BILL ANALYSIS                                                                                                                                                                                                    



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          SENATE THIRD READING


          SB  
          873 (Beall)


          As Amended  June 27, 2016


          Majority vote.  Urgency


          SENATE VOTE:  39-0


           ------------------------------------------------------------------ 
          |Committee       |Votes|Ayes                  |Noes                |
          |                |     |                      |                    |
          |                |     |                      |                    |
          |                |     |                      |                    |
          |----------------+-----+----------------------+--------------------|
          |Housing         |6-0  |Chiu, Steinorth,      |                    |
          |                |     |Burke, Chau, Beth     |                    |
          |                |     |Gaines, Lopez         |                    |
          |                |     |                      |                    |
          |----------------+-----+----------------------+--------------------|
          |Revenue &       |9-0  |Ridley-Thomas,        |                    |
          |Taxation        |     |Brough, Dababneh,     |                    |
          |                |     |Gipson, Mullin,       |                    |
          |                |     |O'Donnell, Patterson, |                    |
          |                |     |Quirk, Wagner         |                    |
          |                |     |                      |                    |
          |----------------+-----+----------------------+--------------------|
          |Appropriations  |15-0 |Gonzalez, Bigelow,    |                    |
          |                |     |Bloom, Bonilla,       |                    |
          |                |     |Bonta, Chang, Eggman, |                    |
          |                |     |Eduardo Garcia,       |                    |
          |                |     |Jones, Obernolte,     |                    |








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          |                |     |Quirk, Santiago,      |                    |
          |                |     |Weber, Wood, McCarty  |                    |
          |                |     |                      |                    |
          |                |     |                      |                    |
           ------------------------------------------------------------------ 


          SUMMARY:  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  
            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. 








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          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:  According to the Assembly Appropriations  
          Committee, General Fund (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:  


          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%. 


          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,  








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          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 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 Tax Credit  
          Allocation Committee (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.  


          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  








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          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 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. 


          Purpose.  According to the author, this bill 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. 


          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 this bill. 












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          Analysis Prepared by:                                             
          Lisa Engel / H. & C.D. / (961) 319-2085  FN:  0004131