are
generally used in conjunction with another funding source,
like state housing bonds or local funding sources. In 2014,
developers only used $80.5 million in annual federal 4% tax
credits, significantly less than prior years. This is
because, unlike in prior years, there is little supplemental
funding from housing bonds or local funding sources to fill
the remaining financing gap The loss of redevelopment
funding and state housing bond funds, which were used in
combination with 4% federal credits to achieve higher
affordability, has made the 4% federal credits less
effective.
3) Background of the 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 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
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rates used to determine the total amount of the state tax
credit (representing all four years of allocation) are 30%
of the eligible basis of a project that is not federally
subsidized and 13% of the eligible 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.
Combining federal 9% credits (which amounts to roughly 70%)
with state credits (which amounts to 30%) generally equals
100% of a project's eligible basis. Combining federal 4%
credits (which amounts to roughly 30%) with state credits
(which amounts to 13%), only results in 43% of a project's
eligible basis.
4) Background of state credits in DDAs and QCTs. Federal law
also allows credits equal to 130% of eligible basis if the
project is located in a QCT or a DDA, a so-called "basis
boost" of 30%. QCTs are designated by the Secretary of 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
have 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 prohibits TCAC from allocating state credits in
QCTs or DDAs unless TCAC swaps out federal credits willing
to forgo the "basis boost," so that the combined credit
amount doesn't exceed 130% of basis. The rationale for this
prohibition is that projects in these areas can qualify for
more federal tax credits through a basis boost and therefore
are already advantaged.
State law 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. The change allows these projects to receive
state credits of 30% of basis in addition to federal ones
generated on 130% of basis.
AB 35 (Chiu) Page 7 of ?
5) Increasing amount of state credits. 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. 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. The increase
would help fill the gap in funding that was created by the
loss of redevelopment and the exhaustion of state
voter-approved bonds.
6) Filling the gap. This bill also increases the amount of
state tax credits awarded to each qualified low-income
housing project from 13% to 50% of the eligible basis,
provided the project is also receiving a 4% federal tax
credit. Developers that receive federal 9% credits can
combine them with a sufficient subsidy to construct a
low-income housing project, but TCAC can only allocate those
credits up to a federal cap. While the 4% credits are not
subject to a cap, they do not have the same value because
developers cannot generate sufficient capital needed to
cover the cost of the project. This bill would increase the
value of the state credits to secure more interest than the
4% to generate sufficient amounts to construct projects.
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 eligible basis.
7) An extra boost. Federal law gives projects an extra 30%
boost on eligible basis if the project is located in a DDA
or QCT. These areas have a higher poverty level and a
higher concentration of extremely low-income individuals and
families, so deep subsidy is required to make housing
AB 35 (Chiu) Page 8 of ?
affordable. State law does not allow state credits to be
awarded in DDAs or QCTs, except for housing developments
where 50% of the units are for special-needs populations.
The rationale for the prohibition is that projects in these
areas can qualify for more federal tax credits and are
already advantaged.
The bill allows TCAC to allocate state credits for new or
existing buildings in QCTs and DDAs up to 50% of basis of a
project receiving a 4% credit, but must replace federal
credits with state ones when doing so. In other words, the
state would provide the percentage necessary so that the
aggregate of the state credits and the federal boost equal
50% of basis. The main purpose of this change is to provide
enough state tax credits to match the value of a 9% federal
tax credit. As with the other provisions of the bill, this
only changes the state tax credit for projects receiving 4%
credits and does not affect projects receiving 9% tax
credits.
8) Rehabilitating existing housing stock. Many low-income
housing developments in the state are older and need
significant rehabilitation. These projects, therefore,
require more investment due to their age and level of
repairs, combined with low rents. This bill will
significantly increase an amount of state LIHTC - 95% of the
eligible basis - that may be awarded to a qualified
low-income housing building that houses very low-income or
extremely low-income tenants and meets all specified
requirements, including the building's location, age, and
value.
9) Costs and effects. The increase in state LIHTCs is a tax
credit, which means this is tax liability that would have
otherwise gone to the general fund from corporations, which
instead choose to invest in low-income housing tax credits.
While it's possible that it could take $300 million from the
general fund, the idea is that investors would likely be
seeking tax credits elsewhere and might, with the enactment
of this bill, now build affordable housing. As previously
noted, the increase in the amount of state LIHTC would allow
the state to leverage an additional $200 million in federal
AB 35 (Chiu) Page 9 of ?
4% LIHTC and at least $400 million in federal tax-exempt
bond authority annually. The sponsors also estimate that if
this bill were enacted, 2,000 new rental homes would be
created annually.
Further, there are economic impacts from the construction,
job creation, and local tax benefits of building multifamily
homes. The estimated one-year impacts of building 100 rental
apartments in a typical local area include $11.7 million in
local income, $2.2 million in taxes and other revenue for
local governments, and 161 local jobs (1.62 jobs per
apartment). The additional, annually recurring impacts of
building 100 rental apartments in a typical local area
include $2.6 million in local income, $503,000 in taxes and
other revenue for local governments, and 44 local jobs (.44
jobs per apartment).
10) Double-referred. This bill was heard in the Senate
Governance and Finance Committee on July 1, 2015, and
approved 6-0.
Assembly Votes:
Floor: 78-0
Appr: 17-0
Rev&Tax: 9-0
H&CD: 7-0
Related Legislation:
SB 377 (Beall, 2015) - allows a taxpayer who receives an
allocation of state LIHTC from TCAC to sell all or any portion
of the credit to one or more unrelated parties for each taxable
year in which the credit is allowed for not less than 80% of the
amount of the credit. This bill is pending in the Assembly
Revenue and Taxation Committee.
AB 952 (Atkins, Chapter 771, Statutes of 2013) - authorizes TCAC
to allocate a state LIHTC for buildings located in a DDA or QCT
that have at least 50% special-needs occupants.
FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes
AB 35 (Chiu) Page 10 of ?
Local: No
POSITIONS: (Communicated to the committee before noon on
Wednesday,
July 8, 2015.)
SUPPORT:
California Housing Consortium (co-sponsor)
California Housing Partnership (co-sponsor)
Non-Profit Housing Association of Northern California
(co-sponsor)
AARP California
Abode Communities
Apartment Association, California Southern Cities
Apartment Association of Orange County
Aspiranet
BRIDGE Housing
Burbank Housing Corporation
Burbank Housing Development Corporation
California Alliance for Retired Americans
California Apartment Association
California Bankers Association
California Building Industry Association
California Center for Cooperative Development
California Coalition for Youth
California Council for Affordable Housing
California Council of Community Mental Health Agencies
California Economic Summit
California Infill Builders Federation
California Special Districts Association
California State Association of Counties
California State Treasurer
Christian Church (Disciples of Christ) Pacific Southwest Region
City of Alameda
City of Burbank/Burbank Redevelopment Agency
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
AB 35 (Chiu) Page 11 of ?
City of Eureka
City of Fairfield
City of Fremont
City of Glendale
City of Lafayette
City of Lakeport
City of Lakewood
City of Livermore
City of Lodi
City of Los Angeles
City of Merced
City of Morgan Hill
City of Napa
City of Oakland
City of Rocklin
City of Sacramento
City of San Carlos
City of San Francisco
City of San Jose
City of Santa Barbara
City of Santa Monica
City of Santa Rosa
City of Taft
City of Thousand Oaks
City of Torrance
City of Tulare
City of Turlock
City of Union City
City of Ventura
City of Vista
City of West Hollywood
Community Economics, Inc.
Community Housing Opportunities Corporation
Community HousingWorks
Community Land Trust Association of West Marin
Contra Costa County
Contra Costa Interfaith Housing
Core Affordable Housing
County Welfare Directors Association of California
Disability Rights California
Domus Development
EAH Housing
East Bay Developmental Disabilities Legislative Coalition
East Bay Rental Housing Association
Elder Advocates for Community Health
AB 35 (Chiu) Page 12 of ?
The Episcopal Diocese of Los Angeles
Goldfarb & Lipman LLP
Greenbelt Alliance
Highridge Costa Housing Partners, LLC
Highridge Costa Investors
HIP Housing, Inc.
HKIT Architects
Hollywood Adventist Church
Home Ownership for Personal Empowerment
Housing Authority of the City of San Buenaventura
Housing Authority of the City of Santa Barbara
Housing Authority of the County of Alameda
Housing Leadership Council of San Mateo County
Housing Trust Silicon Valley
Hudson Housing Capital
Irvine Community Land Trust
Islamic Shura Council of Northern California
Jamboree Housing Corporation
The Kennedy Commission
Korean Resource Center
Larkin Street Youth Services
Law Foundation of Silicon Valley
League of California Cities
LINC Housing
Lutheran Office of Public Policy - California
Many Mansions
Marin County Board of Supervisors
Mayor of Long Beach
Mayor of Los Angeles
Mayor of Santa Barbara
Mental Health America of California
Mercy Housing/Bennett House
MidPen Housing Corporation
Monterey County Board of Supervisors
Nancy Lewis Associates
Napa Valley Community Housing
National Association of Social Workers
Nelson Rental Consultant
Nor Cal Rental Property Association
North Los Angeles County Regional Center
North Valley Property Owners Association
Northern California Community Loan Fund
The Pacific Companies
Palm Communities
Peoples' Self-Help Housing
AB 35 (Chiu) Page 13 of ?
Powell & Partners,, Architects
Rural Communities Housing Development Corporation
Rural Community Assistance Corporation
Sacramento Loaves & Fishes
San Diego County Apartment Association
San Diego Housing Commission
San Francisco County
San Francisco Housing Action Coalition
San Francisco Unified School District
San Luis Obispo County Housing Trust Fund
San Mateo County
Santa Clara County Board of Supervisors
Satellite Affordable Housing Associates
Seventh-Day Adventist Church, Santa Clarita
SHELTER, Inc.
Shelter Partnership, Inc.
Silicon Valley Bank
Southwest California Legislative Council
Trinity Center
United Ways of California
Venice Community Housing Corporation
Ward Economic Development Corporation
Western Seniors Housing, Inc.
Women Organizing Resources, Knowledge and Services
Yolo Housing
17 individuals
OPPOSITION:
City of Banning
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