BILL ANALYSIS                                                                                                                                                                                                    



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          Date of Hearing:  August 3, 2016


                        ASSEMBLY COMMITTEE ON APPROPRIATIONS


                               Lorena Gonzalez, Chair


          SB 873  
          (Beall) - As Amended June 27, 2016


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          |Policy       |Housing and Community          |Vote:|6 - 0        |
          |Committee:   |Development                    |     |             |
          |             |                               |     |             |
          |             |                               |     |             |
          |-------------+-------------------------------+-----+-------------|
          |             |Revenue and Taxation           |     |9 - 0        |
          |             |                               |     |             |
          |             |                               |     |             |
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          Urgency:  No  State Mandated Local Program:  NoReimbursable:  No


          SUMMARY:


          This bill allows taxpayers to sell Low-Income Housing Tax  
          Credits (LIHTCs) and extends the sunset date on provisions  
          relating to the allocation of federal and state LIHTCs.  
          Specifically, this bill:  


          1)Allows a taxpayer to make an irrevocable election to sell all  
            or any portion of the state LIHTC to an unrelated party for  








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            projects that receive a preliminary reservation on or after  
            January 1, 2017, and before January 1, 2020, subject to both  
            of the following conditions:


             a)   The consideration received by the taxpayer from the sale  
               of the LIHTC equals at least 80% of the credit amount; and,


             b)   The purchaser of the credit is a taxpayer allowed a  
               state or federal LIHTC in connection with a project in this  
               state in the same taxable year as the credit purchased, or  
               any previous taxable year.  


          2)Allows an LIHTC purchaser to resell the credit once, subject  
            to all of the applicable requirements. 


          3)Specifies that the taxpayer that originally received the LIHTC  
            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. 


          4)Extends the sunset date the provisions allowing the state  
            LIHTC to be allocated within the partnership agreement  
            differently than federal LIHTCs to January 1, 2020.


          FISCAL EFFECT:


          GF revenue gain of $300,000 in 2016-17, and GF revenue losses of  
          $100,000 and $700,000 in 2017-18 and 2018-19, respectively.  


          COMMENTS:








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          1)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 replaced traditional  
            housing tax incentives, such as accelerated depreciation, with  
            a tax credit that enables low-income housing sponsors and  
            developers to raise project equity through the allocation of  
            tax benefits to investors.



            Two types of federal tax credits are available, the 9% and 4%  
            credits.  These terms refer to the approximate percentage of a  
            project's "qualified basis" a taxpayer may deduct from his/her  
            annual federal tax liability in each of 10 years. For projects  
            that are not financed with a federal subsidy, the applicable  
            rate is 9%. For projects that are federally subsidized  
            (including projects financed with more than 50% with  
            tax-exempt bonds), the applicable rate is 4%. 





          2)State LIHTC Program.  In 1987, the Legislature authorized a  
            state LIHTC program to augment the federal program. While the  
            state LIHTC program is patterned after the federal program,  
            there are several differences, including a provision allowing  
            investors to claim the state LIHTC over a four-year allocation  
            period, rather than the federal 10-year. Furthermore, unlike  
            the federal LIHTC program, the California LIHTC law requires  
            project developers or housing sponsors to agree to a minimum  
            of 55 years of rent and income restrictions. 
             


            State tax credits can only be awarded to projects that have  








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            also received, or are concurrently receiving, an allocation of  
            the federal LIHTCs.  Federal law specifies that each state  
            must designate a "housing credit agency" to administer the  
            federal LIHTC program. In California, responsibility for  
            administering the federal program is assigned to the  
            California TCAC, which is comprised of the State Treasurer,  
            the State Controller, the Director of Finance, and three  
            non-voting members.  TCAC allocates both federal and state  
            LIHTCs through a competitive application process. 


               


            The amount of state LIHTC that may be annually allocated by  
            the TCAC is limited to $70 million, adjusted for inflation,  
            plus any unallocated or unused credits from previous years.   
            In 2015, the total state credit amount available for  
            allocation was approximately $90 million (representing all  
            four years of allocation), plus $5.5 million in farmworker  
            state credit available for agricultural worker housing.  The  
            TCAC awarded approximately $123.1 million in state tax credits  
            to 47 projects in 2015, including one farmworker state credit  
            award of almost $1 million.  





          3)Housing partnership agreements and tax liability. Investment  
            partnerships are a primary source of equity financing for  
            LIHTC projects. A typical arrangement is to match a corporate  
            tax credit investor with a project developer or sponsor,  
            creating a partnership (such as a general partnership or a  
            LLC) where the investor is allocated the LIHTC in exchange for  
            cash and the developer acts as a general partner (or managing  
            member). The money that investors pay for the partnership  
            interest is paid into the low-income housing project as equity  
            financing. Although investors are buying an interest in a  








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            rental housing partnership, this process is commonly referred  
            to as "buying" tax credits because they receive tax credits in  
            return for their investment. According to TCAC, this  
            arrangement usually finances 30% to 60% of the capital costs  
            of project construction.



            This structure of investors being able to claim state LIHTCs  
            in exchange for part ownership of the project can also lead to  
            adverse federal tax consequences for those investors.  
            Specifically, because taxpayers can deduct their state taxes  
            paid from their federal taxes, a state LIHTC can actually  
            increase federal taxpayer liabilities. Because of these  
            federal tax liabilities, the amount of tax credits an investor  
            will receive often exceed the amount of investments actually  
            made. 





          4)Purpose. According to the author, SB 873 will increase the  
            value of state LIHTCs by eliminating the federal tax impacts  
            associated with investors claiming the state LIHTCs. The  
            author argues that allowing developers to sell their state  
            LIHTCs to investors will make the state LIHTC more lucrative  
            for these investors and allow them to invest more dollars into  
            affordable housing projects. By selling their credits to other  
            eligible taxpayers, investors can devote more resources to  
            affordable housing projects without concern for federal tax  
            liability. 



          5)Enacted Budget. This bill duplicates provisions in the enacted  
            2016-17 budget. The enacted budget modifies the state LIHTC to  
            allow developers to sell the credit, with similar restrictions  
            established by SB 873. 








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          Analysis Prepared by:Luke Reidenbach / APPR. / (916)  
          319-2081