BILL ANALYSIS Ó
SENATE COMMITTEE ON TRANSPORTATION AND HOUSING
Senator Jim Beall, Chair
2015 - 2016 Regular
Bill No: AB 2817 Hearing Date: 6/28/2016
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|Author: |Chiu |
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|Version: |5/27/2016 |
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|Urgency: |No |Fiscal: |Yes |
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|Consultant|Alison Dinmore |
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SUBJECT: Taxes: credits: low-income housing: allocation
increase
DIGEST: This bill increases the amount of state tax credits the
California Tax Credit Allocation Committee (TCAC) can allocate
for low-income housing to $300 million, increases the allocation
for the farmworker housing tax credit to $25 million, and makes
other changes to the state low-income housing tax credit (LIHTC)
program.
ANALYSIS:
Existing law:
1)Provides that a low-income housing development that is a new
building and is receiving 9% federal LIHTCs is eligible to
receive state LIHTC over four years of 30% of the eligible
basis of the building.
2) Provides that a low-income housing development that is a new
building that is receiving federal LIHTC and is "at risk of
conversion" to market rate is eligible to receive state LIHTC
over four years of 13% of the eligible basis of the building.
2) Allows TCAC to award state LIHTCs to developments in a
qualified census tract (QCT) or a difficult to designated
difficult development area (DDA) if the project is also
receiving federal LIHTC, under the following conditions:
a) Developments restrict at least 50% of the units to
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special-needs households
b) The state credits do not exceed 130% of the eligible
basis of the building
4) Allows TCAC to replace federal LIHTC with state LIHTC of up
to 130% of a project's eligible basis if the federal LIHTC is
reduced in an equivalent amount.
5) Defines a QCT as any census tract designated by the U.S.
Department of Housing and Urban Development (HUD) in which 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%.
6) 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.
This bill:
1) Modifies the allocation of state LIHTC that may be awarded
to a federally subsidized low-income housing project receiving
federal 4% LIHTC so that:
a) A new, qualified low-income housing building is eligible
for a cumulative state LIHTC over four years of 50% of the
eligible basis of the building, provided that the building
is not located in a DDA or a QCT. (
b) An existing qualified low-income housing building that
is not located in a DDA or a QCT is eligible for a
cumulative state LIHTC over four years of 13% of the
eligible basis of the building. (
c) A new or existing low-income housing building that is
located in a DDA or QCT may be awarded a cumulative state
LIHTC in an amount not to exceed 50% of the eligible basis
of the building, provided that the federal LIHTC is
replaced with state LIHTC, as specified. (
d) A qualified existing, low-income building that is at
least 15 years old is eligible for a cumulative state LIHTC
of 95% of the eligible basis over four years if it meets
all of the following requirements:
i. 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
AB 2817 (Chiu) Page 3 of ?
ii. The project is subject to a regulatory
agreement restricting the average maximum household
income to the above standard for 55 years(
iii. The project would have insufficient credits
under current categories to complete substantial
rehabilitation
iv. The credit allocation results in the
completion of the project
1)Authorizes TCAC to allocate up to $300 million in credits,
beginning in 2017, and each year thereafter, for projects only
eligible for the 4% credit. Authorizes TCAC to allocate
credits to developers eligible for the 9% credit from the
current $75 million authorization, but developers of these
projects are ineligible for allocations from the new $300
million.
3) Authorizes TCAC, beginning in 2017, to increase the amount
of LIHTCs set aside for farmworker housing from $500,000 to
$25 million.
4) Imports current definitions for "low-income" and "extremely
low-income" and makes other conforming changes.
5) Takes effect immediately as a tax levy.
COMMENTS:
1) Purpose. 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% while the
median income has dropped by 8%. 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% -
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
AB 2817 (Chiu) Page 4 of ?
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% of applicants were awarded credits -leaving
many qualified projects without a secure source of funding or
any incentive to build additional affordable housing units.
This bill would increase the state's LIHTC by $300 million and
leverage an additional $600 million in federal funds for
affordable housing.
2) Background of the federal LIHTC program. 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 enables
low-income housing sponsors and developers to raise project
equity through the allocation of tax benefits to investors.
TCAC administers the program and awards credits to qualified
developers who can then sell those credits to private
investors who use the credits to reduce their federal tax
liability. The developer in turn invests the capital into the
affordable housing project. (
Two types of federal tax credits are available: the 9% and 4%
credits. These terms refer to the approximate percentage of a
project's "eligible basis" a taxpayer may deduct from his/her
annual federal tax liability in each of 10 years. "Eligible
basis" means the cost of development excluding land,
transaction costs, and costs incurred for work outside the
property boundary. For projects that are not financed with a
federal subsidy, the applicable rate is 9%. For projects that
are federally subsidized (including projects financed 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. Generally, the 9% tax credit amounts to 70% of
a taxpayer's eligible basis and the 4% tax credit amounts to
30% of a taxpayer's eligible basis, spread over a 10-year
period.
Each year, the federal government allocates funding to the
states for LIHTCs on the basis of a per-resident formula. In
California, TCAC is the entity that reviews proposals
submitted by developers and selects projects based on a
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variety of prescribed criteria. Only rental housing
buildings, which are either undergoing rehabilitation or newly
constructed, are eligible for the LIHTC programs. In
addition, the qualified low-income housing projects must
comply with both rent and income restrictions.
Each state receives an annual ceiling of 9% federal tax
credits, and in California they are oversubscribed by a 2:1
ratio. Unlike 9% LIHTC, federal 4% tax credits are not
capped; however, they must be used in conjunction with
tax-exempt private activity mortgage revenue bonds which are
capped and are administered by the California Debt Limit
Allocation Committee. In 2015, the state ceiling for private
activity bonds was set at $5.61 billion.
The value of the 4% tax credits is less than half of the 9%
tax credits and, as a result, 4% federal credits are generally
used in conjunction with another funding source, like state
housing bonds or local funding sources. In 2014, developers
only used $80.5 million in annual federal 4% tax credits,
significantly less than prior years. This is because, unlike
in prior years, there is little supplemental funding from
housing bonds or local funding sources to fill the remaining
financing gap. The loss of redevelopment funding and state
housing bond funds, which were used in combination with 4%
federal credits to achieve higher affordability, has made the
4% federal credits less effective.
3) Background of the 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
TCAC is limited to $70 million, adjusted for inflation. In
2014, the total credit amount available for allocation was
$103 million 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
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used to determine the total amount of the state tax credit
(representing all four years of allocation) are 30% of the
eligible basis of a project that is not federally subsidized
and 13% of the eligible 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.
Combining federal 9% credits (which amounts to roughly 70%)
with state credits (which amounts to 30%) generally equals
100% of a project's eligible basis. Combining federal 4%
credits (which amounts to roughly 30%) with state credits
(which amounts to 13%) only results in 43% of a project's
eligible basis.
4) Background of state credits in DDAs and QCTs. Federal law
also allows credits equal to 130% of eligible basis if the
project is located in a QCT or a DDA, a so-called "basis
boost" of 30%. QCTs are designated by the Secretary of 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 have
a poverty rate of 25%. The Secretary of HUD also draws DDAs
using a ratio of construction, land, and utility costs to area
median gross income.
State law prohibits TCAC from allocating state credits in QCTs
or DDAs unless TCAC swaps out federal credits willing to forgo
the "basis boost," so that the combined credit amount doesn't
exceed 130% of basis. The rationale for this prohibition is
that projects in these areas can qualify for more federal tax
credits through a basis boost and therefore are already
advantaged.
State law 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. The change allows these projects to receive state
credits of 30% of basis in addition to federal ones generated
on 130% of basis.
5) Increasing amount of state credits. This bill would
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increase the state LIHTC allocation by $300 million per year,
in addition to the existing $70 million cap, as adjusted for
inflation. The increase in the amount of state LIHTC would
allow the state to leverage an additional $200 million in
federal 4% LIHTC and at least $400 million in federal
tax-exempt bond authority annually. The increase would help
fill the gap in funding that was created by the loss of
redevelopment and the exhaustion of state voter-approved
bonds. Additionally, this bill increases the set-aside for
farmworker housing from $500,000 to $25 million.
6) Filling the gap. This bill also increases the amount of
state tax credits awarded to each qualified low-income housing
project from 13% to 50% of the eligible basis, provided the
project is also receiving a 4% federal tax credit. Developers
that receive federal 9% credits can combine them with a
sufficient subsidy to construct a low-income housing project,
but TCAC can only allocate those credits up to a federal cap.
While the 4% credits are not subject to a cap, they do not
have the same value because developers cannot generate
sufficient capital to cover the cost of the project. This
bill would address this issue by increasing the value of the
state credits to secure more interest than the 4%. This
increase would apply to new construction and rehabilitation
costs of the project and would more than triple the amount of
equity that an investor in the project would receive, which
would bring the return on 4% credits in line with 9% credits
and would likely result in greater affordability for the
project. The costs of acquiring an existing low-income
building would also be eligible for the state LIHTC allocated
from the new additional funding of $300 million, but the
applicable percentage used to calculate the amount of that
credit would be limited to 13% of the project's eligible
basis. (
7) An extra boost. Federal law gives projects an extra 30%
boost on eligible basis if the project is located in a DDA or
QCT. These areas have a higher poverty level and a higher
concentration of extremely low-income individuals and
families, so deep subsidy is required to make housing
affordable. State law does not allow state credits to be
awarded in DDAs or QCTs, except for housing developments where
50% of the units are for special-needs populations. The
rationale for the prohibition is that projects in these areas
can qualify for more federal tax credits and are already
AB 2817 (Chiu) Page 8 of ?
advantaged. The bill allows TCAC to allocate state credits for
new or existing buildings in QCTs and DDAs up to 50% of basis
of a project receiving a 4% credit, but must replace federal
credits with state ones when doing so. In other words, the
state would provide the percentage necessary so that the
aggregate of the state credits and the federal boost equal 50%
of basis. The main purpose of this change is to provide
enough state tax credits to match the value of a 9% federal
tax credit. As with the other provisions of the bill, this
only changes the state tax credit for projects receiving 4%
credits and does not affect projects receiving 9% tax credits.
8) Rehabilitating existing housing stock. Many low-income
housing developments in the state are older and need
significant rehabilitation. These projects, therefore,
require more investment due to their age and level of repairs,
combined with low rents. This bill will significantly
increase an amount of state LIHTC - 95% of the eligible basis
- that may be awarded to a qualified low-income housing
building that houses very low-income or extremely low-income
tenants and meets all specified requirements, including the
buildings location, age, and value. (
9) Costs and effects. The increase in state LIHTCs is a tax
credit, which means this is a tax liability that would have
otherwise gone to the General Fund from corporations, which
instead choose to invest in LIHTCs. While it's possible that
this bill could take $300 million from the general fund, the
idea is that investors would likely be seeking tax credits
elsewhere and might, with the enactment of this bill, now
build affordable housing. As previously noted, the increase
in the amount of state LIHTC would allow the state to leverage
an additional $200 million in federal 4% LIHTC and at least
$400 million in federal tax-exempt bond authority annually.
Further, there are economic impacts from the construction, job
creation, and local tax benefits of building multifamily
homes. According to the National Association of Home Builders,
the estimated one-year impacts of building 100 rental
apartments in a typical local area include $11.7 million in
local income, $2.2 million in taxes and other revenue for
local governments, and 161 local jobs (1.61 jobs per
apartment). The additional, annually recurring impacts of
building 100 rental apartments in a typical local area include
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$2.6 million in local income, $503,000 in taxes and other
revenue for local governments, and 44 local jobs (.44 jobs per
apartment).
10) Double-referred. This bill was heard in the Senate
Governance and Finance Committee on June 22, and approved 5-0.
Assembly Votes:
Floor:79-0
Appr:19-0
Rev&Tax: 9-0
H&CD:7-0
Related Legislation:
AB 873 (Beall, 2016) - allows a taxpayer who receives an
allocation of state LIHTC from TCAC to sell all or any portion
of the credit to one or more unrelated parties for each taxable
year in which the credit is allowed for not less than 80% of the
amount of the credit. This bill is pending in the Assembly.
AB 35 (Chiu, 2015) - would have modified the existing LIHTC
program and increase the aggregate credit amount that may be
annually allocated to low-income housing projects by $100
million for calendar years 2016 through 2021, inclusive, as
provided. This bill was vetoed by the Governor.
AB 377 (Beall, 2015) - would have allowed a taxpayer who
receives an allocation of state LIHTC from TCAC to sell all or
any portion of the credit to one or more unrelated parties for
each taxable year in which the credit is allowed for not less
than 80% of the amount of the credit. This bill was vetoed by
the Governor.
FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes
Local: No
POSITIONS: (Communicated to the committee before noon on
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Wednesday,
June 22, 2016.)
SUPPORT:
Non-Profit Housing Association of Northern California (sponsor)
Apartment Association, California Southern Cities
Apartment Association of Orange County
Burbank Housing Development Corporation
California Coalition for Rural Housing
California Housing Consortium
California Housing Partnership Corporation
California Rural Legal Assistance Foundation
California State Association of Counties
City of Dublin
City of Glendale
City of Lakewood
City of Livermore
City of Rancho Cucamonga
City of San Luis Obispo
City of San Mateo
City of Santa Rose
City of Thousand Oaks
California Apartment Association
California Building Industry Association
California Chamber of Commerce
California Credit Union League
California Housing Consortium
Disability Rights California
East Bay Developmental Disabilities Legislative Coalition
East Bay Rental Housing Association
Housing California
League of California Cities
Marin County Board of Supervisors
North Valley Property Owners Association
Peoples' Self-Help Housing
Santa Clara County Board of Supervisors
The Arc and United Cerebral Palsy California Collaboration
Western Center on Law and Poverty
OPPOSITION:
None received
-- END --
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