BILL ANALYSIS
AB 1065
Page 1
Date of Hearing: January 11, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
AB 1065 (Gilmore) - As Amended: January 4, 2010
2/3 vote. Urgency. Fiscal committee.
SUBJECT : Farmworker housing tax credit: low-income housing tax
credit: recapture period.
SUMMARY : Modifies the "recapture" provisions under the
farmworker housing tax credit (FHC) law by reducing the
recapture period from 30 consecutive taxable years to 15
consecutive taxable years, and partially conforms the California
low-income housing tax credit (LIHC) program to the federal
low-income housing credit recapture provisions. Specifically,
this bill :
1)Conforms the state LIHC program to the Internal Revenue Code
(IRC) Section 42(j) relating to a 15-year recapture period for
the LIHC in the case of a "disqualifying event," while
retaining the 30-year regulatory compliance period.
2)Specifies that the new LIHC recapture provisions will apply to
preliminary reservations of the LIHCs made on or after the
effective date of the act.
3)Retroactively reduces the recapture period for the FHC granted
or allocated under the former FHC program, prior to January 1,
2009 from 30 years to 15 consecutive taxable years, beginning
with the taxable year in which the credit is allowable.
4)Defines the "recapture amount" as an amount determined by
multiplying the entire amount of the FHC allowed under the
prior FHC program by a fraction, the numerator of which is the
number of years remaining in the recapture period and the
denominator of which is 15.
5)Takes effect immediately as an urgency measure.
EXISTING FEDERAL LAW allows a LIHC for the costs of
constructing, rehabilitating, or acquiring low-income housing.
The credit amount varies depending on several factors, including
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when the housing was placed in service and whether it was
federally subsidized. The credit is claimed over 10 years. The
compliance period is 15 years during which there is a ratable
recapture period of the LIHC. The compliance period begins at
the beginning of the credit period, meaning when the building is
placed in service, or the next year, if the taxpayer so elects.
Failure to comply with the requirements of IRC Section 42 during
the 15-year compliance period generally causes immediate
recapture.
EXISTING STATE LAW :
1)Authorizes the California Tax Credit Allocation Committee
(TCAC) to oversee the process and allocate the LIHC and FHC.
1)Does not provide for the stand-alone FHC program anymore since
the recently enacted state law [SB 1247 (Lowenthal), Chapter
521, Statutes of 2008] repealed the FHC program, but allows
projects that would have otherwise qualified under the FHC to
receive a state tax credit under the LIHC program.
2)Requires the California TCAC to set aside, for annual
allocation for projects housing farmworker
households, $500,000 plus the amount of any unallocated,
unused, or returned and unused credits under the former FHC
offered under the insurance, personal income, and corporation
tax laws. Specifies that the FHC may be awarded independently
of the federal LIHC.
3)Provides for the recapture for noncompliance, within a 30-year
compliance period, of FHCs granted or allocated prior to
January 1, 2009, with respect to the costs of constructing or
rehabilitating farmworker housing. The FHCs allocated under
the former FHC provisions have a recapture period of 30 years
and all FHCs allocated after January 1, 2009, have the same
compliance requirements as the LIHC, but are not subject to
recapture.
4)Specifies that the FHC recapture amount is based on a
disqualifying event where the California TCAC determines that
the project is out of compliance.
5)Allows a credit for costs related to construction,
rehabilitation, or acquisition of low-income housing in
conformity with federal law. The California LIHC, which
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mirrors a federal credit, is allocated each year by the TCAC
based upon qualification of the applicant and the proposed
project.
6)Does not require recapture of the California LIHC but,
instead, increases the compliance period for state LIHC to 30
years (from 15 years under the federal tax law). The
compliance period begins at the beginning of the credit
period, meaning when the building is placed in service or the
next year, if the taxpayer so elects. If a project fails to
meet the compliance requirements, compliance is restored
through judicial action.
PRIOR STATE LAW allowed a tax credit in an amount not exceeding
50% of the qualified costs paid or incurred for the construction
or rehabilitation of qualified farmworker housing. The
aggregate amount of FHCs allowed under the program was $500,000
per calendar year, increased by an amount equal to any
unallocated credits from preceding years.
FISCAL EFFECT : The Franchise Tax Board (FTB) staff estimates
that this bill will result in an annual loss of $2 million
beginning with the fiscal year (FY) 2014-15 until FY 2025-26.
Starting with FY 2026-27, the loss will be reduced to $200,000.
COMMENTS :
1)The purpose of this bill . According to the author's office,
two projects that were awarded the FHCs prior to January 1,
2009, are currently in jeopardy because of the 30-year
"recapture" provisions applicable to those credits. These
recapture provisions were repealed with the passage of SB
1247, but the repeal is effective only for credits granted or
awarded after January 1, 2009. Effectively, SB 1247 created
two different types of FHCs. Some lenders are uncomfortable
proceeding with the financing of projects that received
credits prior to January 1, 2009, and are requiring the
investors to fund fully the maximum recapture penalty for the
next 30 years. One of those projects, the Bakersfield Family
Apartments - an 81 unit Farmworker Housing Complex - had
planned to complete the final phase of development and
celebrate their grand opening in November 2009. But in light
of the incredible expense to fund the recapture penalty fully,
with no return on the investment, the committed investors had
second thoughts about this project. This bill would reduce
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the recapture period for FHCs awarded or allocated prior to
January 1, 2009, from 30 taxable years to 15 taxable years,
would resolve the concerns of both the investors and lenders
and would allow for the completion of the project.
2)Background . Affordable housing projects face many barriers in
California: high costs of land, labor, and capitol, to name a
few. The state and federal LIHC programs provide an incentive
for investors to fund these projects. The state and federal
LIHC programs represent the biggest source of funds for
affordable housing in California, and they are the most
important single source of funds for units that are affordable
to very low- and extremely low-income households. The amount
of federal credits available to California in 2009 is equal to
$2.3 per capita, or roughly $83.1 million. However, that
amount translates into the actual value of the annual federal
credits ten times more - $831 million - because investors can
take the credit each year for a 10-year period.
The California LIHC is available only to projects that received
an allocation of the federal LIHC. The aggregate amount of
tax credit allowed under the California LIHC program is $70
million, as adjusted for an increase in the California
consumer price index from 2002, plus any unused LIHC for the
preceding calendar year and any LIHC returned in the calendar
year. The annual state credit ceiling for 2009 was
approximately $78.9 million. The California LIHC awarded may
be claimed as a credit against tax over a four-year period.
Prior to January 1, 2009, the state law provided for two
distinct LIHC programs - LIHC and FHC. In 2008, the
Legislature decided to merge those two programs into one - the
LIHC program, with a separate set aside amount dedicated
specifically to the construction, rehabilitation and
preservation of farmworker housing. SB 1247 repealed the
stand-alone FHC program and, instead, required that $500,000
plus any unallocated farmworker housing credit under prior law
be set aside annually exclusively for farmworker housing. SB
1247 allows any FHC that is unallocated or returned to be
added to the annual $500,000 credit allocation cap, until
exhausted. It also allows the FHC to be awarded independently
of the federal LIHC.
3)Recapture of Farmworker Housing Tax Credits . When SB 1247
eliminated the separate state FHC program, it also repealed
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the "recapture" provisions for any FHC granted or allocated
after January 1, 2009. Under prior FHC law, a credit was
subject to "recapture" upon a "disqualifying event" within the
30-year compliance period. "Recapture" generally means that
the investor could forfeit all or a portion of the previously
claimed credits, plus interest, and might also have to pay a
penalty. In order to claim the credit, owners of FHC or LIHC
properties are subject to a number of requirements during the
planning, construction and operation of the property. While
failure to meet many of these requirements, if remedied
quickly, will not have an adverse impact on the property's
tax-credit status, it will result in a loss of all or a major
portion of the property's potential tax credits. For example,
the failure to maintain the property's status as farmworker
housing for the full 30-year compliance period would
constitute a "disqualifying event" that would allow the state
to "recapture" the FHC. The amount of recapture depends on
the type of a "disqualifying event." The new law that
repealed the recapture provisions for FHCs applies only
prospectively to FHCs granted or allocated after January 1,
2009. Thus, any FHC granted or awarded prior to January 1,
2009, is still subject to the recapture by the state during
the 30-year compliance period.
This bill seeks to modify the recapture provisions applicable to
the FHCs granted or allocated prior to January 1, 2009, by
reducing the period within which the credit may be recaptured
from 30 consecutive taxable years to 15 consecutive taxable
years, beginning with the taxable year in which the credit is
allowable. The disparity in treatment of newly awarded
credits and FHCs awarded or allocated prior to January 1,
2009, will still remain, even with the passage of this bill.
Committee staff also notes that this bill would amend the FHC
law retroactively and would provide a relief to investors who
knew, or should have known, at the time they received the
credits, that those credits were subject to a 30-year
recapture period.
4)Recapture of Low-income Housing credits . In the same year
that the Legislature merged the FHC and LIHC programs, it
enacted SB 585 (Lowenthal), Chapter 385, Statutes of 2008 to
modify the LIHC program as well. SB 585 allowed a low-income
housing project to bifurcate federal and state LIHC, provided
that those credits are preliminarily reserved to the project
between January 1, 2009, and before January 1, 2016. The term
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"bifurcation" simply means that the state LIHCs may be
allocated to the partners of a partnership owning the project
in accordance with their partnership agreement, without a
corresponding allocation of the federal LIHCs or without a
consideration of the allocation's substantial economic effect.
Under the federal LIHC law, a LIHC is subject to recapture
within the 15-year compliance period. The California LIHC,
which mirrors a federal credit, does not require recapture of
the California LIHC, but instead, increases the compliance
period for state LIHCs to 30 years. The state law also
requires the housing sponsor to enter into a regulatory
agreement with the TCAC. If a project fails to meet the
compliance requirements, compliance is restored through
judicial action. The remedies available to the state, in the
event of a default by the sponsor, include a collection of
rents, taking possession of the project and operating the
project. Recapture of the credit, however, is not on the
list.
Prior to January 1, 2009, investors that received the state LIHC
in a low-income housing project also had a federal LIHC
allocated to them, since the state and federal LIHCs could not
have been bifurcated. Because of the federal recapture
provision, all investors in the project were treated equally,
i.e., if the project failed to comply with the applicable
requirements, all of the investors were subject to the federal
recapture provision. However, under the new state law created
by SB 585, investors that received only the state LIHCs in the
project would not be at risk of recapture, even though the
regulatory compliance agreement may still be enforced by the
TCAC, or other state and local agencies, against the housing
sponsor in a judicial proceeding. It seems that the recapture
provision would create more of an incentive for the investors
with state LIHCs to monitor the sponsor's compliance with the
necessary requirements of the LIHC program. Furthermore, this
bill would also treat LIHCs and FHCs similarly by establishing
the same recapture period for LIHCs and newly awarded FHCs
(which are now administered under the LIHC program).
It should be noted that both the recapture and compliance
periods for LIHCs under federal tax law are set at 15 years,
whereas, this bill would create a 15-year recapture period and
a 30-year compliance period for state LIHCs.
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5)Related Legislation .
AB 1554 (Committee on Jobs, Economic Development and the
Economy), which was introduced in the 2009 Legislative
Session, is almost identical to this bill. AB 1554 is
currently with the Senate Committee on Rules.
SB 16 (Lowenthal), which was introduced in the 2009
Legislative Session, would make the LIHC refundable for
projects that have received a preliminary reservation for a
state low-income housing tax credit on or after July 1, 2008,
and before January 1, 2010. SB 16 is in the Senate
Appropriations Committee.
SB 585 (Lowenthal), Chapter 385, Statutes of 2008, allows a
project that receives a preliminary reservation of the LIHC on
or after January 1, 2009, and before January 1, 2016, to have
the LIHC be allocated to the partners of a partnership owning
a low-income housing project in accordance with a partnership
agreement, regardless of how the federal LIHC is allocated to
the partners or whether the allocation of the credit under the
terms of the agreement has substantial economic effect under
IRC Section 704(b).
SB 1247 (Lowenthal) Chapter 521, Statutes of 2008, repealed
the FHC program and required that the future FHCs be allocated
in the same manner as the state low-income housing tax credit.
6)Double-referral . This bill has been double-referred to the
Committee on Housing and Community Development and Revenue and
Taxation.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
None on file
AB 1065
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Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098