BILL ANALYSIS Ó
AB 2842
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Date of Hearing: April 27, 2016
ASSEMBLY COMMITTEE ON HOUSING AND COMMUNITY DEVELOPMENT
David Chiu, Chair
AB 2842
(Thurmond) - As Amended April 12, 2016
SUBJECT: Workforce Housing Tax Credit Pilot: property taxes:
income taxes: insurance taxes: credits: low-income housing:
sale of credit
SUMMARY: Authorizes $100 million in state workforce housing tax
credits for qualified buildings that serve households between
60% and 80% of the area median income (AMI) in twelve counties
with the highest fair market rents in the state as determined by
the U.S. Department of Housing and Urban Development (HUD).
Specifically, this bill:
1)Defines "low-income household" to mean a household with an
income that is greater than 60% of AMI but not higher than 80%
of AMI.
2)Expands the property tax welfare exemption to include an owner
of a property that is eligible for and receives a workforce
housing tax credit for housing units with an income that is
greater than 60% of AMI but not higher than 80% of AMI.
3)Creates a state workforce housing tax credit for qualified
low-income buildings for households with incomes that are
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greater than 60% of AMI but not higher than 80% of AMI.
4)Provides that the workforce housing tax credit will be equal
to 20% of the project's unadjusted allocated basis not to
exceed $50,000 per unit.
5)Defines a "qualified low-income building" to mean a building
that is eligible for and can qualify for federal Low-Income
Housing Tax Credits (LIHTC) except that all of the following
apply:
a) Eligible projects are either acquisition or substantial
rehabilitation of a building that is at least 20 years old
or is a new development;
b) No more than 50% of the units in a project are eligible
for state LIHTC;
c) Prohibits workforce housing tax credit from being used
to supplant existing affordable housing units that are not
eligible for a workforce housing tax credit including any
units where the income of the household is less than 80% of
AMI and the rent of the existing unit is a at least 20%
below market rate at the time the tax credit is allocated;
d) At least 40% of the units in a project are for
households with incomes that are greater than 60% of AMI
but not higher than 80% of AMI.
e) A project is located in one of twelve counties that HUD
has identified as having the highest fair market rents in
the state.
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1)Requires Tax Credit Allocation Committee (TCAC) to post on its
Internet Web site annually the counties that can qualify for
the workforce housing tax credit.
2)Provides that a taxpayer does not have to have currently or
previously been allocated a federal LIHTC in order to be
allocated a workforce housing tax credit.
3)Provides that a taxpayer that is allocated a workforce housing
tax credit can also be allocated a state or federal LIHTC.
4)Prohibits a workforce housing tax credit from being allocated
to a taxpayer that received a federal LIHTC for units with a
household income that is greater than 60% of AMI.
5)Requires an applicant for a workforce housing tax credit to
demonstrate to TCAC that in the city in which the project is
located that the area median income for the average rental
unit is above the area median income for the project.
6)Provides that if a taxpayer does not use the entire workforce
housing tax credit in the first year it can be carried over to
the following year and for up to fourteen years if necessary
until the credit is exhausted.
7)Allows a workforce housing tax credit to credits to be taken
over four years like a state LIHTC.
8)Requires housing units funded using the workforce housing tax
credit must be provided at an affordable rate or at
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substantially below-market rate for 55 years in the same
manner as LIHTC housing units.
9)Requires workforce housing tax credit to be allocated on a
first-come-first served basis.
10)Requires TCAC to report the following information to the
Legislature once all the credits are allocated:
a) The total number of units for which the tax credits were
allowed;
b) The geographic areas of the tax credit allocations; and
c) A recommendation as to whether the tax credits should
continue to be allowed.
1)Allows a taxpayer to make an irrevocable election to sell all
or any portion of the workforce housing tax credit to an
unrelated party, provided that the consideration received by
the taxpayer from the sale of the workforce housing tax credit
equals at least 80% of the credit amount.
2)Requires the taxpayer to report to the TCAC, within 10 days of
the sale of the credit, certain specified information
regarding the purchase and sale of the credit, as provided by
the TCAC.
3)Requires TCAC to provide an annual listing to the Franchise
Tax Board (FTB), in a form and manner agreed upon by TCAC and
FTB, of the taxpayers that have sold or purchased a workforce
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housing tax credit.
4)Applies to projects that receive a preliminary reservation
beginning on or after January 1, 2017.
5)Prohibits a sale of the workforce housing tax credit to more
than one unrelated party or a re-sale of the credit by the
unrelated party to another taxpayer or party.
6)Specifies that the taxpayer that originally received the
workforce housing tax credit will remain solely liable for all
obligations and liabilities imposed on the taxpayer by law
with respect to the credit, none of which shall apply to any
party to whom the credit has been sold or subsequently
transferred.
7)Disallows a sale of a workforce housing tax credit if the
taxpayer was allowed the credit on any of his/her tax returns.
8)Allows the taxpayer who has made an election to sell a
workforce housing tax credit, with the approval of the
Executive Director of TCAC, to rescind this election if the
consideration for the credit falls below 80% of the amount of
the credit after TCAC reservation.
9)Authorizes FTB to prescribe rules, guidelines, or procedures,
as specified.
10)Requires TCAC to enter into an agreement with FTB to pay any
costs incurred by FTB in the administration of the workforce
housing tax credit that was sold.
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11)Repeals the sunset date, thus making permanent the provisions
allowing the state workforce housing credit to be allocated
within the partnership agreement differently than federal
LIHTC credits.
12)Takes effect immediately as a tax levy.
EXISTING LAW:
1)Allows a state tax credit for costs related to construction,
rehabilitation, or acquisition of low-income housing. This
credit, which mirrors a federal LIHTC credit, may be used by
taxpayers to offset the tax under the Personal Income Tax
(PIT), the Corporation Tax (CT), and the Insurance Tax (IT)
laws.
2)Requires the California TCAC to allocate each year the
California LIHTC credits based upon qualifications of the
applicant and proposed project. The California LIHTC credit
is available only to projects that have received an allocation
of the federal LIHTC credit.
3)Limits the annual aggregate amount of the state LIHTC credit
to $70 million, as adjusted for an increase in the California
consumer price index from 2002, plus any unused LIHTC credits
for the preceding calendar year and any LIHTC credits returned
in the calendar year. The California LIHTC credit awarded may
be claimed as a credit against tax over a four-year period.
4)Requires TCAC to certify the amount of tax credit allocated.
In the case of a partnership or an S Corporation, a copy of
the certificate is provided to each taxpayer. The taxpayer is
required, upon request, to provide a copy of the certificate
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to the FTB.
5)Allows, until January 1, 2016, the partnership agreements
formed to construct low-income housing projects to allocate
the state LIHTC credits to investors in a manner that differs
from the proportional allocation of the federal LIHTC credits
by disconnecting federal tax rules that apply to partnerships,
to which California conforms.
6)Authorizes the Legislature to exempt from taxation property
used exclusively for religious, hospital, or charitable
purposes, as specified. (California Constitution Article
XIII, Section 4(b).) The Legislature has implemented this
"welfare exemption" in R&TC Section 214.
7)Exempts low-income housing developments operated by non-profit
organizations, as specified.
8)Imposes a "certification requirement" on low-income housing
owners seeking the welfare exemption. Specifically, the law
requires a project's owner to "[c]ertify that the funds that
would have been necessary to pay property taxes are used to
maintain the affordability of, or reduce rents otherwise
necessary for, the units occupied by lower income households."
FISCAL EFFECT: Unknown. 2/3 vote.
COMMENTS:
Background : In 1986, the federal government authorized the
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LIHTC program to enable affordable housing developers to raise
private capital through the sale of tax credits to investors.
Two types of federal tax credits are available and are generally
referred to as nine percent (9%) and four percent (4%) credits.
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 also receive federal LIHTCs,
except for farmworker housing projects, which can receive state
credits without federal credits. Investors can claim the state
credit over four years. TCAC has authority for approximately $70
million in state tax credits each year. Projects that receive
either state or federal tax credits are required to maintain the
housing at affordable levels for 55 years.
TCAC administers the programs and awards credits to qualified
developers who do not have sufficient tax liability to use the
credits themselves so they sell those credits to private
investors who use the credits to reduce their federal or state
tax liability. The developer in turn invests the capital into
the affordable housing project. Under current law, investors
must become an owner of the property to claim the credits.
New state workforce housing tax credit: This bill would create a
$100 million workforce housing tax credit for housing units with
an income that is greater than 60% of AMI but not higher than
80% of AMI. The amount of credits that a workforce unit could
receive would not exceed $50,000 per unit. The credits would be
awarded on a first-come-first-serve basis to developers. The
credits would only be available in twelve counties that HUD has
identified as having the highest fair market rents in the state.
Currently those counties are: Contra Costa, Napa, Marin,
Monterey, Orange, San Diego, San Francisco, San Mateo, Santa
Barbara, Santa Clara, and Ventura.
Federal credits can only be awarded to projects that serve
households that make up to 60% of AMI. State credits are paired
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with federal credits to so that developers can generate enough
equity to finance a project. The new workforce housing credit
proposed by this bill would be unable to leverage federal tax
credits; it's unclear whether developers would be able to
generate enough additional subsidies to reduce the rents of
these units to reach between 60% and 80% of AMI.
The Welfare Exemption for low-income housing developments :
Article XIII, Section 4(b) of the California Constitution
authorizes the Legislature to exempt from taxation property used
exclusively for religious, hospital, or charitable purposes, as
specified. The Legislature has implemented this "welfare
exemption" in R&TC Section 214. AB 2144 (Filante), of the
1987-88 Regular Session, amended R&TC Section 214 specifically
to exempt low-income housing developments operated by non-profit
organizations. As noted in the Senate Revenue and Taxation
Committee analysis, AB 2144's proponents argued that the
property tax funds then being paid "could better be used in
furtherance of the goals of providing low income housing."
The owner of a property that receives LIHTC is eligible for a
welfare exemption. The state and federal LIHTC serve households
that make 60% of AMI or below. This bill proposes to create a
new workforce housing tax credit program that would finance
housing units for households at 60% to 80% of AMI. Because the
welfare exemption only applies to the existing LIHTC program the
units receiving workforce housing tax credits would not be
eligible for the welfare exemption. This bill would add the new
workforce housing tax credit as a property eligible for a
welfare exemption.
Sale of credit to unrelated party : This bill would allow a
developer who receives an award of state workforce housing
credit to sell the credits to an investor without requiring the
investor to be part of the ownership entity for the project,
typically a limited liability partnership. A developer could
sell the tax credit to one or more unrelated parties if they
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received at least 80% of the value of the credit. Allowing for
the sale of workforce housing credits to investors with no
ownership in the project will increase the value of the credits.
Non-profit affordable housing developers, who do not have the
required tax liability on their own, must seek out private
equity investments for their developments. Under current law,
investors must become owners of the property to claim the
credits against their state tax liabilities. Due to the fact
that state taxes are deductible from federal taxes, a reduction
in the state tax liability increases the federal tax liability
for the investor. With the federal corporate tax rate at 35%,
investors will generally invest no more than 65 cents for each
dollar of state credit. Allowing a developer who is awarded
state credits to sell the credits to an investor without
admitting the investor to the ownership partnership will
increase the credit closer to one dollar for each dollar of
credit. Last year, SB 377 (Beall) would have allowed the sale
of state LIHTC to a third party without an ownership stake in
the project. That bill was vetoed by the Governor and the author
has reintroduced it this year.
Purpose of this bill: According to the author, "All state funds
that subsidize the development of multi-family housing are
effectively capped at 60% of the Area Median Income (AMI). State
programs, as well as federal programs that incent development
for units below market rent are capped. And the only existing
program which goes to 80% AMI, the Multifamily Housing Program,
is an overly-subscribed competitive program where advantage is
given for lower-income developments-the implication of which is
that no development occurs above 60% AMI. The consequence of
this lack of gap-financing is that there are no rent-restricted
units developed above 60% AMI which for the most part is
justifiably below what the market provides. However, in
high-cost metropolitan areas, the free market does not naturally
provide housing for many above that income designation. The
consequence of this lack of investment has been the displacement
of vital workers, many workers whom, despite their contribution
to the community, cannot live within it-such as healthcare
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workers, education professionals, firefighters, and others."
Related legislation : AB 2817 (Chiu) increases the allocation
of state LIHTC by an additional $300 million and makes changes
to the state LIHTC to allow for greater leveraging of 4% federal
LIHTC. This bill passed out of this committee 7-0 and is
currently pending hearing in the Assembly Committee on Revenue
and Taxation.
Policy Issues:
1)This credit would be awarded on a first-come-first-serve basis
rather than on a competitive basis. The committee may wish to
consider if the bill should be amended to require the credit
be awarded on a competitive basis to encourage the best and
highest use of the credit.
2)After all the workforce housing tax credits are awarded, TCAC
is required to report back to the Legislature on whether the
workforce housing tax credits achieved their intended purpose.
The committee may wish to require the report to include the
number of units that are occupied by qualified low income
households at the time the report is completed and how many
tenants are paying an affordable rent at the time the report
is completed.
3)This bill prohibits workforce housing tax credit from being
used to replace existing units that are already affordable
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housing units including units where the households are making
less than low-income and the rents for those units is at least
20% below market rate at the time the tax credit is allocated.
The intent of this provision may be to prevent the workforce
housing tax credit from being used for a naturally occurring
affordable unit that is not subsidized. The committee may wish
to consider if these protections are strong enough to prevent
against the displacement of existing low-income tenants or if
these provisions should be strengthened. Additionally, the
bill should include a mechanism for determining the market
rate for rent in order to determine if a rent is "below market
rent."
4)The bill prohibits a housing unit that is financed using
workforce housing tax credit to also be financed using federal
LIHTC. It unclear why this provision is needed since the
workforce housing tax credits are above the income limit for
federal LIHTC.
Committee amendments:
1) Delete the requirement that the workforce housing tax
credits be allocated on a first-come-first-served basis.
2) Require the report that must be submitted at the
conclusion of the pilot program to include the number of
units that are occupied by qualified low income households
and how many tenants are paying an affordable rent at the
time the report is completed.
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3) Add to the definition of a "qualified low-income
building" that units funded by the workforce housing tax
credit be at least 20% below market rate at the time the
tax credit is allocated.
4) Delete the $100 million appropriation in the bill.
Technical amendments:
On page 22, line 24, after "(2)," insert "lower"
Double referred: If AB 2842 passes this committee, the bill will
be referred to the Committee on Revenue and Taxation.
REGISTERED SUPPORT / OPPOSITION:
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Support
California Council for Affordable Housing
Opposition
None on File
Analysis Prepared by:Lisa Engel / H. & C.D. / (961) 319-2085