BILL ANALYSIS �
AB 523
Page 1
CONCURRENCE IN SENATE AMENDMENTS
AB 523 (Ammiano and Brown)
As Amended June 23, 2014
Majority vote
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|ASSEMBLY: |53-24|(May 29, 2013) |SENATE: |25-10|(June 30, |
| | | | | |2014) |
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Original Committee Reference: H. & C.D.
SUMMARY : Allows the Department of Housing and Community
Development (HCD) to reduce 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 0.42% per annum if
the following conditions are met:
a) There is no other debt or regularly amortized debt
service payments on the development;
b) The development has no debt in a senior lien position to
HCD's debt;
c) Thirty-five percent or more of the total units must
serve households with income not exceeding 30% of the area
median income;
d) HCD's new loan cannot be used to supplement or replace
an existing department loan;
e) The development is using low-income housing tax credits;
and
f) 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
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Internal Revenue Service.
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, for a loan extension request
associated with an award of federal or state low-income
housing tax credits made, 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.
The Senate amendments :
1)Change the minimum amount of interest that HCD is authorized
to reduce a loan to from 0% to 0.42%.
2)Adds the following requirements that a development must meet
in order to qualify for a reduced interest rate:
a) The development can have no debt in a senior lien
position to HCD's debt;
b) Thirty-five percent or more of the total units must
serve households with income not exceeding 30% of the area
median income; and
c) HCD's new loan cannot be used to supplement or replace
an existing department loan.
1)Gives HCD the authority to impose a default interest rate of
3% if any amortizing debt is placed on the project after the
interest rate is lowered.
2)Gives HCD the authority to contract with a third-party tax
professional to verify that the department's loan is not
eligible to be treated as debt for federal or state low-income
housing tax credit purposes and in order for it to qualify the
interest rate on the loan must be reduced.
3)Allow HCD to charge a fee to cover the administrative costs
associated with modifying a loan.
4)Limit the project to which HCD can reduce the interest rate to
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the applicable federal rate to those that have received a
state or federal low-income housing tax credits.
FISCAL EFFECT : According to the Senate Appropriations
Committee:
1)One-time HCD costs of up to $50,000 to revise regulations for
existing loan programs.
2)Unknown annual HCD administrative costs, likely in hundreds of
thousands annually, to perform loan modifications on existing
loans. Costs would be approximately $400,000 in a year in
which HCD restructured 10 loans (various funds, primarily
Housing Rehabilitation Loan Fund).
3)Unknown, significant loss of interest revenues, the proceeds
of which are used to fund HCD loan administration costs of
future loans (various funds, primarily Housing Rehabilitation
Loan Fund). For each $1 million in loan proceeds for which
the simple interest rate is reduced from 3% to 0%, there would
be a loss of $1.65 million over the life of a 55-year loan
($30,000 per year).
4)Unknown future loss of interest repayments as a result of
forgiveness of accrued interest on specified loans for which a
developer requests an extension associated with an award of
low-income housing tax credits (various funds, primarily
Housing Rehabilitation Loan Fund). Most accrued interest is
paid at the end of the loan term.
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 55 years at 3% simple interest and payments of
principal and the accumulated interest are due at the end of the
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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.
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: This bill would give HCD discretion in
limited circumstances to reduce the interest rate on a project
that receives an MHP loan that 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 0.42% 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.
AB 523
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Analysis Prepared by : Lisa Engel / H. & C.D. / (916) 319-2085
FN: 0004197