BILL ANALYSIS                                                                                                                                                                                                    

                              Senator Jim Beall, Chair
                                2015 - 2016  Regular 

          Bill No:          AB 35             Hearing Date:    7/14/2015
          |Author:   |Chiu                                                  |
          |Version:  |5/20/2015                                             |
          |Urgency:  |Yes, Tax Levy          |Fiscal:      |Yes             |
          |Consultant|Alison Dinmore                                        |
          |:         |                                                      |

          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.

          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  

            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. 


            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  


          AB 35 (Chiu)                                        Page 5 of ?
              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  

            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  


          AB 35 (Chiu)                                        Page 6 of ?
              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  

            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  

            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  
                          July 8, 2015.)

          California Housing Consortium (co-sponsor)
          California Housing Partnership (co-sponsor)
          Non-Profit Housing Association of Northern California  
          AARP California
          Abode Communities
          Apartment Association, California Southern Cities
          Apartment Association of Orange County
          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


          City of Banning

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