BILL ANALYSIS �
SB 77
Page 1
SENATE THIRD READING
SB 77 (Leno)
As Amended August 24, 2012
Majority vote
SENATE VOTE : Vote not relevant.
SUMMARY : Permits the Department of Housing and Community
Development (HCD) to reduce the interest rate on any loan that
the department issues to a rental housing development to as low
as 0%. Specifically, this bill :
1)Requires rental housing developments to meet the following
requirements to qualify for a reduction in the interest rate
on a HCD loan:
a)It has no other debt with regularly scheduled or amortizing
debt service payments;
b)It will utilize low-income housing tax credits; and,
c)The sponsor provides evidence that demonstrates that the loan
issued by the department is not eligible to be treated as debt
for federal or state low income housing tax credit purposes
without a reduction in the interest rate of the loan.
FISCAL EFFECT : Unknown
COMMENTS :
The Multifamily Housing Program (MHP), administered by the
Department of Housing and Community Development provides
low-interest loans to affordable housing developments which
serve various populations including homeless youth, veterans and
other special-needs populations. The interest rate, set at 3%
is a differed for the life of the 55-year loan, and payment is
only required where there are "residual receipts" or when the
property generates enough income to pay toward the MHP loan
after operating costs and certain other lenders that have
priority over HCD are paid.
According to the author's office," the statutory requirement
that MHP loans carry 3% accruing interest interacts with
Internal Revenue Service (IRS) requirements of the Low Income
SB 77
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Housing Tax Credit program which can make projects which are
typically deeply targeted to extremely low-income residents
unable to use MHP funds.
Under IRS regulations, funds granted to a project reduce the
amount of Low Income Housing Tax Credits a project can receive,
whereas funds lent to a project do contribute. For a residual
receipts "soft" loan like MHP to be considered a loan and not a
grant for tax purposes, a sponsor must be able to demonstrate
some plausible set of circumstances under which that loan could
be repaid. A project sponsor and/or investor will run a "true
debt" analysis showing the project could conceivably generate
enough net operating income to repay all debt, typically by
showing the market rents the project could charge after the 55
year regulatory period ends. If a project fails this true debt
test the loans are treated as grants for tax purposes and the
project loses an equivalent amount of tax credit basis. This
makes the debt essentially worthless to the project."
The difference between a 3% and 0% interest rate accruing on the
soft MHP loan is the difference between the some projects
passing and failing its true debt analysis, and therefore the
difference between the project moving forward and stalling."
Purpose of this bill : This bill would allow HCD to reduce the
interest rate on loans for affordable rental projects to 0% if
the projects were able to prove that they had no other debt
payments, will use low-income housing tax credits, and that a
reduction in the interest rate on the HCD loan is needed to
allow the project to be able to qualify for low-income housing
tax credits without a reduction in the interest rate.
Analysis Prepared by : Lisa Engel / H. & C.D. / (916) 319-2085
FN: 0005642