BILL ANALYSIS �
SENATE TRANSPORTATION & HOUSING COMMITTEE BILL NO: ab 523
SENATOR MARK DESAULNIER, CHAIRMAN AUTHOR: Ammiano
VERSION: 5/24/13
Analysis by: Mark Stivers FISCAL: yes
Hearing date: June 18, 2013
SUBJECT:
Department of Housing and Community Development loans
DESCRIPTION:
This bill allows the Department of Housing and Community
Development (HCD) to reduce or eliminate the interest rate on
any loan it has issued to a rental housing development under
specified conditions.
ANALYSIS:
Under existing law, HCD makes loans to the developers of
affordable rental housing. As a general rule, HCD makes these
loans with the proceeds of general obligation bonds or federal
funds. The terms of these loans differ somewhat by program and
in some cases are established in statute. For example, the
statute for HCD's Multifamily Housing Program (MHP) states that
loans shall have 55-year terms, carry a 3% simple interest rate,
and defer principal and interest payments until loan maturity,
except for nominal annual interest payments to cover HCD's
on-going monitoring costs. These deferred loans significantly
lower the developer's debt service expenditures, allowing the
developer to offer rents at an affordable level to lower-income
households.
Federal law creates the Low-Income Housing Tax Credit Program,
which the California Tax Credit Committee (TCAC) administers in
California. TCAC also administers a small State Low-Income
Housing Tax Credit Program, which largely follows rules for the
federal program. Federal law counts towards the "eligible
basis" on which the credit is based, development costs supported
by debt (i.e., a loan) but not those supported by a grant. In
addition, federal tax law defines as debt only those amounts
that the developer can reasonably expect to repay by the end of
the loan term. If the debt cannot be shown to be supportable by
the project, federal tax law considers it a grant, which a
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taxpayer therefore cannot count towards a project's eligible
basis for purposes of claiming a low-income housing tax credit.
In addition, when a developer seeks low-income housing tax
credits to acquire and rehabilitate an existing affordable
housing development, federal tax rules provide that he or she
must reduce the eligible basis by the difference between the
long-term cost of below-market-rate debt (e.g., the HCD loan)
and the long-term cost of the loan assuming use of the federally
determined "applicable federal rate" (AFR). When the AFR is
above HCD's rate, the developer still owes the full amount of
the HCD loan but may only count a portion of it towards the
eligible basis. If HCD's rate is equal to or less than the AFR,
there is no reduction in the eligible basis.
This bill allows HCD to reduce or eliminate the interest rate on
any loan it has issued to a rental housing development under the
following conditions:
The development has no other debt with regularly scheduled or
amortizing debt service payments.
The development will utilize low-income housing tax credits.
The sponsor provides evidence acceptable to HCD that
demonstrates that the loan 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.
The bill also allows HCD to change the current interest rate for
any loan it originates on or after January 1, 2014 to the
federally determined AFR. In cases where doing this will make
the total amount of debt and accrued interest at the end of the
loan term greater than it would be under the original interest
rate, HCD may forgive some or all of the interest accrued on the
existing loan in order to make the ultimate amount of principal
and interest owed the same as it would be using the original
interest rate.
COMMENTS:
1.Purpose of the bill . HCD's loans for affordable rental
housing are "soft" loans, meaning that most interest and
principal payments are deferred to the end of the loan term
rather than due on a monthly basis. For such soft loans to be
considered a loan and not a grant for low-income housing tax
purposes, a project sponsor must be able to demonstrate some
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plausible set of circumstances under which it could repay the
loan. To do this, a project sponsor will run a "true debt"
analysis showing the project could conceivably generate enough
net operating income to repay all debt, typically by showing
the rents the project could charge after the 55-year
regulatory period ends, when rents are no longer restricted.
If a project fails this true debt test, the loan is treated as
a grant for tax credit purposes and the project loses an
equivalent amount of tax credit basis, which makes the loan
worth very little to the project.
According to the sponsor of the bill, it is extremely rare for
a project to fail the true debt analysis, but supportive
housing developments that serve extremely low-income residents
have such minimal cash flow from rents that they may not be
able to pass the test. In such cases, the difference between
a 3% and 0% interest rate accruing on the soft loan is the
difference between the project passing and failing its true
debt analysis, and therefore the difference between the
project moving forward and stalling.
This bill is narrowly drawn to only allow a rate reduction
when it makes the difference in terms of a project passing or
failing the true debt test. As a result, this bill allows
projects in such situations to move forward and realize the
social benefits for which HCD awarded the projects funds.
2.Using AFRs . With interest rates at such historic lows, the
federal AFR has dipped below HCD's 3% interest rate for its
standard Multifamily Housing Program. As a result, an
applicant who seeks to extend an existing HCD loan as part of
an acquisition and rehabilitation project that also uses
low-income housing tax credit financing cannot count the full
loan amount for tax credit purposes, thereby reducing the
amount of tax credits the project may receive. This situation
may make the project financially infeasible. Moreover,
because HCD's interest rate is applied only to the actual loan
amount (i.e., simple interest) and the AFR applies to the loan
and deferred interest (i.e., compound interest), the repayment
burden under the AFR may actually be higher even though the
rate is lower. This bill gives HCD authority to address both
problems. It allows HCD to use the AFR rate so that a
developer may count the full loan amount for tax credit
purposes and allows HCD to reduce the amount of interest
accrued to date on the loan so that the total future payments
are ultimately the same. In no case is HCD required to
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utilize these authorities.
3.Other programs allow similar assistance . This bill does not
convert any loan into a grant. It only allows for a reduction
in the interest rate as needed for the loan to be useful.
Even if HCD reduces an interest rate to zero percent under
this bill, the project sponsor will still owe the full
principal amount at the end of the loan term. HCD administers
other programs, such as the Farmworker Housing Grant Program
and the Emergency Housing Assistance Program, in which it
offers grants to the developers of farmworker housing or
emergency shelters due to the extremely low incomes of the
intended residents and the inability of sponsors to repay the
assistance. These programs receive general obligation bond
funding as well.
4.Technical amendment . On page 2, line 19 strike "it
originates" and insert "for which it receives a loan extension
request associated with an award of federal or state
low-income housing tax credits made"
Assembly Votes:
Floor: 53-24
Appr: 12-5
H&CD: 5-1
POSITIONS: (Communicated to the committee before noon on
Wednesday, June 12,
2013.)
SUPPORT: Non-Profit Housing Assn. of Northern CA (sponsor)
California Housing Consortium
California Housing Partnership Corporation
City and County of San Francisco
Community Economics
EAH Housing
Housing California
Leading Age California
MidPen Housing
San Diego Housing Federation
Western Center on Law and Poverty
OPPOSED: None received.
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