BILL ANALYSIS �
AB 523
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ASSEMBLY THIRD READING
AB 523 (Ammiano and Brown)
As Amended May 24, 2013
Majority vote
HOUSING 5-1 APPROPRIATIONS 12-5
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|Ayes:|Torres, Atkins, Brown, |Ayes:|Gatto, Bocanegra, |
| |Chau, Mullin | |Bradford, |
| | | |Ian Calderon, Campos, |
| | | |Eggman, Gomez, Hall, |
| | | |Ammiano, Pan, Quirk, |
| | | |Weber |
| | | | |
|-----+--------------------------+-----+--------------------------|
|Nays:|Beth Gaines |Nays:|Harkey, Bigelow, |
| | | |Donnelly, Linder, Wagner |
| | | | |
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SUMMARY : Allows the Department of Housing and Community
Development (HCD) to reduce or change the interest rate on loans
for affordable rental housing developments. Specifically, this
bill :
1)Allows HCD to reduce the interest rate on loans for affordable
rental housing developments to as low as 0% if the following
conditions are met:
a) There is no other debt or regularly amortized debt
service payments on the development;
b) The development is using low-income housing tax credits;
and
c) The sponsor of the development can prove that a
reduction in the interest rate is necessary for the HCD
loan to be treated as debt for federal or state low-income
housing tax credit purposes.
1)Allows HCD to change the interest rate for any loan it
originates on or after January 1, 2014, to the applicable
federal rate most recently published by the United States
Internal Revenue Service.
AB 523
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2)Provides that if the total amount of debt and accrued interest
at the end of the loan term with the applicable federal rate
interest rate is greater than it would have been with the
original interest rate, than HCD may forgive, whichever is
less, either an amount of accrued interest necessary to match
what the expected principal and interest would have been under
the original interest rate or the amount of interest accrued
at the time the sponsor requested the change.
FISCAL EFFECT : According to the Assembly Appropriations
Committee, possible cost from extending the terms of the
existing loans, potentially in the millions of dollars. To the
extent that there are projects that cannot pay the state back
under the loan terms, the net cost of the bill is reduced.
Administrative costs are expected to be minor, approximately
$25,000. \
COMMENTS : Rental housing developments that are affordable to
low- and very-low income families and individuals typically
require multiple sources of construction financing. Two key
sources of funding are the Multifamily Housing Program (MHP) and
the Low-Income Housing Tax Credit (LIHTC). The Tax Credit
Allocation Committee (TCAC) administers the LIHTC program and
awards credits to qualified developers who can then sell those
credits to private investors who use the credits to reduce their
federal tax liability. The developer in turn invests the
capital into the affordable housing project. MHP provides
deferred payment loans to developers for the construction of
affordable housing to low- and very-low income residents. All
loans are for fifty-five years at 3% simple interest and
payments of principal and the accumulated interest are due at
the end of the loan period. There is approximately $51 million
currently available in MHP and $7 million available in the
supportive housing component of MHP for funding.
Federal law requires TCAC to conduct a feasibility study on
every project to ensure that the amount of tax credits allocated
do not exceed the amount required for the project to make the
project feasible. To calculate the amount of credits a project
may receive, TCAC first determines the total project cost and
then determines the "eligible basis" by subtracting the
non-depreciable costs, such as land permanent financing costs,
rent reserves, and marketing costs.
AB 523
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Under Federal Internal Revenue Service Law, a developer
receiving LIHTC must demonstrate that all loans on a project can
be repaid. Because MHP loans carry a 3% deferred interest rate,
this can create a conflict for projects that receive an MHP loan
and reduce the amount of "eligible basis" reducing the amount of
federal tax credits for which a project can qualify.
Purpose of this bill: AB 523 would give HCD discretion in
limited circumstances to reduce the interest rate on a project
that receives an MHP loan is also awarded LIHTC. To qualify a
sponsor would have to prove to the satisfaction of HCD that
without the reduction in the interest rate on the MHP loan the
amount of tax credit the project could qualify for would be
reduced and there are no other loans on the development that
require ongoing debt payments. MHP loans are considered "soft"
debt because they are deferred and do not require debt and
interest payments until the end of the term of the 55-year loan.
Under federal law, a sponsor of a development that receives
LIHTC must demonstrate a plausible set of circumstance under
which the MHP loan could be repaid. The 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, loans are treated as grants for tax
purposes and the project loses an equivalent amount of tax
credits.
By reducing the interest rate on these loans to 0% the program
will not recover the 3% interest payments at the end of the
55-years; however, the principal will be due on the loan at the
end of the term.
Analysis Prepared by : Lisa Engel / H. & C.D. / (916) 319-2085
FN: 0000913
AB 523
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