BILL ANALYSIS Ó AB 35 Page 1 ASSEMBLY THIRD READING AB 35 (Chiu and Atkins) As Amended May 20, 2015 Majority vote. Tax levy ------------------------------------------------------------------- |Committee |Votes |Ayes |Noes | | | | | | | | | | | |----------------+------+--------------------+----------------------| |Housing |7-0 |Chau, Steinorth, | | | | |Burke, Chiu, Beth | | | | |Gaines, Lopez, | | | | |Mullin | | | | | | | |----------------+------+--------------------+----------------------| |Revenue & |9-0 |Ting, Brough, | | |Taxation | |Dababneh, Gipson, | | | | |Roger Hernández, | | | | |Mullin, Patterson, | | | | |Quirk, Wagner | | | | | | | |----------------+------+--------------------+----------------------| |Appropriations |17-0 |Gomez, Bigelow, | | | | |Bonta, Calderon, | | | | |Chang, Daly, | | | | |Eggman, Gallagher, | | | | | | | | | | | | | | |Eduardo Garcia, | | | | |Gordon, Holden, | | AB 35 Page 2 | | |Jones, Quirk, | | | | |Rendon, Wagner, | | | | |Weber, Wood | | | | | | | | | | | | ------------------------------------------------------------------- SUMMARY: Modifies the existing Low-Income Housing Tax Credit (LIHTC) program and increases the aggregate credit amount that may be annually allocated to low-income housing projects by $300 million for the 2016 calendar year and each calendar year thereafter, as provided. Specifically, this bill: 1)Beginning in 2016 and each year thereafter, increases the amount of state LIHTC by an additional $300 million, as adjusted for inflation starting in 2017. 2)Provides that a low-income housing building that has received an award of 9% federal LIHTC is not eligible for an allocation from the additional $300 million of state LIHTC, but shall remain eligible for the existing $70 million allocation, as annually adjusted. 3)Modifies the allocation of state LIHTC that may be awarded to a federally subsidized low-income housing project receiving federal 4% LIHTC as follows: a) A new qualified low-income housing building is eligible for a cumulative state LIHTC over four years of 50% of the qualified basis of the building, provided that the building is not located in a Difficult to Develop Area (DDA) or a Qualified Census Tract (QCT). AB 35 Page 3 b) An existing qualified low-income housing building that is not located in a DDA or a QCT is eligible for a cumulative state LIHTC over four years of 13% of the qualified basis of the building. c) A new or existing low-income housing building that is located in a DDA or QCT may be awarded a cumulative state LIHTC in an amount not to exceed 50% of the qualified basis of the building, provided that the federal LIHTC is replaced with state LIHTC, as specified. d) A qualified low-income building is eligible for a cumulative state LIHTC of 95% of the qualified basis over four years if it meets all of the following requirement: i) Is at least 15 years old; ii) Serves households with very-low income or extremely low-income residents, as specified; iii) Is restricted, for a period of not less than 55 years, to serving residents with the average targeted household income of no more than 45% of the area median income; and, iv) It would receive insufficient state credits, due to the building's low appraised value, to complete substantial rehabilitation and the rehabilitation will be completed. 4)Revises the definition of a "taxpayer" for purposes of the state LIHTC program to include members of a limited liability company. AB 35 Page 4 5)Revises the definition of a "housing sponsor" for purposes of the LIHTC program to include a limited liability company. 6)Adds the following definitions: a) "Extremely low-income" has the same meaning as Health and Safety Code (H&SC) Section 50053; and, b) "Very low-income" has the same meaning as in H&SC Section 50053. 1)Makes technical, non-substantive changes to the provisions of the LITHC program. 2)Takes effect immediately as a tax levy. FISCAL EFFECT: According to the Assembly Appropriations Committee: 1)Potentially significant General Fund costs to the California Tax Credit Allocation Committee (TCAC), administrator of the LIHTC program for the State Treasurer, to administer changes to the program; minor and absorbable costs to Franchise Tax Board to administer program changes. 2)Estimated General Fund revenue decreases of $44 million, $150 million, and $180 million in Fiscal Year (FY) 2015-16, FY 2016-17, and FY 2017-18, respectively. COMMENTS: AB 35 Page 5 1)Author's Statement. The author has provided the following statement in support of this bill: California's shortfall of 1.5 million affordable rentals impedes our state's economic growth by slowing job creation and driving Californians into poverty. When housing costs are accounted for, the proportion of people unable to meet their basic needs - food, shelter, transportation - rises from 16 percent to 23 percent, the highest rate of poverty in the nation. A recent report from the California Housing Partnership depicts a growing statewide crisis driven by a growing divide between incomes and rents. Statewide, median incomes have fallen 8 percent since 2000; meanwhile, rental prices have soared by 21 percent in the same timeframe. There isn't a single county in California with enough affordable rentals for families struggling to make ends meet. Rising rents are locking broad swaths of Californians - people who are key contributors to our communities - out of San Francisco, San Diego and many other California cities and crowding their families into unsafe housing. Twenty-one of the nation's least affordable cities are in California; our home-health aides, child-care workers, and teachers' assistants have virtually nowhere to live in the communities where they work, even if they work full-time. Small businesses and creators of entry-level jobs face particular difficulties recruiting employees. Closing our communities to struggling workers reverberates through our entire economy and impacts all taxpayers.' AB 35 Page 6 California leaders must act to replace the $1.5 billion annual state investment wiped out when voter-approved housing bonds were expended and redevelopment funding was eliminated. AB 35 would take a step in the right direction by increasing the California Low-Income Housing Tax Credit, a proven public-private-partnership model, by $300 million per year, and enable the state to attract $600 million in additional federal funding that would otherwise not come to California. 2)State LIHTC Program. In 1987, the Legislature authorized a state LIHTC Program to augment the federal tax credit program. State tax credits can only be awarded to projects that have also received, or are concurrently receiving, an allocation of the federal LIHTCs. The amount of state LIHTC that may be annually allocated by the TCAC is limited to $70 million, adjusted for inflation. In 2014, the total credit amount available for allocation was $103 million (representing all four years of allocation) plus any unused or returned credit allocations from previous years. Current state tax law generally conforms to federal law with respect to the LIHTC, except that it is limited to projects located in California. While the state LIHTC program is patterned after the federal LIHTC program, there are several differences. First, investors may claim the state LIHTC over four years rather than the 10-year federal allocation period. Second, the rates used to determine the total amount of the state tax credit (representing all four years of allocation) are 30% of the qualified basis of a project that is not federally subsidized and 13% of the qualified basis of a project that is federally subsidized, in contrast to 70% and 30% (representing all 10 years of allocation on a present-value basis), respectively, for purposes of the federal LIHTCs. Furthermore, state tax credits are not available for acquisition costs, except for previously subsidized projects that qualify as "at-risk" of being converted to market rate. AB 35 Page 7 TCAC is authorized to replace federal LIHTC with state LIHTC of up to 30% of a project's eligible basis if the federal LIHTC is reduced in an equivalent amount. This provision allows TCAC to increase the number of projects funded with the limited federal credits in a given year. As discussed, the maximum federal tax credit that can be awarded (the 9% credit) is generally equal to 70% (on a present-value basis) of a taxpayer's qualified basis in the project, spread over a ten-year period. Thus, a project that receives the maximum in both state and federal credits receives an amount equal to 100% of the taxpayer's qualified basis over a 10-year period. 3)DDAs and QCTs. Federal LIHTCs can be used anywhere, but a project is given an additional 30% on its eligible basis (a "basis boost") if the project is located in a DDA or a QCT. These areas, by definition, have a higher poverty level and a higher concentration of extremely low-income or homeless individuals and families, who typically need larger housing subsidies. Prior to 2014, TCAC was not allowed to award state tax credits for projects located in DDAs and QCTs. The rationale for this prohibition was that projects in these areas could qualify for more federal tax credits through a basis "boost" and therefore are already advantaged. State law, however, was recently amended to authorize TCAC, in limited cases, to award state LIHTCs for use in DDAs or QCTs, in addition to the federal credits. To qualify, a development must restrict at least 50% of the units to special needs households. Projects that serve special needs populations need greater subsidy in order to offer deeply affordable rents. 4)Deficiency in Current Law: According to the California Housing Partnership, California used more of the federal 4% LIHTC than any other state during the early part of last decade. However, with the elimination of California's redevelopment agencies and the exhaustion of state housing bond funding, developers of low-income housing have been left with very few resources to leverage the 4% credit. As a result, the number of newly AB 35 Page 8 constructed LIHTC units that have been funded with the 4% credit has plummeted in the last two years, from 4,000 in 2012 to fewer than 2,000 in 2014. Existing state law prescribes two different tax credit rates - 30% and 13% - to calculate the amount of the state LIHTC. The first one is allowed for projects that are not federally subsidized and, thus, qualify for the higher 9% federal LIHTC. In contrast, federally subsidized projects that qualify only for the 4% federal LIHTC receive the state LIHTC in the amount equal to 13% of the project's qualified basis. Furthermore, no state credit may be allocated to a low-income housing project located in a DDA or QCT if the project has received a federal LIHTC calculated on the 130% of eligible basis, unless the state LIHTC is computed on 100% of the qualified basis or at least 50% of the building's units are restricted to special need occupants. Thus, existing state law limits the availability of the state LIHTC to projects located outside a DDA or QCT, since they do not receive a federal "basis boost" of 30% that is available to projects located in those areas. However, the bill's proponents argue that developing housing in these areas is inherently more expensive because of a higher concentration of extremely low-income or homeless individuals and families. 5)What Does This Bill Do? This bill would increase the state LIHTC allocation by $300 million per year, in addition to the existing $70 million cap, as adjusted for inflation. While increasing the total amount of state LIHTC, this bill proposes to limit the new funding only to projects that qualify for the 4% federal LIHTC. The projects that receive the 9% federal LIHTC would still qualify for the state LIHTC, albeit the annual amount of those state credits would remain at $70 million, as adjusted for inflation. According to the California Housing Partnership Corporation, the increase in the amount of state LIHTC would allow the state to leverage an additional $200 million in federal 4% LIHTC and at least $400 million in federal tax-exempt bond authority annually. This additional funding is AB 35 Page 9 intended to be used exclusively for the construction, rehabilitation and preservation of affordable rental homes for a broad range of lower income households throughout the state. The expectation is that an increase in the amount of state LIHTC would help fill the gap in funding that was created by the loss of redevelopment and the exhaustion of state voter-approved bonds. Furthermore, this bill would increase the amount of state tax credits awarded to each qualified low-income housing project from 13% to 50% of the qualified basis, provided the project is also receiving a 4% federal tax credit. This increase would apply to new construction and rehabilitation costs of the project and would more than triple the amount of equity that an investor in the project would receive, which would bring the return on 4% credits in line with 9% credits and would likely result in greater affordability for the project. The costs of acquiring an existing low-income building would also be eligible for the state LIHTC allocated from the new additional funding of $300 million, but the applicable percentage used to calculate the amount of that credit would be limited to 13% of the project's qualified basis. In addition, this bill would allow state tax credits to be awarded to qualified projects without regard to DDA or QCT status, with the main purpose of providing enough state tax credits to match the value of a 9% federal tax credit. However, to ensure a level playing field between DDA/QCT areas and non-DDA/QCT areas, this bill would explicitly allow TCAC to adjust the new higher state credit percentage downward for projects in DDAs or QCRs to equalize the value of the state credit available in the different areas. Finally, this bill would significantly increase an amount of state LIHTC - 95% of the qualified basis - that may be awarded to a qualified low-income housing building that houses very AB 35 Page 10 low-income or extremely low-income tenants and meets all specified requirements, including the building's location, age, and value. Analysis Prepared by: Oksana Jaffe / REV. & TAX. / (916) 319-2098 FN: 0000641