BILL ANALYSIS Ó
AB 2140
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Date of Hearing: May 9, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
AB 2140
(Roger Hernández) - As Amended March 28, 2016
2/3 vote. Fiscal committee. Tax levy.
SUBJECT: Income taxes: insurance tax: credits: low-income
housing: farmworker housing assistance
SUMMARY: Modifies the Farmworker Housing Assistance (FHA) tax
credit program. Specifically, this bill:
1)Redefines "farmworker housing" as housing in which at least
50% of the units are available to, and occupied by,
farmworkers and their households.
2)Authorizes the California Tax Credit Allocation Committee
(TCAC) to award a state LIHTC, as specified, to a farmworker
housing project located in a qualified census tract (QCT) or a
designated development area (DDA) and has received the federal
4% LIHTC.
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3)Revises the applicable state LIHTC credit percentage relating
to farmworker housing to provide that a farmworker housing
building, which is federally subsidized, is eligible for the
state LIHTC equal to 75% of the qualified basis of the
building over four years.
4)Takes effect immediately as a tax levy.
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 LIHTC, 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 Tax Credit Allocation Committee (TCAC)
to allocate each year the California LIHTC based upon
qualification of the applicant and proposed project. The
California LIHTC is available only to projects that received
an allocation of the federal LIHTC.
3)Limits the annual aggregate amount of the state LIHTC to $70
million, as adjusted for an increase in the California
consumer price index from 2002, plus any unused LIHTC for the
preceding calendar year and any LIHTC returned in the calendar
year. The California LIHTC awarded may be claimed as a credit
against tax over a four-year period.
4)Requires that $500,000 of LIHT credits be set aside for
farmworker housing developments and provides that the
farmworker tax credit awards are not dependent on receiving a
federal LIHTC.
5)Defines "farmworker" housing to mean housing for agricultural
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workers that is available to, and occupied by, only
farmworkers and their households.
6)Allows TCAC to permit an owner to temporarily house
non-farmworkers in vacant units in the event of a disaster or
other critical occurrence provided there are no pending
qualified farmworker applications for residency.
7)Allows TCAC to award state LIHTCs to developments in a QCT or
a DDA, if the project is also receiving federal LIHTC, under
the following conditions:
a) The amount of state credit is computed on a 100% of the
qualified basis of the building; or,
b) If the usage of at least 50% of the units in a
low-income housing building is restricted to special needs
households, the amount of an allowable state LIHTC may not
exceed 30% of the eligible basis of the building.
1)Defines a "QTC" as any census tract designated by the federal
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%.
2)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.
FISCAL EFFECT: Unknown
COMMENTS:
1)Author's Statement . The author has provided the following
statement in support of this bill:
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"The underinvestment in farmworker housing has created
hardships for this labor force and their families; this bill
seeks to bolster the legislative intent behind the Farmworker
Housing Assistance Tax Credit Program and improve the efficacy
and flexibility of this financial resource for developers of
farmworker housing."
2)Federal LIHTC Program: Background . 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 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. 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
with 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. Nonetheless, Congress has established the
minimum applicable percentage of 9% for allocations made for
non-federally subsidized new buildings before January 1, 2015.
Each year, the Federal Government allocates funding to the
states for LIHTCs 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 are
either undergoing rehabilitation or newly constructed, are
eligible for the LIHTC programs. The federal law specifies
that each state must designate a "housing credit agency" to
administer the federal LIHTC program. In California,
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responsibility for administering the federal program is
assigned to the California TCAC.
3)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 2015, the total credit amount
available for allocation was almost $89.5 million
(representing all four years of allocation) 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 rates used to determine the total amount of the
state tax credit (representing all four years of allocation)
are 30% of the qualified basis of a project that is not
federally subsidized and 13% of the qualified 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.
TCAC is authorized to replace federal LIHTC with state LIHTC of
up to 30% of a project's eligible basis if the federal LIHTC
is reduced in an equivalent amount. This provision allows
TCAC to increase the number of projects funded with the
limited federal credits in a given year. As discussed, the
maximum federal tax credit that can be awarded (the 9% credit)
is generally equal to 70% (on a present-value basis) of a
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taxpayer's qualified basis in the project, spread over a
ten-year period. Thus, a project that receives the maximum in
both state and federal credits receives an amount equal to
100% of the taxpayer's qualified basis over a 10-year period.
4)FHA Program . In 1996, the Legislature created the Farmworker
Housing Assistance Tax Credit Program and set aside $500,000 a
year from the LIHTC allocation for farmworker housing
projects. In an effort to streamline administration and make
the farmworker program more user-friendly, SB 1247
(Lowenthal), Chapter 521, Statutes of 2008, eliminated the FHA
Tax Credit Program as a separate program, consolidated it into
the state LIHTC program, and established an annual set-aside
of state LIHCTs for farmworker housing developments
(Farmworker State Credits). The amount of funding dedicated
to farmworker housing remained the same - $500,000 each year,
available for projects dedicating 100% of their affordable
units to agricultural workers and their families. The funding
may be carried forward into future years if not allocated.
Farmworker housing tax credit applicants apply in California
TCAC's competitive rounds using TCAC application documents.
Farmworker state tax credits can be requested in combination
with nine percent (9%) or four percent (4%) federal tax
credits, or can be requested without federal tax credits.
Farmworker state credit applicants requesting 9% federal
credit compete within the TCAC competitive system as part of
the applicant pool. If successful, an applicant is awarded 9%
federal and farmworker state credit. Farmworker state credit
applicants requesting 4% federal credits apply within the
competitive rounds and compete for Farmworker State Credit
using the TCAC scoring system available to 4% plus state
credit applicants. If multiple applications for Farmworker
State Credits are received requesting 9%, or 4% federal credit
(or farmworker state credit only), TCAC Regulation Section
10317(h) provides for a ranking among these applicants.<1>
Projects awarded farmworker state credit must comply with all
---------------------------
<1> California TCAC, a letter written by then Executive Director
to applicants of the FHA tax credit program, November 4, 2013.
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TCAC regulatory requirements. Beyond the ability to receive
state credit without federal tax credit, farmworker state
credit program requirements are identical to all other LIHTC
program requirements.
5)DDAs and QCTs. Federal LIHTCs can be used anywhere, but a
project is given an additional 30% on its eligible basis (a
"basis boost") if the project is located in a DDA or a QCT.
These areas, by definition, have a higher poverty level and a
higher concentration of extremely low-income or homeless
individuals and families, who typically need larger housing
subsidies. Prior to 2014, TCAC was not allowed to award state
tax credits for projects located in DDAs and QCTs. The
rationale for this prohibition was that projects in these
areas could qualify for more federal tax credits through a
basis "boost" and therefore are already advantaged. State
law, however, 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. Projects that serve special needs populations
need greater subsidy in order to offer deeply affordable
rents.
6)Farmworker Housing Deficiency in Current Law . According to
the TCAC annual report, the total state LIHT credit available
in 2015 was $89,452,736, plus $5,529,815 in farmworker state
credit available for agricultural worker housing. In 2015,
TCAC made one farmworker state credit award of $982,697 to a
4% project in Santa Rosa, Ortiz Plaza. It should be noted
that TCAC funded two additional farmworker housing projects in
2015 with the standard federal and state tax credits. As can
be seen, the FHA tax credit has been largely underutilized -
no project had been awarded an FHA tax credit between 2008 and
2015, with $4.5 million in farmworker state credit remaining
available for future project applicants in 2016.
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7)Proposed Solution . According to the author's office, the
lack of demand is due to the existing fiscal and policy
constraints of the FHA tax credit program. While legislative
changes have been made over the years to improve the broader
LIHTC program, the FHA tax credit program has not benefitted
from some of those policy changes. To improve the FHA tax
credit program's utilization, this bill proposes three
modifications to existing law. First, this bill would reduce
the occupancy requirement from 100% farmworkers and their
families to 50%. Second, it would allow LIHTC state tax
credits to be awarded to farmworker housing projects without
regard to DDA or QCT status, with the main purpose of making
the state credits more valuable and providing enough state tax
credits to match the value of the federal tax credit.
Finally, this bill would encourage developers constructing
farmworker housing to apply for 4% federal credits by
increasing the value of the state credits that would accompany
those credits.
8)Occupancy Requirements . Under current law, occupancy in
farmworkers developments must be limited to farmworkers and
their families, except that TCAC can allow owners to
temporarily house non-farmworkers in vacant units during a
disaster. As noted in the Housing and Community Development
Committee's analysis, in some cases a tenant in a farmworker
housing development may begin his or her tenancy employed as a
farmworker and then change employment while living in the
development; the change in employment can jeopardize their
tenancy in the project. The author argues that reducing the
occupancy to 50% will provide great flexibility to developers
in responding to this and other types of challenges.
9)Farmworker Housing Development in a DDA or QST . Existing
state law does not allow state LIHTCs to be awarded in DDAs
and QCTs with one exception: housing developments where 50%
of the units are for special needs populations. The rationale
for this prohibition is that projects in these areas can
qualify for more federal tax credits and therefore are already
advantaged. This bill would similarly allow state LIHTCs to
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be awarded to farmworker housing projects, without regard to
DDA or QCT status, with the main purpose of making the state
credits more valuable. As stated in the Assembly Housing and
Community Development Committee's analysis, if a farmworker
housing development project qualifies for $10 million in
"eligible basis" in a DDA or QCT, the project could get up to
130% of that basis in federal LIHTCs, which means that the
project sponsor would receive $13 million in federal credits
to sell to an investor. This bill would allow that project to
get an additional 30% in state LIHTCs, which would create an
extra $3 million in state tax credits.
10)Increasing the Value of the 4% Federal LIHTC for Farmworker
Housing Projects . This bill also seeks to increase the amount
of LIHTCs that farmworker tax credit projects can receive in
order to make the credits more valuable and to allow greater
leveraging of other bonding authority. The amount of federal
9% credits available each year are capped, however 4% federal
credits are unlimited. The value of the 4% tax credits are
less than one-half of the 9% tax credits; as a result, 4%
federal credits are generally used in conjunction with another
funding source like state housing bonds or local funding
sources. In addition, federal 9% credits are oversubscribed,
whereas 4% federal credits are less highly subscribed.
Arguably, by increasing the value of the state credits that
would accompany federal LIHTCs, this bill would encourage
developers constructing farmworker housing to apply for 4%
federal credits. Developers that receive 4% federal LIHTCs
would receive state LIHTCs that would be worth 75% of the
projects eligible basis over four years.
11)Related Legislation : AB 2817 (Chiu) proposes to increase the
LIHTC by $300 million on an annual basis and increase the
set-a-side for farmworker housing tax credits within that pool
from $500,000 to $25 million. Any funds not used for
farmworker housing tax credit projects in a calendar year
would be available to other qualified projects that apply for
the larger LIHTC pool. This bill is will be heard by this
Committee today.
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12)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
California Coalition for Rural Housing
California Housing Consortium
California Housing Partnership Corporation
Housing California
Non-Profit Housing Association of Northern California (NHP)
Western Center on Law and Poverty
Opposition
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None on file
Analysis Prepared by:Oksana Jaffe / REV. & TAX. / (916) 319-2098