BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular Session AB 2140 (Roger Hernández) - Income taxes: insurance tax: credits: low-income housing: farmworker housing assistance ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: August 1, 2016 |Policy Vote: GOV. & F. 4 - 1 | | | | |--------------------------------+--------------------------------| | | | |Urgency: No |Mandate: No | | | | |--------------------------------+--------------------------------| | | | |Hearing Date: August 1, 2016 |Consultant: Robert Ingenito | | | | ----------------------------------------------------------------- This bill meets the criteria for referral to the Suspense File. Bill Summary: AB 2140 would modify the farmworker housing assistance component of the low-income housing tax credit, as specified. Fiscal Impact: This bill would increase overall usage of the low-income housing tax credit beyond historical levels under current law. The amount is unknown, but the associated revenue loss would likely be in the millions of dollars over several years (General Fund, see Staff Comments). The California Tax Credit Allocation Committee (CTCAC) would incur minor and absorbable costs to update application materials and review an unknown additional number of applications. AB 2140 (Roger Hernández) Page 1 of ? Background: Current state law allows tax credits 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. Projects must remain affordable to residents for 55 years. 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 lower rate of return. In return for providing the tax shelter, the State gets more low-income housing than otherwise would have occurred on the natural. Low-income housing projects face several barriers in California, including (1) high costs of land, labor, and capital, (2) resistance from local residents, and (3) state and local laws and policies protecting the environment. 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 percent of tax credits to an investor that provides 75 percent 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. State LIHTCs are calculated in partial conformity with federal LIHTCs, although the credit rates and durations differ: state tax credits equal 30 perecnt of the qualified basis of a project over four years (9 percent credits) for project not federally subsidized, and 3 percent of the qualified basis over the same period (4 percent credits) for federally subsidized ones, instead of either 70 percent or 30 percent, respectively, over AB 2140 (Roger Hernández) Page 2 of ? 10 years for federal LIHTCs. Tax-exempt bonds are generally the source of any qualifying federal subsidy. Additionally, acquisition costs cannot be used to generate state LIHTCs, except for previously subsidized projects that qualify as "at-risk" of being converted to market rate. CTCAC 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 percent 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 percent of a project's eligible basis. However, CTCAC can AB 2140 (Roger Hernández) Page 3 of ? replace federal LIHTC with state LIHTC of up to 30 perecnt 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 allocate federal LIHTCs to any area of the state, it can grant federal LIHTCs up to an additional 30 percent for a total of 100 percent 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 percent or more of the households have an income that is less than 60 percent of the area median gross income or that has a poverty rate of at least 25 percent. 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 percent of the units to special needs households because projects that serve special needs populations generally need greater subsidies to offer affordable rents. 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. AB 2140 (Roger Hernández) Page 4 of ? Proposed Law: This bill would modify the farmworker housing assistance component of the LIHTC, to (1) increase credit percentages, and (2) allow additional flexibility to increase potential demand. Specifically, the bill would makes three changes to the LIHTCs: (1) remove 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 percent of units meet that threshold, (2) allow 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, and (3) increase the percentage of basis of the state LIHTC for federally-subsidized farmworker housing projects from 30 percent of eligible basis over four years to 75 percent. Related Legislation: AB 2817 (Chiu) would 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 Committee will also hear AB 2817 at its August 1, 2016, hearing. Staff Comments: CTCAC made a single farmworker state credit award in 2015, in the amount of about $1 million. Additionally, CTCAC did 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. This bill responds to this lack of usage, and would likely stimulate demand from developers seeking to build these projects by allowing projects which are less than fully occupied by farmworkers and their households to qualify for LIHTCs set aside for farmworker projects. In doing so, the bill would result in additional tax credits likely being allocated beyond what would have occurred under current law. Thus, even though the farmworker housing credit program is designed such that unused credits roll forward to AB 2140 (Roger Hernández) Page 5 of ? future use, the bill meet this Committee's criteria for referral to its Suspense File. -- END --