BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |AB 2140 |Hearing |6/22/16 |
| | |Date: | |
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|Author: |Roger Hernández |Tax Levy: |Yes |
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|Version: |5/31/16 |Fiscal: |Yes |
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|Consultant|Grinnell |
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Income taxes: insurance tax: credits: low-income housing:
farmworker housing assistance
Amends the farmworker housing assistance component of the
low-income housing tax credit to increase credit percentages,
and allow additional flexibility to increase potential demand.
Background
Current state law allows credits against the Personal Income
Tax, Corporation Tax, and Gross Premiums Tax for investors who
provide project capital to low-income rental housing projects.
Taxpayers claim Low-Income Housing Tax Credits (LIHTCs)
approximately equal to a specified percentage of the project's
basis over four years, and start claiming the credit in the
taxable year in which the project is placed in service.
Projects must remain affordable to residents for 55 years.
State LIHTCs are calculated in partial conformity with federal
LIHTCs, although the credit rates and durations differ: state
tax credits equal 30% of the qualified basis of a project over
four years (9% credits) for project not federally subsidized,
and 13% of the qualified basis over the same period (4% credits)
for federally subsidized ones, instead of either 70% or 30%,
respectively, over 10 years for federal LIHTCs. Tax-exempt
bonds are generally the source of any qualifying federal
subsidy. Additionally, acquisition costs cannot be used to
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generate state LIHTCs, except for previously subsidized projects
that qualify as "at-risk" of being converted to market rate.
The California Tax Credit Allocation Committee (CTCAC),
comprised of the State Treasurer, the State Controller, the
Director of Finance, and three non-voting members, allocates
state and federal LIHTCs. CTCAC awards federal credits for
non-subsidized projects based on a formula in federal law, and
totaled $91 million for 89 projects in 2015, while federal law
does not cap CTCAC allocation for subsidized projects. In 2015,
the total state LIHTC amount CTCAC could allocate under state
law was almost $89.5 million, which when added to unused or
returned credit allocations from previous years, totaled $111
million that funded 39 projects. Housing developers design
projects, and apply to CTCAC for credits. CTCAC then reviews
the application, and either denies it or grants credits. The
housing developer then forms partnership agreements with
taxpayers that provide project capital for the low-income
housing project in exchange for the credits at a discount.
CTCAC may allocate federal tax credits to any area of the state,
but must conduct a feasibility analysis to ensure that the
amount of credits granted doesn't exceed the amount of capital
needed to build the project. To calculate the amount of credit
a project may receive, CTCAC first determines the total project
cost. Next, it determines the "eligible basis" by subtracting
from total project cost any non-depreciable costs, such as land,
permanent financing costs, rent reserves, and marketing costs.
Next, CTCAC reduces this eligible basis by the applicable
percentage, equal to the percentage of affordable units of floor
space in the project as a share of the entire project. For
example, a project with $5 million in total development costs
that includes $1 million in land acquisition costs has a $4
million basis. If half of the units will be affordable, the
total basis is $2 million, which is multiplied by 9% to
determine the annual amount of the credit of $180,000, for a
ten-year value of $1.8 million.
Combined state and federal LIHTCs are generally equal to 100% of
a project's eligible basis. However, CTCAC can replace federal
LIHTC with state LIHTC of up to 30% of a project's eligible
basis if it equivalently reduces federal LIHTC, thereby
increasing the number of projects in can approve by "backing
out" limited federal credits. Additionally, while CTCAC can
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allocate federal LIHTCs to any area of the state, it can grant
federal LIHTCs up to an additional 30% for a total of 100% of
eligible basis, known as a "basis boost," for projects in a
"Difficult to Develop Area" (DDA) or a Qualified Census Tract
(QCT). The United States Department of Housing and Urban
Development (HUD) designates DDAs on an annual basis based on
high construction, land, and utility costs relative to area
median gross income. HUD designates QCTs as census tracts 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%. Prior to 2014, CTCAC could not
award state tax credits for projects located in DDAs and QCTs
because CTCAC could draw down more federal tax credits through
the basis boost, thereby providing a sufficient advantage
without allocating limited state credits. However, the
Legislature authorized CTCAC to award state LIHTCs to projects
in DDAs or QCTs if at least 50% of the units to special needs
households because projects that serve special needs populations
generally need greater subsidies to offer affordable rents (AB
952, Atkins, 2013).
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, the Legislature eliminated the
Farmworker Housing Assistance Tax Credit Program as a separate
program and consolidated it into the state LIHTC program as a
farmworker set-aside (SB 1247, Lowenthal, 2008.) The amount of
funding dedicated to farmworker housing remained the same,
totaling an inflation-adjusted $5,047,118 in 2016. To qualify,
farmworker housing must be available to and occupied only by
farmworkers and their households. Projects awarded farmworker
state credit must comply with all CTCAC regulatory requirements,
so other than the ability to receive state credit without
federal tax credit, farmworker state credit program requirements
are identical to all other LIHTC program requirements.
Responding to a lack of demand credits for farmworker housing
projects, affordable housing groups want to modify the LIHTC
program to enhance subsidies for these projects.
Proposed Law
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Assembly Bill 2140 makes three changes to the LIHTCs under the
Personal Income Tax, Corporation Tax, and Gross Premiums Tax.
The bill:
Removes the requirement that to be eligible for the
current LIHTC set aside for farmworker housing, that a
project only be available to and occupied by farmworkers
and their households, instead making eligible those
projects where at least 50% of units meet that threshold.
Allows CTCAC to award state LIHTCs to federally
subsidized farmworker housing projects in a QCT or DDA, so
long as it a received the federal credit.
Increases the percentage of basis of the state LIHTC for
federally-subsidized farmworker housing projects from 30%
of eligible basis over four years to 75%.
The measure also makes technical and conforming changes.
State Revenue Impact
FTB states that it is unable to estimate potential annual credit
usage due to its infrequent usage.
Comments
1. Purpose of the bill . According to the author, "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.
In 1996, the Legislature created the Farmworker Housing
Assistance Tax Credit Program to ensure the investment of tax
credits, specifically in farmworker housing projects. Over the
years, legislative changes have been made to improve the broader
STO housing tax credit program, however, the Farmworker Housing
Tax Credit Program has not benefitted from some of those policy
changes. In fact, given the fiscal and policy constraints of
the existing Farmworker Housing Assistance Tax Credit Program,
no projects since 2008 had been awarded tax credits until last
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year. Currently, California does not utilize its entire private
activity tax-exempt bond authority and accordingly does not
access the 4% low-income housing tax credits to the fullest
extent possible. In addition, the 9% tax credit program is
highly oversubscribed resulting in worthy farmworker housing
projects going unfunded. There is a need to bring parity to the
Farmworker Housing Assistance Tax Credit Program, both from a
fiscal and policy perspective, to better achieve the legislative
goals of using tax credits as a financing tool to create
farmworker housing."
2. Need . The LIHTC is highly competitive, where developers for
projects across the state apply for a finite amount of state and
federal tax credits. While CTCAC has awarded credits to
proposals that build units for farmworkers out of its general
authorization, it made only one farmworker state credit award in
2015, of $982,697 to Ortiz Plaza in Santa Rosa. Additionally,
CTCAC has not approved a project under the farmworker program
between 2008 and 2015, leaving $4.5 million in farmworker state
credit remaining available for future project applicants in
2016. AB 2140 responds to this lack of demand, and should help
increase demand from developers seeking to build these projects
by allowing projects which are less than 100% occupied by
farmworkers and their households to qualify for LIHTCs set aside
for farmworker projects. Additionally, allowing farmworker
projects within QCTs and DDAs to obtain both the basis boost and
state tax credits will allow for higher subsidies: if a project
qualifies for $10 million in eligible basis in a DDA or QCT, the
project could get up to 130% (100% federal plus 30% state) of
that basis, which means the project sponsor, would have $13
million in federal credits to sell to an investor. AB 2140 also
allows CTCAC to allocate up to 30% in additional state tax
credits to that project, generating $3 million in potential
project capital. Lastly, boosting state LIHTC credit
percentages for federally subsidized projects makes the credits
more valuable, hopefully drawing more interest.
3. A different kind of credit . The LIHTC induces investment in
low-income housing by providing a tax shelter for investors for
allocating capital to an asset class with a relatively poor rate
of return. In return for providing the tax shelter, the state
gets more low-income housing than it otherwise would have.
Low-income housing projects face many barriers in California:
high costs of land, labor, and capital; resistance from local
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residents and state and local laws and policies protecting the
environment, among others. Because the credit is capped and
allocated, CTCAC awards tax credits to projects on a competitive
process based on an evaluation of the most effective use of the
tax credits. This program is different than other tax credits,
where any individual or businesses can qualify for a credit by
virtue of incurring specific costs such as research and
development or hiring specific individuals. Currently, housing
sponsors form partnership agreements with investors, who provide
capital to fund the housing construction in exchange for the
allocated tax credits. The tax credits exceed the value of the
investment because demand for the tax credits does not meet
supply. For example, a partnership agreement may allocate 100%
of tax credits to an investor that provides 75% of the necessary
project funding; the value of the discounted tax credits is
sufficient for investors to participate. Investors claim the
credit until exhausted, then walk away from the partnership, and
deduct the amount paid to the partnership in exchange for the
tax credits as a capital loss.
4. 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. The Committee will also hear AB 2817 at its June
22, 2016, hearing.
Assembly Actions
Assembly Housing and Community Development 7-0
Assembly Revenue and Taxation 9-0
Assembly Appropriations 16-0
Assembly Floor 75-0
Support and
Opposition (6/16/16)
Support : Burbank Housing Development Corporation, California
Coalition for Rural Housing, California Rural Legal Assistance
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Foundation, California Housing Consortium, California Housing
Partnership Corporation, California Rural Legal Assistance
Foundation , Housing California, Non-Profit Housing Association
of Northern California, Peoples' Self-Help Housing, Western
Center on Law and Poverty, Western Growers
Opposition : None received.
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