BILL ANALYSIS Ó SENATE COMMITTEE ON APPROPRIATIONS Senator Ricardo Lara, Chair 2015 - 2016 Regular Session AB 2817 (Chiu) - Taxes: credits: low-income housing: allocation increase ----------------------------------------------------------------- | | | | | | ----------------------------------------------------------------- |--------------------------------+--------------------------------| | | | |Version: May 27, 2016 |Policy Vote: GOV. & F. 5 - 0, | | | T. & H. 10 - 0 | | | | |--------------------------------+--------------------------------| | | | |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 2817 would (1) increase annual authorization amounts for low-income housing tax credits, and (2) increase the value of the credits for specified projects. Fiscal Impact: The Franchise Tax Board (FTB) indicates that this bill would result in a General Fund revenue loss of $17 million in 2018-19, $50 million in 2019-20, and $90 million in 2020-21. The California Tax Credit Allocation Committee (CTCAC) would incur first-year costs of $261,000 and ongoing costs of $123,000 (special funds) to administer its components of AB 2817 (Chiu) Page 1 of ? the bill. 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, 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 their federal counterparts, although the credit rates and durations differ: state tax credits equal 30 percent of the qualified basis of a project over four years (9 percent credits) for project not federally subsidized, and 13 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 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 AB 2817 (Chiu) Page 2 of ? amount of credits granted doesn't exceed the amount of capital required 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 perent of a project's eligible basis. However, CTCAC can replace federal LIHTC with state LIHTC of up to 30 perent 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%. 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 (AB 952, Atkins, 2013). AB 2817 (Chiu) Page 3 of ? Proposed Law: This bill would enact 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 would modify state allocations of LIHTCs awarded to federally-subsidized low-income housing projects receiving federal LIHTC for federally subsidized projects as follows: Increase state LIHTC to 50 percent 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. Increase 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 with state LIHTC. The bill also would increase LIHTC percentages to a cumulative 95 percent 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 percent 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, AB 2817 (Chiu) Page 4 of ? 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. Related Legislation: AB 35 (Chiu) was similar to this bill, and was vetoed by the Governor. Staff Comments: Using LIHC allocation data from CACTC, FTB assumed that the maximum credit allocation threshold would be reached each year ($300 million), with an adjustment based on the assumption that five percent, or $15 million, of the allocation would ultimately be returned to CACTC due to unforeseen project issues. Other key FTB assumptions include that 25 percent of the credit would be carried forward to future years. Because allocated credits cannot be used until after the building has been put into service, FTB assumes that CACTC would require roughly two positions in the first year and one position annually thereafter to administer the billIf AB 2817 (Chiu) Page 5 of ? position authority were granted, these costs would be covered by existing fees. AB 2817 would require program changes during the first year to implement the bill and update application documents; this workload would be absorbable. The increase in projects awarded will also result in increased CTCAC Compliance Section staff monitoring requirements in the future. CACTC estimates that the bill would increase the number of new projects and units monitored by Compliance staff by approximately 15 to 20 percent by 2019. The resulting workload would require additional staff in CACTC's Compliance Section, but these costs would be covered by monitoring fees. -- END --