BILL ANALYSIS
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|SENATE RULES COMMITTEE | AB 2293|
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THIRD READING
Bill No: AB 2293
Author: Torres (D)
Amended: 8/17/10 in Senate
Vote: 27 - Urgency
SENATE TRANSPORTATION & HOUSING COMMITTEE : 9-0, 6/29/10
AYES: Lowenthal, Huff, Ashburn, DeSaulnier, Harman, Kehoe,
Pavley, Simitian, Wolk
SENATE APPROPRIATIONS COMMITTEE : 11-0, 8/12/10
AYES: Kehoe, Ashburn, Alquist, Corbett, Emmerson, Leno,
Price, Walters, Wolk, Wyland, Yee
ASSEMBLY FLOOR : 75-0, 6/2/10 - See last page for vote
SUBJECT : Housing: construction loans
SOURCE : Housing California
DIGEST : This bill requires the Department of Housing and
Community Development, until June 30, 2013, to offer
construction financing alternatives to specified bond-fund
awardees that are unable to secure a construction loan from
a private lender.
ANALYSIS : In November 2006, California voters approved
Proposition 1C, the $2.85 billion Housing and Emergency
Shelter Trust Fund Act of 2006. Among other things,
Proposition 1C included funds for the following programs
administered by the Department of Housing and Community
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Development (HCD):
$490 million for the Multifamily Housing Program
(MHP), which funds the new construction,
rehabilitation, and preservation of permanent and
transitional rental homes for lower income households
through loans to local governments and developers.
This amount also includes the allocations for the two
MHP subprograms, the Supportive Housing Program and
the Homeless Youth Program.
$300 million for the Transit-Oriented Development
(TOD) Housing Program, which provides grants to
cities, counties, and transit agencies for the
provision of infrastructure necessary to support
mixed-income housing developments within close
proximity to a transit station and loans to housing
developers for the development of the TOD housing
units.
$135 million for the Joe Serna, Jr. Farmworker
Housing Grant (FWHG) Program, which funds the
development of ownership or rental homes for
agricultural workers through grants to local
governments and non-profit organizations.
The housing loans that HCD makes under these three programs
are known as permanent loans. They provide the long-term
financing for the project. In order for construction to
occur, however, a developer must obtain a short-term
construction loan from a private lender, which the
developer later pays off with the permanent loan once
construction is complete.
Prior to the fall of 2008, private lenders made
construction loans based on a developer having received an
award of HCD funds. Although HCD did not have the cash in
hand at the time it made the award, the private lenders
were comfortable that HCD would have access to the cash
when necessary. When construction was complete, HCD
borrowed from the state's Pooled Money Investment Account
(PMIA) to fund the permanent loan. HCD's borrowing from
the PMIA is known as a "warehouse loan", and at a later
time the State of California sold the voter-authorized
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general obligation housing bonds to repay the PMIA.
In the fall of 2008, the PMIA ran extremely low on cash,
and the board overseeing the fund decided to quit making
warehouse loans. At the same time, the bond market
crashed, and the State of California was temporarily unable
to sell new bonds. Because it was no longer clear how HCD
would fund the awards it had made from bond-funded
programs, private lenders quit making construction loans.
Projects that had received HCD awards now could not move
forward.
Since the fall of 2008, the state and HCD have developed a
new model for funding bond awards. Instead of selling
bonds after loans are funded as was done in the past, the
state now projects the amount and timing of funding needs,
sells bonds in anticipation of these needs, and holds the
money until needed. Since the fall of 2008, HCD has
received $1.8 billion from the state's sale of general
obligation bonds and currently has almost $1.2 billion on
account. While this amount on account does not yet cover
all awards made to date (and those yet to be made), it is
more than enough to fund all claims projected over the next
twelve months. Given that the state since fall 2008 has
sold more than $26 billion worth of general obligations
bonds in a time of great economic uncertainty and massive
budget deficits, it is also extremely likely that the state
will be able to sell additional bonds as needed.
Nonetheless, some private lenders remain concerned that
funds may not be available when it comes time to close a
permanent loan on a bond funded project and continue
refusing to make construction loans for such projects.
This bill requires HCD until June 30, 2013, with respect to
each awardee under the MHP, FWHG, and TOD Programs who is
unable to secure a construction loan from a private lender
to place into escrow, reserve, or set aside permanent loan
funding for the project as of the date of closing the
construction loan.
The bill further:
1. Requires HCD, within three months of the bill taking
effect, to establish and publish standards,
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requirements, and procedures for, and begin offering the
option.
2. Requires HCD to set an initial application deadline and,
for awardees that submit an application prior to the
deadline and meet the HCD's threshold requirements, give
priority to awardees in the order in which they received
their awards. Thereafter, the department shall accept
applications on an over-the-counter basis.
3. Prohibits HCD from exercising this authority for any
project that received an award after December 18, 2008,
until HCD has obtained access to bond funds sufficient
to fund all projects within the same class of projects
that received an award prior to December 18, 2008.
4. Limits, at $50 million, the amount HCD may reserve
pursuant to this bill.
A temporary fix . Construction lending is a relatively
labor-intensive and costly business. The lender must
oversee construction and approve draws on the loan based
upon the developer's completion of certain construction
milestones and expenditures. There is much more day-to-day
involvement than with permanent lending, and it helps for
the construction lender to have a local presence. For
these reasons, HCD generally has preferred to rely on
private lenders to fulfill the construction lending role,
though HCD already does limited construction lending under
the FHWG Program and the Emergency Housing Assistance
Program. In general, it may be preferable to maintain this
role for the private sector, but in the current
circumstances where private lenders are unwilling to make
construction loans, it may be necessary for HCD to take a
more active role temporarily in order to fulfill its
mission. This bill seeks to strike a balance by leveraging
HCD's money during construction to entice private lenders
back into the construction lending and oversight business
without making HCD the construction lender per se. In
addition, the bill sunsets HCD's authority on June 30,
2013, by which time the current economic and state budget
uncertainties will hopefully be resolved.
Completing the fix . In March 2010, the State Treasurer's
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Office, in conjunction with HCD, invited private lenders to
participate in a new program designed to resolve the lack
of construction lending in part. Known as the Option
Program, the program offers construction lenders the
ability, with respect to a specific multifamily rental
housing project, to purchase directly from the state a
general obligation bond in the amount of the HCD loan
committed to the project. At the time of closing for the
permanent loan if HCD has insufficient funds on hand to
fund its loan, the lender may then exercise the option.
The state then uses the proceeds from the private placement
bond issuance to fund HCD's permanent loan. In essence,
the construction lender buys state bonds specifically to
repay its own construction loan. To the extent that HCD is
likely to have sufficient funds to fund all of its bond
awards when needed, lenders will probably never exercise
these options but nonetheless will enjoy greater certainty
that construction loans will be repaid on time.
To date, Citibank, Wells Fargo, and Bank of America have
chosen to participate in the Option Program. Some other
lenders, however, are unable to participate because they
have reached their internal limit on purchasing municipal
bonds or because they do not invest in such bonds, in some
cases due to their smaller size. As a result, projects
relying on these non-participating lenders are unable to
move forward. The sponsor, Housing California, is aware of
four projects that received HCD awards, have not yet been
served by the Option Program, and remain unable to obtain
construction loans. These four projects represent a total
of 345 affordable rental homes, and the HCD awards leverage
a total of $81 million in non-state funds. These
developments are intended to serve various special need
populations, including extremely-low-income youth
transitioning from foster care who are homeless or at-risk
of homelessness, homeless transition-aged youth with severe
mental illnesses, and very low-income families. In
addition, HCD is currently accepting applications for a new
round of MHP awards, and some of the new awardees may run
into a similar problem.
To the extent that some construction lenders are unable to
participate in the Option Program, it is possible that the
remaining developers still needing construction loans could
take their business to lenders who do participate. It is
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not exactly clear, however, whether the participating
lenders are able or willing to do business with all of
these additional projects. This bill seeks to provide
concrete options for those affordable housing developers
whose lenders cannot or do not participate in the Option
Program.
FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes
Local: No
According to the Senate Appropriations Committee analysis:
Fiscal Impact (in thousands)
Major Provisions 2010-11 2011-12
2012-13 Fund
HCD startup costs $100 Bond*
Accelerated debt service unknown acceleration of debt
service General
payments to the
extent HCD
sells bonds prior
to construction,
rather than upon
completion
* Housing Rehabilitation Loan Fund, Transit-Oriented
Development Fund, and the Joe Serna, Jr. Farmworker Housing
Grant Fund
SUPPORT : (Verified 8/16/10)
Housing California (source)
Affordable Housing Associates
Cabrillo Economic Development Corporation
California Coalition for Rural Housing
Century Housing
Community Economics, Inc.
Community Housing Improvement Systems and Planning
Association
San Diego Housing Federation
San Luis Obispo County Housing Trust Fund
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Silicon Valley Bank
South County Housing
Southern California Association of Non-Profit Housing
OPPOSITION : (Verified 8/16/10)
Department of Finance
Department of Housing and Community Development
ARGUMENTS IN SUPPORT : According to the author's office,
private lenders are no longer willing to make construction
loans to affordable housing projects which rely upon
Proposition 46 or Proposition 1C bond funds as permanent
financing. Lenders are concerned that the state will not
have sufficient bond funds at the time the construction is
completed. As a result, shovel-ready rental housing,
farmworker housing, and transit-oriented housing projects
that have received state funding awards are unable to move
forward. This bill requires HCD to offer developers
funding alternatives while giving HCD options for how to do
so.
ARGUMENTS IN OPPOSITION : The Department of Finance is
oppsed to this bill because, (1) providing bond funding
during the construction period would subject HCD's bond
funds to substantial risks. Currently, HCD enforces award
requirements, such as affordable rents and project
completion, by requiring that project sponsors demonstrate
that they meet these requirements prior to releasing bond
proceeds. Since project sponsors would not be in a
position to do this at the time a construction loan is
made, it is unclear what recourse HCD would have to enforce
program requirements after bond funds have been released,
(2) reserving cash I escrow accounts for specific projects
during construction would increase General Fund debt
service costs by requiring debt service payments for bond
cash that is not needed for two to three years, and (3)
reserving bond cash, as proposed by this bill, would slow
down the state's ability to fund other projects that may be
proceeding faster and are ready to draw down funds.
ASSEMBLY FLOOR :
AYES: Adams, Ammiano, Anderson, Arambula, Bass, Beall, Bill
Berryhill, Blakeslee, Block, Blumenfield, Bradford,
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Brownley, Buchanan, Caballero, Charles Calderon, Carter,
Chesbro, Conway, Cook, Coto, Davis, De La Torre, De Leon,
DeVore, Emmerson, Eng, Evans, Feuer, Fletcher, Fong,
Fuentes, Fuller, Furutani, Gaines, Galgiani, Garrick,
Gilmore, Hagman, Hall, Harkey, Hayashi, Hernandez, Hill,
Huber, Huffman, Jeffries, Jones, Knight, Logue, Bonnie
Lowenthal, Ma, Mendoza, Miller, Monning, Nava, Nestande,
Niello, Nielsen, V. Manuel Perez, Portantino, Ruskin,
Salas, Saldana, Silva, Skinner, Smyth, Solorio, Swanson,
Torlakson, Torres, Torrico, Tran, Villines, Yamada, John
A. Perez
NO VOTE RECORDED: Tom Berryhill, Lieu, Norby, Audra
Strickland, Vacancy
JJA:do 8/16/10 Senate Floor Analyses
SUPPORT/OPPOSITION: SEE ABOVE
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