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
          
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          |Version: August 1, 2016         |Policy Vote: GOV. & F. 4 - 1    |
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          |Urgency: No                     |Mandate: No                     |
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          |Hearing Date: August 1, 2016    |Consultant: Robert Ingenito     |
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          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.







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          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  
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          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  
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          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  
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          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  








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          future use, the bill meet this Committee's criteria for referral  
          to its Suspense File. 







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