BILL ANALYSIS Ó
SENATE COMMITTEE ON GOVERNANCE AND FINANCE
Senator Robert M. Hertzberg, Chair
2015 - 2016 Regular
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|Bill No: |AB 2817 |Hearing |6/22/16 |
| | |Date: | |
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|Author: |Chiu |Tax Levy: |Yes |
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|Version: |5/27/16 |Fiscal: |Yes |
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|Consultant|Grinnell |
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Taxes: credits: low-income housing: allocation increase
Increases annual authorization amounts for low-income housing
tax credits, and increases the value of the credits for
specified projects.
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
generate state LIHTCs, except for previously subsidized projects
AB 2817 (Chiu) 5/27/16 Page 2
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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
allocate federal LIHTCs to any area of the state, it can grant
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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 many areas of the state, housing rents exceed the ability of
individuals and families to pay given current wages. Seeking to
draw more investment into low-income housing, affordable housing
groups want to increase allocations of state LIHTCs for federal
subsidized projects, and increase credit percentages for
specified low-income housing projects.
Proposed Law
Assembly Bill 2817 makes several changes to the state LIHTC to
establish a new category for LIHTC projects, modify credit
percentages, and additionally authorize CTCAC to allocate $300
million in additional credits. The bill modifies state
allocations of LIHTCs awarded to federally-subsidized low-income
housing projects receiving federal LIHTC for federally
subsidized projects as follows:
Increases state LIHTC to 50% of the qualified basis over
four years for a new building not located in a DDA or QCT,
and keeps unchanged current percentages for existing
buildings not located in DDAs or QCTs.
Increases the state LIHTC to the same amount for new or
existing low-income housing building that is located in a
DDA or QCT, provided that the federal LIHTC is replaced
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with state LIHTC.
AB 2817 also increases LIHTC percentages to a cumulative 95% of
the qualified basis over four years for rehabilitating qualified
low-income buildings at least 15 years old if it meets all of
the following requirements:
The project serves households of very-low and
extremely-low income such that its average maximum
household income is not more than 45% of the area median
gross income,
The project is subject to a regulatory agreement
restricting the average maximum household income to the
above standard for 55 years,
The project would have insufficient credits under
current categories to complete substantial rehabilitation,
and
CTCAC finds that the credit allocation results in the
completion of the project.
The measure authorizes CTCAC to allocate up to $300 million in
credits in the 2017 calendar year, and each year thereafter,
plus an inflation adjustment. CTCAC can allocate credits to
developers eligible for the non-federally subsidized credit from
the current authorization, but developers of these projects are
ineligible for allocations from the new $300 million. The bill
also allocates an additional $25 million per calendar year for
farmworker housing projects. The measure makes a conforming
change to delete provisions allowing CTCAC to allocate state
credits when the project contains at least 50 percent of its
occupants are special needs households.
AB 2817 also imports current definitions in the Health and
Safety Code for CTCAC to sue when determining "low-income" and
"extremely low-income." The measure applies it changes to LIHTC
sections in the Gross Premiums Tax, Personal Income Tax, and
Corporation Tax. The bill also makes conforming changes.
State Revenue Impact
According to the Franchise Tax Board (FTB), AB 2817 results in
revenue losses of $40 million in 2016-17, $150 million in
2017-18, and $180 million in 2018-19.
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Comments
1. Purpose of the bill . According to the author, "California is
undergoing a serious housing affordability crisis with a
shortfall of over one million affordable homes. According to a
2014 report by the California Housing Partnership Corporation,
median rents in California have increased by over 20 percent
while the median income has dropped by 8 percent. The private
housing market is simply not meeting the demand for low to
moderate income homes. State and Federal divestment in
affordable housing has exacerbated this problem. With the
elimination of California's redevelopment agencies and the
exhaustion of state housing bonds, California has reduced its
funding for the development and preservation of affordable homes
by 79 percent -- from approximately $1.7 billion a year to
nearly nothing. There is currently no permanent source of
funding to compensate for this loss. The housing crisis has
contributed to a growing homeless population, increased pressure
on local public safety nets, an unstable development and
construction marketplace, and the outward migration of thousands
of long-time California residents. The LIHTC program is the only
major source of funding available for affordable development in
the state, making it competitive and overprescribed. In 2014,
only 49 percent of applicants were awarded credits - leaving
many qualified projects without a secure source of funding or
any incentive to build additional affordable housing units. AB
2817 would increase our state's LIHTC by $300 million and
leverage an additional $600 million in federal funds for
affordable housing.
2. Bigger and better . Federal law allows CTCAC to allocate 9%
credit for projects that are not "federally subsidized," but 4%
for ones that are. Developers that obtain federal 9% credits
and combine them with state credits generally have a sufficient
subsidy to construct a low-income housing project; however,
CTCAC can only allocated these credits up to a cap set by
federal law. While the 4% credits aren't subject to a similar
cap, they often do not have the value necessary to generate
sufficient project capital for a project to pencil out in a
post-redevelopment world. AB 2817 seeks to fill this gap by
increasing the value of state credits to hopefully secure more
interest in 4% projects to generate sufficient subsidy amounts
to construct projects. Another vital component is the federal
subsidy, which isn't a direct monetary subsidy, but instead the
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issuance of mortgage revenue bonds, where the subsidy is the
federal and state income tax exclusion for interest payments.
Local housing authorities apply to the California Debt Limit
Allocation Committee (CDLAC) for an allocation of tax-exempt
private activity bond ceiling. If approved, the local housing
authority sells the bonds, loans the proceeds to housing
developers, who combine these funds with capital raised from
state and federal LIHTCs to construct the project, and then
repay the bonds out of rents. Last year, CDLAC allocated $1.25
billion in ceiling for multifamily projects, an amount that
should increase should AB 2817 is enacted.
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
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 much 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. Who pays ? In addition to LIHTC, the state's response to its
lack of affordable housing has been to fund projects through
general obligation bonds, and until recently, authorizing
redevelopment agencies to fund projects by securitizing future
property tax growth within redevelopment project areas. Both
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responses are premised on the idea that the lack of affordable
housing is a statewide responsibility that should be paid for by
the general public in the form of general obligation debt
service or foregone revenue from tax expenditures. However,
local agencies may also use other measures, such as impact or
in-lieu fees, and inclusionary zoning ordinances, which require
developers of market rate housing to set aside units as part of
a project that are affordable for to residents across the income
spectrum. Despite legal challenges from the construction
industry, the California Supreme Court recently unanimously
upheld the City of San Jose's inclusionary zoning ordinance
which required developers of projects of 20 or more units to set
aside 15% of units for individuals earning no more than 120% of
the Santa Clara County area median income to purchase in
California Building Industry Association v. City of San Jose
(Case #S212072). Developers could also pay an in-lieu fee,
construct off-site units, dedicate land, or acquire and
rehabilitate other units. However, this case only spoke to
housing for sale; state law does not yet clearly authorize
inclusionary zoning for rental units.
5. Do it again/Budget . AB 2817 is almost identical to AB 35
(Chiu, 2015). However, Governor Brown vetoed the bill, stating:
"Despite strong revenue performance over the past few
years, the states' budget has remained precariously
balanced due to unexpected costs and the provision of new
services. Now, without the extension of the managed care
organization tax that I called for in special session, the
next year's budget faces the prospect of over $1 billion in
cuts. Given these financial uncertainties, I cannot
support providing additional tax credits that will make
balancing the state's budget even more difficult. Tax
credits, like new spending on programs, need to be
considered comprehensively as part of the budget
deliberations."
In response to the Governor's veto message, both Assemblymembers
and Senators have proposed measures to modify and enhance the
LIHTC program as part of the Budget. In his May Revision, the
Governor proposed enhancing "by-right" approval for affordable
housing under specified circumstances.
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6. Related Legislation . At its June 22, 2016, hearing, the
Committee will also hear AB 2140 (Hernandez), which makes
changes to enhance the usage of LIHTCs reserved for farmworker
housing projects. Earlier this year, the Committee approved SB
873 (Beall), which allows developers receiving LIHTC allocations
from CTCAC to sell all or any portion of them to another
taxpayer; the Governor vetoed an almost identical bill, SB 377
(Beall), last year using the same veto message as AB 35 listed
above.
7. Coming and going . The Senate Rules Committee ordered a
double referral for AB 2817 to the Committee on Housing and
Transportation to consider its impacts on housing policy.
Assembly Actions
Assembly Housing and Community Development 7-0
Assembly Revenue and Taxation 9-0
Assembly Appropriations 19-0
Assembly Floor 79-0
Support and
Opposition (6/16/16)
Support : Alameda County Board of Supervisors; Burbank Housing
Development Corporation; California Apartment Association;
California Building Industry Association; California Chamber of
Commerce; California Coalition for Rural Housing; California
Coalition for Youth; California Credit Union League; California
Housing Consortium; California Housing Partnership Corporation;
California Political Consulting Group; California Rural Legal
Assistance Foundation; California State Association of Counties;
City of Burbank; City of Dublin; City of Glendale; City of
Lakewood; City of Livermore; City of Rancho Cucamonga; City of
San Luis Obispo; City of Sacramento; City of San Mateo; City of
Santa Rosa; City of Thousand Oaks; Disability Rights California;
East Bay Developmental Disabilities Legislative Coalition;
Housing California; League of California Cities; Marin County
Board of Supervisors; Non-Profit Housing Association of Northern
California; Peoples' Self-Help Housing Corporation; Santa Clara
County Board of Supervisors; The Arc and United Cerebral Palsy
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California Collaboration; Western Center on Law and Poverty.
Opposition : Unknown.
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