BILL ANALYSIS Ó AB 723 Page 1 Date of Hearing: August 25, 2016 ASSEMBLY COMMITTEE ON HOUSING AND COMMUNITY DEVELOPMENT David Chiu, Chair AB 723 (Chiu) - As Amended August 18, 2016 SUBJECT: Housing: finance SUMMARY: This bill permits the Department of Housing and Community Development (HCD) to allow an applicant with one or more Community Development Block Grant (CDBG) agreements, signed in 2012 or later, to apply for and receive an award of funds, at the determination of the HCD director, without regard to whether the applicant has expended at least 50% of their existing awards, and makes changes to California Housing Finance Agency (CalHFA) statutes. Specifically, this bill: 1)Permits HCD to allow an applicant with one or more CDBG agreements, signed in 2012 or later, to apply for and receive an award of funds without regard to whether the applicant has expended at least 50% of their existing awards. The awarding of funds under these circumstances shall be determined by the HCD director and evaluated on the basis of eligibility, need, benefit, or readiness. 2)Gives CalHFA the option, in adjusting rents for household size, to utilize occupancy assumptions that it determines to AB 723 Page 2 be appropriate and commercially reasonable for financing. 3)Gives the CalHFA board of directors' discretion to waive the priority requirements for very low-income households in designated geographic areas upon a determination that the housing needs of a substantial number of lower income households will not otherwise be met. 4)Removes existing references to the use of the sale of bond proceeds to finance CalHFA programs. 5)Includes intent language stating that nothing in this bill can be interpreted to modify the terms of any regulatory agreement recorded on or before August 31, 2016. 6)Includes an urgency clause. EXISTING LAW: 1)Requires at least 20% of the total number of units in a multifamily rental housing development financed from the proceeds of bonds issued by CalHFA to be occupied on a priority basis by lower income households. 2)Requires in a targeted area, defined as qualified census tract or an area of chronic economic distress, that not less than 15% of the total number of units financed by CalHFA be occupied on a priority basis by lower income households, and no less than one- half of the units required for lower income households be provide on a priority basis to very low- income households. AB 723 Page 3 3)Restricts the rental payments that can be charged to very low-income households to not more than 30% of 50% of the area median income (AMI). 4)Requires CalHFAto in determining rents for household size to assume that one person will occupy a studio unit, two people will occupy a one-bedroom unit, three people will occupy a two-bedroom unity, four people will occupy a three bedroom unit, and five people will occupy a four bedroom unit. FISCAL EFFECT: According to the Senate Appropriations Committee: 1)Accelerated expenditure of CDBG funds, likely in the tens of millions annually over several years (federal funds). Staff notes that current regulations appear to be preventing the expenditure of current available federal funds. Absent the bill, future allocations of federal funding may be at risk. 2)Minor and absorbable administrative costs to HCD (General Fund) and CalHFA (special funds). COMMENTS: CDBG Program. The CDBG program was established by the United States Housing & Community Development Act of 1974 (HCD Act) and is administered at the federal level by the U.S. Department of Housing and Urban Development (HUD). Among the many uses of CDBG funds are infrastructure improvements and activities in AB 723 Page 4 support of the construction of housing for persons of low and moderate income. Congress amended the HCD Act in 1981 to give each state the opportunity to administer CDBG funds for small cities and counties, called "non-entitlement areas." Eligible applicants in "non-entitlement areas" include counties with fewer than 200,000 residents in unincorporated areas and cities with fewer than 50,000 residents that do not participate in the HUD CDBG entitlement program. Since 1983, HCD has administered the state CDBG program in California, and releases a notice of funding availability each year, including CDBG-eligible activities. The state program awards grants to non-entitlement areas to develop and preserve decent affordable housing. According to HUD, California currently has five times its most recent grant amount (i.e., $114 million) in balance in the state's CDBG line of credit, which HUD calls "unprecedented." HCD attributes this backlog of unspent funds to the "50% rule." The rule, a state regulation, states that a jurisdiction has to have spent 50% of its program funds before drawing down new funds. This rule was put in place to prevent some local jurisdictions from "sitting on their funds" rather than expending them. Despite best efforts, some jurisdictions have been unable to expend their awards below the 50% requirement, precluding them AB 723 Page 5 from even applying for new funds. HCD believes that the build-up of state funds has occurred for a number of reasons, including the recession; that some projects take longer than others; and that some delayed projects may make up a large share of the funds held by a jurisdiction. While there is no federal rule which requires HCD to expend its grant amount, federal funds are dispensed on a needs basis; if these funds are not expended, California runs the risk of losing future federal funds. This bill provides that jurisdictions that do not meet the requirements of the 50% rule may apply for additional CDBG funds. These jurisdictions would be eligible to apply for and draw down from the $114 million balance of funds. These applications would be evaluated based upon eligibility, need, benefit, and readiness and would be determined by the HCD director. This bill does not guarantee an award, but merely provides jurisdictions the opportunity to apply for additional funds. California Housing Finance Agency (CalHFA): CalHFA is the state's affordable housing lender. CalHFA funds its programs by issuing bonds and then repays the bonds with loan proceeds. The agency is completely self-supporting and receives no General Fund money. The agency provides low interest rate mortgages to low and moderate income homebuyers in California, as well as down payment and closing costs assistance. Since inception, CalHFA has provided $19.6 billion in mortgages to 153,000 first-time homebuyers. CalHFA loans are used for the acquisition, rehabilitation and permanent financing to preserve, maintain and increase the supply of affordable multi-family AB 723 Page 6 rental housing. Since its creation, CalHFA has made $192 million in loans for affordable housing. Purpose: According to the author, HCD has approximately $114 million in CDBG funding that can be used at the local level for infrastructure projects and housing construction. This backlog of unspent funds is a result of a regulation adopted by HCD requiring that a city or county spend 50% of their program funds before drawing down new funds. Since some projects take longer than others, this has become a barrier. To expedite the release of these funds to worthy projects, this bill allows HCD to make grants to cities and counties that have not spent down 50% of an existing grant before receiving new funding without making a regulatory change. This bill also modernizes CalHFA's occupancy standards to make them consistent with other state housing programs, including the low-income housing tax credit program. In addition, this bill gives CalHFA the flexibility to participate in the funding of projects that reserve at least 20% of their units for households serving between 60-80% AMI. This change allows CalHFA to participate in financing more mixed-income projects. The subsidies needed for these projects will not be as deep as those needed for lower income housing, and will also contain a percentage of market-rate units that do not need subsidy. This subset of low-income households are almost always excluded from projects that also receive funding from tax credits or other state subsidies, as those programs are limited to the financing of very low- and low-income housing units at or below 60% AMI. AB 723 Page 7 This bill was substantially amended from the previous version which dealt with the replacement of plumbing in rental properties. REGISTERED SUPPORT / OPPOSITION: Support California Association of Counties City of Dublin City of Santa Monica Opposition None on file. AB 723 Page 8 Analysis Prepared by:Lisa Engel H. & C.D. / (916) 319-2085