BILL ANALYSIS Ó
AB 1920
Page A
Date of Hearing: April 18, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
AB 1920
(Chau) - As Amended March 18, 2016
2/3 vote. Fiscal committee.
SUBJECT: California Tax Credit Allocation Committee:
low-income housing credit: fines
SUMMARY: Allows the California Tax Credit Allocation Committee
(TCAC) to establish a schedule of fines for violations of the
terms and conditions, the regulatory agreement, covenants, or
program regulations for affordable housing developments that
received low-income housing tax (LIHT) credits. Specifically,
this bill:
1)Allows TCAC to charge up to $500 per violation or double the
amount of the financial gain to the housing credit application
because of the violation, whichever is greater.
2)Allows the fine to be reoccurring if the violation is not
corrected within a reasonable period of time, as determined by
TCAC.
3)Requires TCAC to adopt and revise, by resolution at a public
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meeting, the schedule of fines for specific violations and the
fine amounts for each violation.
4)Requires all fines collected to be deposited into the Housing
Rehabilitation Loan Fund, which is continuously appropriated
to the Department of Housing and Community Development, and
thereby makes an appropriation.
5)Provides that if a fine is not paid within six months from the
date when the fine was initially assessed by TCAC and
reasonable notice is given to the housing credit applicant,
the committee may record a lien against the property.
Specifies that a lien shall not be superior to any lien
recorded prior to the recording of this lien.
EXISTING LAW:
1)Allows a state tax credit for costs related to construction,
rehabilitation, or acquisition of low-income housing. This
credit, which mirrors a federal LIHT credit, may be used by
taxpayers to offset the tax under the Personal Income Tax
(PIT), the Corporation Tax (CT), and the Insurance Tax (IT)
laws.
2)Requires the California TCAC to allocate each year the
California LIHT credits based upon qualifications of the
applicant and proposed project. The California LIHT credit is
available only to projects that have received an allocation of
the federal LIHT credit.
3)Limits the annual aggregate amount of the state LIHT credit to
$70 million, as adjusted for an increase in the California
consumer price index from 2002, plus any unused LIHT credits
for the preceding calendar year and any LIHT credits returned
in the calendar year. The California LIHT credit awarded may
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be claimed as a credit against tax over a four-year period.
4)Requires TCAC to certify the amount of tax credit allocated.
In the case of a partnership or an S Corporation, a copy of
the certificate is provided to each taxpayer. The taxpayer is
required, upon request, to provide a copy of the certificate
to the FTB.
FISCAL EFFECT: Unknown.
COMMENTS:
1)Author's Statement . The author has provided the following
statement in support of this bill:
"Rental housing developments that receive low-income housing tax
credits from the Tax Credit Allocation Committee (TCAC) are
required to rent to income eligible applicants, limit rents,
and maintain the physical condition of the units for 55 years.
Owners agree to further commitments, such as more deeply
targeting units to be affordable to extremely low income
households, as part of the competitive scoring process. The
Internal Revenue Service (IRS) enforces the basic program
requirements for 15 years, but does not enforce deeper
affordability or other requirements imposed by TCAC during the
first 15 years, or any requirements after year 15.
"TCAC has few enforcement remedies for an owner's failure to
comply with program requirements that the IRS does not
enforce. TCAC can impose negative points, which only work if
the owner wants to propose new applications. Or, TCAC can
bring a lawsuit to seek compliance or receivership, which is
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expensive, time-consuming, and only appropriate for worst-case
scenarios. TCAC needs a more efficient and effective
enforcement tool to ensure correction of violations that do
not merit litigation or a receivership.
"AB 1920 addresses this issue by providing TCAC with the
legislative authority to levy fines for non-compliance with
the regulatory agreement and program regulations."
2)Background: Federal LIHT Credit Program . The LIHT credit is
an indirect federal subsidy developed in 1986 to incentivize
the private development of affordable rental housing for
low-income households. The federal LIHT credit program
replaced traditional housing tax incentives, such as
accelerated depreciation, with a tax credit that enables
low-income housing sponsors and developers to raise project
equity through the allocation of tax benefits to investors.
Two types of federal tax credits are available: the 9% and 4%
credits.<1>
Each year, the Federal Government allocates funding to the
states for LIHT credits on the basis of a per-resident
formula. State or local housing authorities review proposals
submitted by developers and select projects based on a variety
of prescribed criteria. Only rental housing buildings, which
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<1> These terms refer to the approximate percentage of a
project's "qualified basis" a taxpayer may deduct from his/her
annual federal tax liability in each of 10 years. 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 rates fluctuate
every month, based on the determination made by the Internal
Revenue Service on a monthly basis. Nonetheless, Congress has
established the minimum applicable percentage of 9% for
allocations made for non-federally subsidized new buildings
before January 1, 2015.
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are either undergoing rehabilitation or newly constructed, are
eligible for the LIHT credit programs. In addition, the
qualified low-income housing projects must comply with both
rent and income restrictions. Rents on qualified units cannot
exceed 30% of an imputed income based on 1.5 persons per
bedroom. Furthermore, the initial incomes of households in
those units may not exceed either 60% or 50% of the area
median income, adjusted for household size. A project
developer or sponsor who applies for the tax credit allocation
must also elect to set aside a minimum of either 40% of the
units to be occupied by households with incomes of 60% or less
of the area median gross income or 20% of the units to
household with incomes of 50% or less of the area median gross
income.
LIHT credit projects must remain affordable for at least 15 or
30 years, whichever is applicable. Properties that received
LIHT credit allocation before 1990 are subject to a 15-year
compliance period during which the units must remain
affordable. Beginning in 1990, federal law required tax
credit projects to remain affordable for a minimum of 30
years, for the 15-year initial compliance period and a
subsequent 15-year extended use period. During the compliance
period, owners must report annually to both the IRS and the
state monitoring agency. After 15 years, the obligation to
report to the IRS on compliance issues ends, and investors are
no longer at risk for tax credit recapture. However, for
properties with allocations in 1990 or later, there is an
additional 15-year restricted-use period, for a total of 30
years.
3)State LIHT Credit Program . In 1987, the Legislature
authorized a state LIHT credit program to augment the federal
program. Current state tax law generally conforms to federal
law with respect to the LIHT credit, except that it is limited
to projects located in California. While the state LIHT
credit program is patterned after the federal program, there
are several differences, including a provision allowing
investors to claim the state LIHT credit over a four-year,
rather than the federal 10-year, allocation period.
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Furthermore, unlike the federal LIHT credit program, the
California LIHT credit law requires project developers or
housing sponsors to agree to a minimum of 55 years of rent and
income restrictions.
State tax credits can only be awarded to projects that have also
received, or are concurrently receiving, an allocation of the
federal LIHT credits. Federal law specifies that each state
must designate a "housing credit agency" to administer the
federal LIHT credit program. In California, responsibility
for administering the federal program is assigned to the
California TCAC, which is comprised of the State Treasurer,
the State Controller, the Director of Finance, and three
non-voting members. TCAC allocates both federal and state
LIHT credits through a competitive application process.
The amount of state LIHT credit that may be annually allocated
by the TCAC is limited to $70 million, adjusted for inflation,
plus any unallocated or unused credits from previous years.
In 2015, the total state credit amount available for
allocation was $89,452,736 (representing all four years of
allocation), plus $5,529,815 in farmworker state credit
available for agricultural worker housing. The TCAC awarded
approximately $123.1 million in state tax credits to 47
projects in 2015, including one farmworker state credit award
of $982,697.
4)Federal LIHT Credit Program: Compliance: Federal Enforcement
Efforts . The Federal LIHT credit program is jointly
administered by the IRS and state housing finance agencies
(HFAs). The IRS is the federal entity responsible for
enforcing taxpayer compliance as well as overseeing HFAs'
implementation of the program.<2> In addition, the United
States (U.S.) Department of Housing and Urban Development
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<2> United States Government Accountability Office, Low-Income
Housing Tax Credit Report, Joint IRS-HUD Administration Could
Help Address Weaknesses in Oversight, July 2015, p.6.
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(HUD) is required to collect data collection on the LIHT
credit program.<3> HUD also participates in designating
difficult development areas and qualified census tracts.<4>
However, HUD's role in the LIHT credit program is generally
limited to the collection of information on tenant
characteristics.
According to a report issued by the U.S. Government
Accountability Office (GAO), the IRS relies on HFAs to
administer and oversee the LIHT credit programs in their
respective states. The IRS can recapture some or all of the
credits received by taxpayers if the taxpayers have not met
the requirements during the 15-year compliance period. The
GAO reported that IRS oversight to identify and address
compliance issues has been minimal.<5> While the IRS
conducted some audits of taxpayers claiming the tax credits,
it does not have detailed information on the results of these
audits.<6> The GAO reports that the IRS's database on LIHT
credit programs is neither complete nor reliable to assess
compliance. According to the IRS officials, competing audit
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<3> In 2008, with the passage of the Housing and Economic
Recovery Act, HFAs were required to submit annual data to HUD on
race, ethnicity, family composition, age, income, use of rental
assistance, disability status, and monthly rental payments of
households residing in each property receiving LIHT credits.
<4> Ibid.
<5> Id., pp.18-28.
<6> According to the IRS, the agency had completed a review of a
sample of 402 audits of LIHT credit program taxpayers. The
review did not find evidence of widespread noncompliance with
the law. The IRS audited additional 555 taxpayers claiming LIHT
credit from 2001 through 2013, of which 29% resulted in no
change to the amount of credit claimed and 24% resulted in
changes to the amount of credit claimed. The IRS did not pursue
the remaining audits because either the statute of limitation
was within one year of expiring or the taxpayer requested
adjudication. Id., p. 21.
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priorities have limited the number of LIHT credit taxpayer
audits conducted.<7>
Once the IRS monitoring of LIHT credit projects ends after year
15, HFAs have sole authority to monitor compliance for at
least another 15 years, and the taxpayer must ensure that the
project continues to meet program requirements, as defined in
the project's extended use agreement with the HFA.<8> In the
case a project becomes non-compliant, the HFA could take
action by litigating the issue of noncompliance under state
law.
As required by federal law, TCAC monitors a tax credit project
located in California that has received an award of the
federal LIHT credit. Specifically, TCAC ensures that the
project meets milestones and reservation requirements up until
it is completed and placed in service. Additionally, TCAC is
required to monitor compliance throughout the entire term of
the project's regulatory period, i.e., every three years
during the 15 years of the federal credit compliance period.
If non-compliance is discovered, the IRS could recapture
credits claimed during the 15-year compliance period.
However, for the remaining term of the regulatory agreement,
TCAC is solely responsible for enforcement.
5)California LIHT Credit Program: Compliance: State
Enforcement. In California, housing developments that receive
LIHT credit awards from TCAC are required to rent to income
eligible applicants, limit rents, and maintain the physical
condition of the units for 55 years. Furthermore, owners must
agree to further commitments, such as more deeply targeting
units to be affordable to extremely-low income households, as
part of the competitive scoring process. TCAC has few
enforcement remedies when the project owner fails to comply
with program requirements. TCAC can deduct points from the
overall score during the application process for a new LIHT
credit award (a so-called "negative points" procedure). But
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<7> Id., p. 22.
<8> Id., p. 14.
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this approach only works if the owner submits a new
application for the credit award. Alternatively, TCAC can
bring a lawsuit to seek compliance or receivership. However,
potential litigation is expensive and time-consuming.
6)What is the Problem ? While the IRS oversees the basic federal
program requirements for 15 years, it does not enforce
compliance with the additional requirements imposed by TCAC
for California-based LIHT credit projects. For example, if a
developer agreed to keeping rents affordable to tenants with
incomes at 30% of the area median income, as opposed to 60%
(in order to receive a higher score during the application
process) and later failed to comply with this requirement,
federal agencies will not view this compliance failure as a
violation of the federal requirements. The TCAC staff reports
a recent case where a developer had committed during the
competitive application process to include a play area as part
of the housing development. Upon inspection two years later,
TCAC found out that the play area had not been constructed.
In this case, TCAC was able to enforce compliance with the
previous agreement successfully by using the "negative points"
approach because the developer was planning a new project and
was applying for a new round of LIHT credit. However, had the
developer not been planning a new project, TCAC would have had
little ability to require the developer to correct the
violation.
Nor does the IRS enforce compliance with any LIHT credit
program requirement after the 15-year compliance period ends.
According to TCAC, approximately 1,000 LIHT credit projects
per year are inspected by the state and about 120 projects are
reported to the IRS for various non-compliance issues,
including ineligible residents, over-charged rents, and more
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significant maintenance issues. Most of these violations
(probably 90%) are corrected by the time the violations are
reported to the IRS. Without IRS's oversight, the
responsibility to enforce affordability requirements and other
commitments made by housing development owners after the
15-year compliance period falls to TCAC. In other words, TCAC
is the only enforcement agency for the remaining 40 years of
the 55-year regulatory agreement. And the limited enforcement
tools available to TCAC may not be sufficient to enforce the
LIHT credit program's requirements effectively.
7)Proposed Solution . This bill would provide TCAC with the
legislative authority to levy fines for violations of the
terms and conditions, the regulatory agreement, covenants, or
LIHT credit program regulations. Fines may not exceed the
greater of $500 or double the amount of the financial gain to
the violator, whichever is greater, and could be recurring if
the violations are not corrected in a reasonable amount of
time. Fines would be deposited in the Housing Rehabilitation
Loan Fund and be made available to the Multifamily Housing
Program at the Department of Housing and Community
Development. TCAC could record a lien on the property if
fines are not paid within six months of being assessed. TCAC
would adopt the fine schedule through a public process and
provide for due process through appeals to the TCAC.
8)What is the Urgency ? As more and more of LIHT credit projects
in California approach the end of the 15-year federal
compliance period, TCAC is concerned about the lack of
adequate enforcement tools to deter or remedy non-compliance,
which is likely to occur at a greater rate as projects age.
In addition, many of the existing projects are being sold to
REITs, which are non-traditional affordable housing
developers. A REIT may choose to ignore the regulatory
agreement, knowing that the deterrent of not qualifying for
future LIHT credit awards is irrelevant, unless the REIT
decides to become a low-income housing project developer in
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California. The sponsor argues that the lack of enforcement
tools to deter future non-compliance has been a long standing
issue, and there is no better time than the present to
authorize TCAC to levy fines and hold developers accountable
for keeping housing affordable beyond the 15-year federal
compliance window. The sponsor believes that this bill is
needed to preserve availability of California's affordable
housing.
9)Double-referral . This bill was double-referred to the
Assembly Committee on Housing and Community Development. This
bill passed the Assembly Committee on Housing and Community
Development on a 7 - 0 vote on March 30, 2016. For additional
discussion of this bill's provisions, please refer to that
committee's analysis.
REGISTERED SUPPORT / OPPOSITION:
Support
John Chiang, Treasurer, State of California (Sponsor)
The Arc of California
United Cerebral Palsy California
Opposition
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None on file
Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098