BILL ANALYSIS Ó ----------------------------------------------------------------- |SENATE RULES COMMITTEE | AB 35| |Office of Senate Floor Analyses | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ----------------------------------------------------------------- THIRD READING Bill No: AB 35 Author: Chiu (D) and Atkins (D), et al. Amended: 9/3/15 in Senate Vote: 21 SENATE GOVERNANCE & FIN. COMMITTEE: 6-0, 7/1/15 AYES: Hertzberg, Nguyen, Beall, Hernandez, Lara, Pavley NO VOTE RECORDED: Moorlach SENATE TRANS. & HOUSING COMMITTEE: 10-0, 7/14/15 AYES: Beall, Cannella, Allen, Bates, Gaines, Leyva, McGuire, Mendoza, Roth, Wieckowski NO VOTE RECORDED: Galgiani SENATE APPROPRIATIONS COMMITTEE: 6-0, 8/27/15 AYES: Lara, Bates, Beall, Hill, Leyva, Mendoza NO VOTE RECORDED: Nielsen ASSEMBLY FLOOR: 78-0, 6/4/15 - See last page for vote SUBJECT: Income taxes: credits: low-income housing: allocation increase SOURCE: Author DIGEST: This bill increases the amount of low-income housing tax credits (LIHTCs) the California Tax Credit Allocation Commission (CTCAC) can allocate for low-income housing; revises percentages; and establishes new categories. Senate Floor Amendments of 9/3/15 address conflicts with SB 377 (Beall), require the State Treasurer to report to the Legislature describing the increase, if any, in the use of 4% credits on or before January 1, 2020; and make technical and AB 35 Page 2 conforming changes. ANALYSIS: Existing law: 1)Allows tax credits against the Personal Income Tax, Corporation Tax, and Gross Premiums Tax for investors who provide project capital to low-income rental housing projects to complement credits allowed by federal law. Credits are computed in modified conformity with federal law, but can only be claimed in fixed percentages equal to 30% of qualified basis over four years. Under the state credit, projects must remain affordable for 30 years. 2)Establishes CTCAC, comprised of the State Treasurer, the State Controller, the Director of Finance, and three non-voting members, to allocate both federal and state credits. a) CTCAC can award federal credits to a project, or state and federal credits together, but cannot solely award state credits to a project except for farmworker housing. b) CTCAC can annually allocate federal 9% credits to projects up to a cap set by federal law, currently $2.30 per capita for each state, but can allocate federal 4% credits without limit. c) CTCAC can annually allocate state credits to federal 9% credit projects up to an amount equal to $70 million each year, adjusted for inflation since the Legislature initially set the $70 million figure in statute in 2001, plus any unallocated credits from previous years. d) CTCAC can allocate credits for 4% credit projects for federally subsidized projects, but can only do some out of the same authorized amount as the 9% credits. 3)Prohibits CTCAC from allocating state credits to projects in Qualified Census Tracts (QCTs) and Difficult to Develop Areas (DDAs) unless it swaps out federal credits willing to forgo the "basis boost," as the maximum basis for these projects is AB 35 Page 3 130%, not 100% for other projects. a) QCTs are designated by the Secretary of the United States Department of Housing and Urban Development (HUD) in which either 50% or more of the households have an income that is less than 60% of the area median gross income or has a poverty rate of 25%. b) The Secretary of HUD also draws DDAs using a ratio of construction, land, and utility costs to area median gross income. This bill: 1) Increases credit percentages for new buildings that are federally subsidized, and not in QCTs or DDAs, from the current 4% of qualified basis over the first three years, and 3% in the fourth year, for a total of 15%, to 15% for each of the first three years, and 5% in the fourth year, for a total of 50%. 2) Allows CTCAC to allocate state credits for new or existing buildings in QCTs and DDAs up to 50% of basis, but must replace federal credits with state ones when doing so. 3) Establishes a new, targeted category for existing buildings at least 15 years old that are eligible for a credit of 30% in the first three years, and 5% in the fourth, for a total of 95%, if: a) The project serves households of very-low and extremely-low income such that its average maximum household income is not more than 45% of the area median gross income. b) The project is subject to a regulatory agreement restricting the average maximum household income to the above standard for 55 years. c) The project would have insufficient credits under current categories to complete substantial rehabilitation. AB 35 Page 4 d) The credit allocation results in the completion of the project. 4) Authorizes CTCAC to allocate up to $300 million in credits in the 2016-17 fiscal year, plus $300 million each fiscal year thereafter plus an inflation adjustment, for projects under the new category, or for projects currently only eligible for the 4% credit. 5) Allows CTCAC to allocate credits to developers eligible for the 9% credit from the current $75 million authorization, but developers of these projects are ineligible for allocations from the new $300 million. 6) Imports current definitions in the Health and Safety Code for CTCAC to sue when determining "low-income" and "extremely low-income." 7) Applies its changes to the Gross Premiums Tax, Personal Income Tax, and Corporation Tax. 8) Requires the State Treasurer to report to the Legislature describing the increase, if any, in the use of 4% credits on or before January 1, 2020 9) Makes conforming and grammatical changes. 10)Contains double-jointing provisions resolving conflict with SB 377 (Beall). Background The LIHTC induces investment in low-income housing by providing a tax shelter for investors for allocating capital to an asset class with a relatively poor rate of return. In return for providing the tax shelter, the state gets more low-income housing than it otherwise would have. Low-income housing projects face many barriers in California: high costs of land, labor, and capital; resistance from local residents and state and local laws and policies protecting the environment, among others. Because the credit is capped and allocated, CTCAC awards tax credits to projects on a competitive process based on AB 35 Page 5 an evaluation of the most effective use of the tax credits. This program is much different than other tax credits, where any individual or businesses can qualify for a credit by virtue of incurring specific costs such as research and development or hiring specific individuals. Currently, housing sponsors apply to CTCAC for credits, and if granted, then form partnership agreements with investors, who provide capital to fund the housing construction in exchange for the allocated tax credits. The tax credits exceed the value of the investment because demand for the tax credits does not meet supply. For example, a partnership agreement may allocate 100% of tax credits to an investor that provides 75% of the necessary project funding; the value of the discounted tax credits is sufficient for investors to participate. Investors claim the credit until exhausted, then walk away from the partnership, and deduct the amount paid to the partnership in exchange for the tax credits as a capital loss. The Internal Revenue Service may recapture federal credits; however, the Franchise Tax Board cannot. Instead, CTCAC maintains an enforcement staff to monitor affordability, and a party can bring suit in Superior Court to enforce the project's affordability. Comments Federal law allows CTCAC to allocate 9% credit for projects that are not "federally subsidized," but 4% for ones that are. Developers that obtain federal 9% credits and combine them with state credits generally have a sufficient subsidy to construct a low-income housing project; however, CTCAC can only allocated these credits up to a cap set by federal law. While the 4% credits aren't subject to a similar cap, they often do not have the value necessary to generate sufficient project capital for a project to pencil out in a post-redevelopment world. AB 35 seeks to fill this gap by increasing the value of state credits to hopefully secure more interest in 4% projects to generate sufficient subsidy amounts to construct projects. Another vital component is the federal subsidy, which isn't a direct monetary subsidy, but instead the issuance of mortgage revenue bonds, where the subsidy is the federal and state income tax exclusion for interest payments. Local housing authorities apply to the AB 35 Page 6 California Debt Limit Allocation Committee (CDLAC) for an allocation of tax-exempt private activity bond ceiling. If approved, the local housing authority sells the bonds, loans the proceeds to housing developers, who combine these funds with capital raised from state and federal LIHTCs to construct the project, and then repay the bonds out of rents. Last year, CDLAC allocated $1.25 billion in ceiling for multifamily projects, an amount that should increase if AB 35 is enacted. Related Legislation SB 377 (Beall, 2015) allows developers receiving LIHTC credit reservations to sell credits to unrelated parties under specified conditions. The bill is pending in the Assembly Appropriations Committee. FISCAL EFFECT: Appropriation: No Fiscal Com.:YesLocal: No According to Senate Appropriations Committee, this bill will result in General Fund revenue losses of $44 million in 2015-16, $150 million in 2016-17, and $180 million in fiscal year 2017-18. CTCAC would incur first-year administrative costs of $246,000, increasing potentially in the out years. SUPPORT: (Verified9/4/15) California State Controller Betty T. Yee California State Treasurer John Chiang A Community of Friends Adobe Community Affirmed Housing Affordable Housing Association-Pacific Southwest Affordable Housing, Inc. Alameda County Development Disabilities Council Alameda County Housing Authority Alpha Construction Co., Inc. American Association of Retired Persons American Planning Association, California Chapter Amy Hiestand Consulting AB 35 Page 7 Angelus Plaza, a Retirement Housing Foundation Aspira Net Association of Bay Area Governments Bay Area Council Be.grou Beacon Communities/ABHOW Bridge Housing Burbank Housing Corporation Burbank Housing Development Corporation Cabrillo Economic Development Corporation California Alliance for Retired Americans California Apartment Association California Association of Housing Authorities California Association of Local Housing Finance Agencies California Bankers Association California Building Industry Association California Center for Cooperative Development California Chamber of Commerce California Coalition for Rural Housing California Coalition for Youth California Community Loan Fund California Council for Affordable Housing California Council of Community Mental Health Agencies California Housing Consortium California Housing Partnership Corporation California Infill Builders Federation California Institute for Rural Studies California Partnership to End Domestic Violence California Political Consulting Group California Special Districts Association California State Association of Counties Capitol Area Development Authority Christian Church Homes Christian Church Pacific Southwestern Region Cities Association of Santa Clara County City and County of San Francisco City of Alameda City of Banning City of Berkeley City of Burbank City of Camarillo City of Chowchilla AB 35 Page 8 City of Concord City of Culver City City of Danville City of Dublin City of El Centro City of Emeryville City of Eureka City of Fairfield City of Fremont City of Glendale City of Lafayette City of Lakeport City of Lakewood City of Livermore City of Lodi City of Los Angeles City of Merced City of Morgan Hill City of Napa City of Rocklin City of Sacramento City of San Carlos City of San Diego City of San Jose City of Santa Barbara City of Santa Monica City of Santa Rosa City of South San Francisco City of Taft City of Thousand Oaks City of Torrance City of Tulare City of Turlock City of Union City City of Vista City of West Hollywood Community Action North Bay Community Corporation of Santa Monica Community Economics, Inc. Community Housing Opportunities Corporation Community Housing Partnership Community Housing Works AB 35 Page 9 Community Land Trust Association Community Leadership Association Community Overcoming Relationship Abuse Contra Costa Interfaith Housing Core Affordable Housing Corporation for Supportive Housing County of Santa Clara County Welfare Directors Association Disability Rights California Domus Development Downtown Women's Center EAH Housing East Bay Developmental Disabilities Legislative Coalition East Bay Legislative Coalition Eden Housing Episcopal Diocese of Los Angeles First Community Housing Goldfarb & Lipman LLP Habitat for Humanity HCEB Highridge Costa Housing Partners, LLC Highridge Costa Investors, LLC HIP Housing, Inc. HKIT Architects Hollywood Adventist Church Hope Home Ownership for Personal Empowerment, LLC Housing Authority, City of San Buenaventura Housing Authority, City of Santa Barbara Housing Authority, City of Santa Clara Housing California Housing Choices Coalition Housing Element of the City of Emeryville Housing Leadership Council of San Mateo County Housing Trust Silicon Valley Hudson Housing Capital Hunger Advocacy Network Irvine Community Land Trust Jamboree Housing Corporation Kennedy Commission Korean Resource Center Larkin Street Youth Services Laurin Associates AB 35 Page 10 Law Foundation of Silicon Valley Leadership Counsel for Justice and Accountability LeadingAge California League of Cities LINC Housing Linda M. Nelson DBA Nelson Rental Consultant Little Tokyo Service Center CDC Loaves and Fishes Los Angeles Area Chamber of Commerce Los Angeles Community Action Network Many Mansions Marin County Board of Supervisors Mental Health America of California Mercy Housing California MidPen Housing Monterey County Board of Supervisors Nancy Lewis Associates, Inc. Napa Valley Community Housing National Association of Social Workers, California Chapter National Housing Law Project NeighborWorks Orange County Newman Garrison and Partners, Inc. Non-Profit Housing Association of Northern California North Bay Leadership Council North Los Angeles County Regional Center Northern California Community Loan Fund Northern California Presbyterian Homes and Services Onyx Architects Orange Coast Interfaith Shelter Pacific West Communities Palm Communities PATH People's Self Help Housing Corporation PEP Housing Powell & Partners, Architects Project Access, Inc. Promise Energy Resources for Community Development Retirement Housing Foundation Rural Communities Housing Development Corporation Rural Community Assistance Corporation Sacramento Homeless Organizing Committee AB 35 Page 11 Sacramento Housing Alliance Sacramento Loaves and Fishes San Diego County Apartment Association San Diego Housing Commission San Diego Housing Federation San Diego Organizing Project San Diego Regional Chamber of Commerce San Diego Tenant Association San Francisco Housing Action Coalition San Francisco Unified School District San Joaquin Valley Housing Collaborative San Luis Obispo County Housing Trust Fund Santa Clara County Board of Supervisors Satellite Affordable Housing Associates Self-Help Enterprises Seventy Day Adventist Church Shelter Partnership, Inc. Shelter, Inc. Sierra Business Council Silicon Valley Bank Silicon Valley Leadership Group Skid Row Housing Trust Sonoma County Housing Advocacy Group Southern California Association of Non-Profit Housing Southern California Legislative Council St. Anthony Foundation; St. Vincent's TELACU Residential Management Tenemos que Reclamar y Unidos Salvar La Tierra - South Los Angeles Thomas Safran & Associates Trinity Center Walnut Creek United Ways of California Urban Habitat Venice Community Housing Corporation Walkland Housing and Development Corporation Ward Economic Development Corporation Western Seniors Housing, Inc. WORKS Yolo Housing 19 individuals AB 35 Page 12 OPPOSITION: (Verified9/4/15) None received ARGUMENTS IN SUPPORT: According to the author "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. 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." ASSEMBLY FLOOR: 78-0, 6/4/15 AYES: Achadjian, Alejo, Travis Allen, Baker, Bigelow, Bloom, AB 35 Page 13 Bonilla, Bonta, Brough, Brown, Burke, Calderon, Campos, Chang, Chau, Chávez, Chiu, Chu, Cooley, Cooper, Dababneh, Daly, Dodd, Eggman, Frazier, Beth Gaines, Gallagher, Cristina Garcia, Eduardo Garcia, Gatto, Gipson, Gomez, Gonzalez, Gordon, Gray, Grove, Hadley, Harper, Roger Hernández, Holden, Irwin, Jones-Sawyer, Kim, Lackey, Levine, Linder, Lopez, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Nazarian, Obernolte, O'Donnell, Olsen, Patterson, Perea, Quirk, Rendon, Ridley-Thomas, Rodriguez, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Wagner, Waldron, Weber, Wilk, Williams, Wood, Atkins NO VOTE RECORDED: Dahle, Jones Prepared by:Colin Grinnell / GOV. & F. / (916) 651-4119 9/4/15 18:03:51 **** END ****