Existing law, the Multifamily Housing Program, is administered by the Department of Housing and Community Development to address renter housing needs through an omnibus multifamily housing program. Under the program, assistance provided to a project is required to be provided in the form of a deferred payment loan to pay for the eligible costs of development. Existing law, subject to specified terms, authorizes the department to approve an extension of an existing loan, the subordination of an existing loan to new debt, or an investment of tax credit equity if the rental housing development is being operated in a manner consistent with the regulatory agreement and the development requires an extension in order to continue to operate in that manner. Existing law also authorizes the department to reduce the interest rate on any loan issued by the department to a rental housing development to as low as 0.42% per annum, or a rate determined by the department that is sufficient to cover the costs of project monitoring, whichever is greater, if the development meets specified requirements regarding, among other things, debt and household income.

Existing law also authorizes the Department of Housing and Community Development to approve an extension of a department loan, the subordination of a department loan to new debt, or an investment of tax credit equity under specified rental housing finance programs other than the Multifamily Housing Program, subject to specified conditions.

This bill would include loans made under the Multifamily Housing Program and any and all other multifamily housing loans funded or monitored by the department within these latter provisions authorizing the extension of an existing loan, subordination of an existing loan to new debt, or an investment of tax credit equity. The bill would require the department to reduce the interest rate on any loan issued by the department to a rental housing development if the development will utilize low-income housing tax credits, the department makes a specified determination regarding the loan or the ability of the development to syndicate, and the rate change will materially increase the feasibility of the proposed project and ensure long-term affordability for the residents.

Existing law also authorizes the department to change the current interest rate for any loan for which it receives a loan extension request, associated with an award of federal or state low income housing tax credits made on or after January 1, 2014, to the applicable federal rate most recently published by the Internal Revenue Service.

This bill instead would provide that the department is authorized to change the current interest rate for any loan issued by the department for which it receives a loan extension request, associated with an award of federal or state low-income housing tax credits made on or after January 1, 2014, to the applicable federal rate published by the Internal Revenue Service and in effect at the time of the project closing.

Existing law requires the department to charge a fee in an amount sufficient to cover administrative costs associated with a loan modification requested by a borrower pursuant to these provisions.

This bill would instead authorize the department to charge the fee.

Existing law, the Multifamily Housing Program, is administered by the Department of Housing and Community Development to address renter housing needs through an omnibus multifamily housing program. Under the program, assistance provided to a project is required to be provided in the form of a deferred payment loan to pay for the eligible costs of development. Existing law, subject to specified terms, authorizes the department to approve an extension of an existing loan, the subordination of an existing loan to new debt, or an investment of tax credit equity if the rental housing development is being operated in a manner consistent with the regulatory agreement and the development requires an extension in order to continue to operate in that manner. Existing law also authorizes the department to reduce the interest rate on any loan issued by the department to a rental housing development to as low as 0.42% per annum, or a rate determined by the department that is sufficient to cover the costs of project monitoring, whichever is greater, if the development meets specified requirements regarding, among other things, debt and household income.

Existing law also authorizes the Department of Housing and Community Development to approve an extension of a department loan, the subordination of a department loan to new debt, or an investment of tax credit equity under specified rental housing finance programs other than the Multifamily Housing Program, subject to specified conditions.

This bill would include loans made under the Multifamily Housing Program and any and all other multifamily housing loans funded or monitored by the department within these latter provisions authorizing the extension of an existing loan, subordination of an existing loan to new debt, or an investment of tax credit equity. The bill would require the department to reduce the interest rate on any loan issued by the department to a rental housing development if the development will utilize low-income housing tax credits, the department makes a specified determination regarding the loan or the ability of the development to syndicate, and the rate change will materially increase the feasibility of the proposed project and ensure long-term affordability for the residents.

Existing law also authorizes the department to change the current interest rate for any loan for which it receives a loan extension request, associated with an award of federal or state low income housing tax credits made on or after January 1, 2014, to the applicable federal rate most recently published by the Internal Revenue Service.

This bill instead would provide that the department is authorized to change the current interest rate for any loan issued by the department for which it receives a loan extension request, associated with an award of federal or state low-income housing tax credits made on or after January 1, 2014, to the applicable federal rate published by the Internal Revenue Service and in effect at the time of the project closing.

Existing law requires the department to charge a fee in an amount sufficient to cover administrative costs associated with a loan modification requested by a borrower pursuant to these provisions.

This bill would instead authorize the department to charge the fee.

Existing law, the Multifamily Housing Program, is administered by the Department of Housing and Community Development to address renter housing needs through an omnibus multifamily housing program. Under the program, assistance provided to a project is required to be provided in the form of a deferred payment loan to pay for the eligible costs of development. Existing law, subject to specified terms, authorizes the department to approve an extension of an existing loan, the subordination of an existing loan to new debt, or an investment of tax credit equity if the rental housing development is being operated in a manner consistent with the regulatory agreement and the development requires an extension in order to continue to operate in that manner. Existing law also authorizes the department to reduce the interest rate on any loan issued by the department to a rental housing development to as low as 0.42% per annum, or a rate determined by the department that is sufficient to cover the costs of project monitoring, whichever is greater, if the development meets specified requirements regarding, among other things, debt and household income.

Existing law also authorizes the Department of Housing and Community Development to approve an extension of a department loan, the subordination of a department loan to new debt, or an investment of tax credit equity under specified rental housing finance programs other than the Multifamily Housing Program, subject to specified conditions.

This bill would include loans made under the Multifamily Housing Program and any and all other multifamily housing loans funded or monitored by the department within these latter provisions authorizing the extension of an existing loan, subordination of an existing loan to new debt, or an investment of tax credit equity. The bill would also authorize, with respect to loans made under the Multifamily Housing Program, the extension of an existing loan, subordination of an existing loan to new debt, or an investment of tax credit equity to be made in connection with the combining of multiple sites or collateral as if the existing loan is a new loan, as specified. The bill would require the department to reduce the interest rate on any loan issued by the department to a rental housing development if the development will utilize low-income housing tax credits, the department makes a specified determination regarding the loan or the ability of the development to syndicate, and the rate change will materially increase the feasibility of the proposed project and ensure long-term affordability for the residents.

Existing law also authorizes the department to change the current interest rate for any loan for which it receives a loan extension request, associated with an award of federal or state low income housing tax credits made on or after January 1, 2014, to the applicable federal rate most recently published by the Internal Revenue Service.

This bill instead would provide that the department is authorized to change the current interest rate for any loan issued by the department for which it receives a loan extension request, associated with an award of federal or state low-income housing tax credits made on or after January 1, 2014, to the applicable federal rate published by the Internal Revenue Service and in effect at the time of the project closing.

Existing law requires the department to charge a fee in an amount sufficient to cover administrative costs associated with a loan modification requested by a borrower pursuant to these provisions.

This bill would instead authorize the department to charge the fee.

Existing law, the Multifamily Housing Program, is administered by the Department of Housing and Community Development to address renter housing needs through an omnibus multifamily housing program. Under the program, assistance provided to a project is required to be provided in the form of a deferred payment loan to pay for the eligible costs of development. Existing law, subject to specified terms, authorizes the department to approve an extension of an existing loan, the subordination of an existing loan to new debt, or an investment of tax credit equity if the rental housing development is being operated in a manner consistent with the regulatory agreement and the development requires an extension in order to continue to operate in that manner. Existing law also authorizes the department to reduce the interest rate on any loan issued by the department to a rental housing development to as low as 0.42% per annum, or a rate determined by the department that is sufficient to cover the costs of project monitoring, whichever is greater, if the development meets specified requirements regarding, among other things, debt and household income.

This bill would authorize each include loans made under the Multifamily Housing Program and any and all other multifamily housing loans funded or monitored by the department within these latter provisions authorizing the extension of an existing loan, subordination of an existing loan to new debt, or an investment of tax credit equity equity. The bill would also authorize, with respect to loans made under the Multifamily Housing Program, the extension of an existing loan, subordination of an existing loan to new debt, or an investment of tax credit equity to be made in connection with the combining of multiple sites or collateral as if the existing loan is a new loan, as specified, and specified. The bill would require the department to reduce the interest rate on any loan issued by the department to a rental housing development if the development will utilize low-income housing tax credits, the department makes a specified determination regarding the loan or the ability of the development to syndicate, and the rate change will materially increase the feasibility of the proposed project and ensure long-term affordability for the residents.

Existing law also authorizes the department to change the current interest rate for any loan for which it receives a loan extension request, associated with an award of federal or state low income housing tax credits made on or after January 1, 2014, to the applicable federal rate most recently published by the Internal Revenue Service.

This bill instead would provide that the department is authorized to change the current interest rate for any loan issued by the department for which it receives a loan extension request, associated with an award of federal or state low-income housing tax credits made on or after January 1, 2014, to the applicable federal rate published by the Internal Revenue Service and in effect at the time of the project closing.

Existing law requires the department to charge a fee in an amount sufficient to cover administrative costs associated with a loan modification requested by a borrower pursuant to these provisions.

This bill would instead authorize the department to charge the fee.

Existing law, the Multifamily Housing Program, is administered by the Department of Housing and Community Development to address renter housing needs through an omnibus multifamily housing program. Under the program, assistance provided to a project is required to be provided in the form of a deferred payment loan to pay for the eligible costs of development. Existing law, subject to specified terms, authorizes the department to approve an extension of an existing loan, the subordination of an existing loan to new debt, or an investment of tax credit equity if the rental housing development is being operated in a manner consistent with the regulatory agreement and the development requires an extension in order to continue to operate in that manner. Existing law also authorizes the department to reduce the interest rate on any loan issued by the department to a rental housing development to as low as 0.42% per annum, or a rate determined by the department that is sufficient to cover the costs of project monitoring, whichever is greater, if the development meets specified requirements regarding, among other things, debt and household income.

This bill would authorize each extension of an existing loan, subordination of an existing loan to new debt, or investment of tax credit equity to be made in connection with the combining of multiple sites or collateral as if the existing loan is a new loan, as specified, and would authorize require the department to revise the requirements for reduce the interest rate reduction to instead require that if the development will utilize low-income housing tax credits, the department makes a specified determination regarding the loan or the ability of the development to syndicate, and the rate change will materially increase the feasibility of the proposed project and further the goals and purpose of the department and the appropriate loan program. ensure long-term affordability for the residents.

Existing law also authorizes the department to change the current interest rate for any loan for which it receives a loan extension request, associated with an award of federal or state low income housing tax credits made on or after January 1, 2014, to the applicable federal rate most recently published by the Internal Revenue Service.

This bill instead would provide that the department is authorized to change the current interest rate for any loan issued by the department for which it receives a loan extension request, associated with an award of federal or state low-income housing tax credits made on or after January 1, 2014, to the applicable federal rate published by the Internal Revenue Service and in effect at the time of the project closing.

Existing law requires the department to charge a fee in an amount sufficient to cover administrative costs associated with a loan modification requested by a borrower pursuant to these provisions.

This bill would instead authorize the department to charge the fee.

Existing law authorizes the Department of Housing and Community Development to make loans under a multifamily housing program, and law, the Multifamily Housing Program, is administered by the Department of Housing and Community Development to address renter housing needs through an omnibus multifamily housing program. Under the program, assistance provided to a project is required to be provided in the form of a deferred payment loan to pay for the eligible costs of development. Existing law, subject to specified terms, authorizes the department to approve an extension of an existing loan, the subordination of an existing loan to new debt, or an investment of tax credit equity if the rental housing development is being operated in a manner consistent with the regulatory agreement and the development requires an extension in order to continue to operate in that manner. Existing law also authorizes the department to reduce the interest rate on any loan issued by the department to a rental housing development to as low as 0.42% per annum, or a rate determined by the department that is sufficient to cover the costs of project monitoring, whichever is greater, if the development meets specified requirements regarding, among other things, debt and household income.

This bill would authorize the department to reduce the interest rate on any loan issued by the department to a rental housing development to only a rate determined by the department that is sufficient to cover the costs of project monitoring and would each extension of an existing loan, subordination of an existing loan to new debt, or investment of tax credit equity to be made in connection with the combining of multiple sites or collateral as if the existing loan is a new loan, as specified, and would authorize the department to revise the requirements for the interest rate reduction to instead require that the rate change increase the feasibility of the proposed project and further the goals and purpose of the department and the appropriate loan program.

Existing law also authorizes the department to change the current interest rate for any loan for which it receives a loan extension request, associated with an award of federal or state low income housing tax credits made on or after January 1, 2014, to the applicable federal rate most recently published by the Internal Revenue Service.

This bill instead would provide that the department is authorized to change the current interest rate for any loan issued by the department for which it receives a loan extension request, associated with an award of federal or state low-income housing tax credits made on or after January 1, 2014, to the applicable federal rate published by the Internal Revenue Service and in effect at the time of the project closing.

Existing law requires the department to charge a fee in an amount sufficient to cover administrative costs associated with a loan modification requested by a borrower pursuant to these provisions.

This bill would instead authorize the department to charge the fee.

Existing law authorizes the Department of Housing and Community Development to make loans under a multifamily housing program, and to reduce the interest rate on any loan issued by the department to a rental housing development to as low as 0.42% per annum, or a rate determined by the department that is sufficient to cover the costs of project monitoring, whichever is greater, if the development meets specified requirements regarding, among other things, debt and household income.

This bill would authorize the department to reduce the interest rate on any loan issued by the department to a rental housing development to only a rate determined by the department that is sufficient to cover the costs of project monitoring and would revise the requirements for the reduction to instead require that the rate change increase the feasibility of the proposed project and further the goals and purpose of the department and the appropriate loan program.

Existing law also authorizes the department to change the current interest rate for any loan for which it receives a loan extension request, associated with an award of federal or state low income housing tax credits made on or after January 1, 2014, to the applicable federal rate most recently published by the Internal Revenue Service.

This bill instead would provide that the department is authorized to change the current interest rate for any loan issued by the department for which it receives a loan extension request, associated with an award of federal or state low-income housing tax credits made on or after January 1, 2014, to the applicable federal rate published by the Internal Revenue Service and in effect at the time of the project closing.

Existing law authorizes the Department of Housing and Community Development to make loans under a multifamily housing program, and to reduce the interest rate on any loan issued by the department to a rental housing development to as low as 0.42% per annum, or a rate determined by the department that is sufficient to cover the costs of project monitoring, whichever is greater, if the development meets specified requirements regarding, among other things, debt and household income.

This bill would authorize the department to reduce the interest rate on any loan issued by the department to a rental housing development to only a rate determined by the department that is sufficient to cover the costs of project monitoring and would revise these the requirements for the reduction to instead require that the rate change increase the feasibility of the proposed project and will further the goals and purpose of the department and the appropriate loan program.

Existing law also authorizes the department to change the current interest rate for any loan for which it receives a loan extension request, associated with an award of federal or state low income housing tax credits made on or after January 1, 2014, to the applicable federal rate most recently published by the Internal Revenue Service.

This bill instead would provide that the department is authorized to change the current interest rate for any loan issued by the department for which it receives a loan extension request, associated with an award of federal or state low income low-income housing tax credits made on or after January 1, 2014, to the applicable federal rate published by the Internal Revenue Service and in effect at the time of the loan extension and project closing.

Existing law authorizes the Department of Housing and Community Development to make loans under a multifamily housing program, and to reduce the interest rate on any loan issued by the department to a rental housing development to as low as 0.42% per annum, or a rate determined by the department that is sufficient to cover the costs of project monitoring, if the development meets specified requirements regarding, among other things, debt and household income.

This bill would revise these requirements to instead require that the rate change increase the feasibility of the proposed project and will further the goals and purpose of the department and the appropriate loan program.

Existing law also authorizes the department to change the current interest rate for any loan for which it receives a loan extension request, associated with an award of federal or state low income housing tax credits made on or after January 1, 2014, to the applicable federal rate most recently published by the Internal Revenue Service.

This bill instead would provide that the department is authorized to change the current interest rate for any loan issued by the department for which it receives a loan extension request, associated with an award of federal or state low income housing tax credits made on or after January 1, 2014, to the applicable federal rate published by the Internal Revenue Service and in effect at the time of the loan extension and project closing.

CONCURRENCE IN SENATE AMENDMENTS

CSA1 Bill Id:AB 2562

Author:(Mullin)

As Amended Ver:August 22, 2018

Majority vote

Original Committee Reference: H. & C.D.

SUMMARY: Authorizes the Department of Housing and Community Development (HCD) to change interest rates on loans issued to low-income rental housing projects. Specifically, this bill:

1. Revises the conditions a rental housing development must meet in order for HCD to reduce the interest rate on its loan, as follows:
   1. Eliminates the requirement that the development have no other debt with regularly scheduled or amortizing debt service payments.
   2. Provides that HCD (rather than the sponsor) must determine if the loan is eligible to be treated as debt for federal or state low income housing tax credit (LIHTC) purposes without a reduction in the interest rate, or if the development is not able to syndicate due to projected negative capital account balances. (A syndicated loan is one in which two or more lenders jointly provide loans for one or more borrowers on the same loan terms and the same loan agreement.) Authorizes HCD to require a third-party tax professional to verify the determination, the cost of which shall be borne by the sponsor.
   3. Eliminates the requirement that the development have no debt in a senior lien position to HCD's debt.
   4. Eliminates the requirement that the development have 35% or more of the total units in the project serving households with income at or below 30% area median income (AMI).
   5. Adds a requirement that the change in the interest rate will materially increase the feasibility of the proposed project and will ensure long-term affordability for residents.
2. Modifies the authority for HCD to change the current interest rate pursuant to a loan extension request associated with an award of federal or state LIHTCs made on or after January 1, 2014, by specifying that HCD can use the applicable federal rate in effect at the time of the project closing rather than the most recent rate published by the IRS.
3. Authorizes (rather than requires) HCD to charge a fee to cover administrative costs.
4. Provides that this bill shall not affect any interest rate reduction authorized by HCD prior to this bill being enacted.
5. Specifies that MHP and other multi-family loans under HCD are eligible for a loan extension, subordination of the loan to existing debt, or an investment of tax credit equity.

The Senate amendments: Specify that MHP and any other multifamily loans issued by HCD are eligible for a loan extension, subordination of the loan to existing debt, or an investment of tax credit equity.

FISCAL EFFECT: According to the Assembly Committee on Appropriations: Unknown, but significant costs to HCD to review and process loan modifications in an expedited manner. For example, if 20% of HCD's loan portfolio requested a modification, estimated annual costs are $1.7 million (General Fund) in the first year and $1.5 million ongoing for nine positions, including two attorneys, necessary to perform the work.

COMMENTS:

Background: 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 ("soft" 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. 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.

For such soft loans to be considered a loan and not a grant for LIHTC purposes, however, a project sponsor must be able to demonstrate some plausible set of circumstances under which it could repay the loan. Because MHP loans carry a 3% deferred interest rate, this can create a conflict for projects that receive an MHP loan, reducing the amount of federal tax credits for which such a project can qualify. In some cases, the developer would be liable for a large amount of "exit taxes" once the tax credit investor leaves the partnership after year fifteen, which could put the affordable housing at risk.

In an attempt to address this problem, AB 523 (Ammiano), Chapter 445, Statutes of 2014 gave HCD discretion in limited circumstances to reduce the interest rate on a project that receives an MHP loan and is also awarded a LIHTC. To qualify, a sponsor has 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. That bill provided a minimum floor of 0.42% interest per year.

This bill also loosens requirements on development eligibility in order to allow more low-income rental housing projects receiving HCD loans, such as projects in the Affordable Housing and Sustainable Communities Program or the Veterans Housing and Homelessness Prevention Program, to qualify for this interest rate modification. Additionally, this bill permits HCD to increase interest rates on any extended HCD loans to the AFR, which may be needed to preserve project feasibility in some instances where loans are being extended for more than five years or otherwise modified.

Federal tax reform: The 2017 federal tax reform bill, the Tax Cuts and Jobs Act, lowered the corporate tax rate from 35% to 21%. As a result, the value of the LIHTC, which provides a way for corporations to offset some of their federal tax liability, has declined. Though the 2018 federal omnibus spending bill increased LIHTC allocations by 12.5%, experts estimate that the net effect of the two bills will result in a loss of about 204,000 affordable rental homes nationwide over the next decade.^[1] In California specifically, the 12.5% increase is worth about $125 million annually over the four-year term of the increase, but the corporate rate change will cause a loss of $500 million per year in LIHTC value on a permanent basis. The modifications in this bill could prevent existing affordable rental housing developments that utilize LIHTC from losing their affordability, and make it easier for future projects awarded LIHTC to maintain affordability.

Analysis Prepared by: Lisa Engel / H. & C.D. / (916) 319-2085 FN: 0004951

1. Michael Novogradac and Peter Lawrence, “How Many Jobs, Affordable Rental Homes Each State Would Gain Under FY 2018 Omnibus?,” Novogradac & Company, Notes from Novogradac (blog), April 4, 2018. ↑

 THIRD READING  

Bill No: AB 2562

Author:

: 8/22/18

Vote:

SENATE TRANS. & HOUSING COMMITTEE: 9-3, 6/26/18

AYES: Beall, Cannella, Allen, Dodd, Galgiani, McGuire, Roth, Skinner, Wiener

NOES: Gaines, Morrell, Vidak

NO VOTE RECORDED: Wieckowski

SENATE APPROPRIATIONS COMMITTEE: 5-2, 8/16/18

AYES: Portantino, Beall, Bradford, Hill, Wiener

NOES: Bates, Nielsen

ASSEMBLY FLOOR: 54-24, 5/30/18 - See last page for vote

SUBJECT:

SOURCE: Author

DIGEST:

This bill authorizes the state Department of Housing and Community Development (HCD) to adjust interest rates on loans issued to low-income rental housing projects and to provide flexibility on refinancing certain project loans.

Senate Floor Amendments of 8/22/18 remove a provision authorizing each extension of an existing loan, subordination of an existing loan, or investment of tax credit equity under the Multifamily Housing Program (MHP) to be made in connection with the combining of multiple sites or collateral as if the existing loan were a new loan.

ANALYSIS:

Existing law:

1. Creates the state low income housing tax credit (LIHTC) program within the Tax Credit Allocation Committee (TCAC) in the State Treasurer’s Office. TCAC administers state LIHTCs to augment federal LIHTCs.
2. Authorizes HCD to reduce the interest rate on any loan it issues to a rental housing development to as low as 0.42% per year, or a rate determined by HCD that is sufficient to cover the costs of project monitoring, whichever is greater, if the development meets all of the following requirements:
   1. The development has no other debt with regularly scheduled or amortizing debt service payments. HCD may impose a default interest rate of 3% should amortizing debt be placed on the project.
   2. The development will utilize LIHTCs.
   3. The sponsor determines that the loan issued by HCD is not eligible to be treated as debt for federal or state LIHTC purposes without a reduction in the interest rate of the loan. The determination must be acceptable to HCD, who may contract with a third-party tax professional for verification, the cost of which shall be borne by the sponsor.
   4. The development has no debt in a senior lien position to HCD’s debt.
   5. The development has 35% or more of the total units in the project serving households with income not exceeding 30% of area median income.
   6. The new HCD loan shall not be used to supplant or replace an existing HCD loan.
3. Authorizes HCD to change the current interest rate for any loan for which it receives a loan extension request associated with an award of federal or state low-income housing tax credits made on or after January 1, 2014, to the applicable federal rate most recently published by the Internal Revenue Service.
4. Requires HCD to charge a fee to cover administrative costs.
5. Authorizes a sponsor to apply for loans for rental or transitional housing developments under MHP.
6. Authorizes HCD to approve an extension of an existing MHP loan, the subordination of an existing loan to new debt, or an investment of tax credit equity under specified circumstances. Requires all MHP loan payments to be deferred for the full term of the loan, except for residual receipts payments, which shall be structured to avoid reducing the amount of payments on local public agency loans as specified.
7. Authorizes HCD to charge a transaction fee to cover its restructuring costs, though it may waive the fee if it determines that a particular development does not have the ability to make these payments.
8. Authorizes a sponsor to apply for MHP loans for loans for one or more rental or transitional housing developments, as specified.

This bill:

1. Revises the conditions a rental housing development must meet in order for HCD to reduce the interest rate on its loan, as follows:
   1. Eliminates the requirement that the development have no other debt with regularly scheduled or amortizing debt service payments.
   2. Provides that HCD (rather than the sponsor) must determine if the loan is eligible to be treated as debt for federal or state LIHTC purposes without a reduction in the interest rate, or if the development is not able to syndicate due to projected negative capital account balances. (A syndicated loan is one in which two or more lenders jointly provide loans for one or more borrowers on the same loan terms and the same loan agreement.) Authorizes HCD to require a third-party tax professional to verify the determination, the cost of which shall be borne by the sponsor.
   3. Eliminates the requirement that the development have no debt in a senior lien position to HCD’s debt.
   4. Eliminates the requirement that the development have 35% or more of the total units in the project serving households with income at or below 30% AMI.
   5. Adds a requirement that the change in the interest rate will materially increase the feasibility of the proposed project and will ensure long-term affordability for residents.
2. Modifies the authority for HCD to change the current interest rate pursuant to a loan extension request associated with an award of federal or state LIHTCs made on or after January 1, 2014, by specifying that HCD can use the applicable federal rate in effect at the time of the project closing rather than the most recent rate published by the IRS.
3. Authorizes (rather than requires) HCD to charge a fee to cover administrative costs.
4. Provides that this bill shall not affect any interest rate reduction authorized by HCD prior to this bill being enacted.
5. Specifies that MHP and other multifamily loans under HCD are eligible for a loan extension, subordination of the loan to existing debt, or an investment of tax credit equity.

Background

The LIHTC is an indirect federal subsidy developed in 1986 to incentivize the private development of affordable rental housing for low-income households. The federal LIHTC program enables low-income housing sponsors and developers to raise project equity through the allocation of tax benefits to investors. TCAC administers the 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. In 1987, the Legislature authorized a state LIHTC program to augment the federal 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 2017 federal tax reform bill, the Tax Cuts and Jobs Act, lowered the corporate tax rate from 35% to 21%. As a result, the value of the LIHTC, which provides a way for corporations to offset some of their federal tax liability, has declined. Though the 2018 federal omnibus spending bill increased LIHTC allocations by 12.5%, experts estimate that the net effect of the two bills will result in a loss of about 204,000 affordable rental homes nationwide over the next decade. In California specifically, the 12.5% increase is worth about $125 million annually over the four-year term of the increase, but the corporate rate change will cause a loss of $500 million per year in LIHTC value on a permanent basis. The modifications in this bill could prevent existing affordable rental housing developments that utilize LIHTCs from losing their affordability and make it easier for future projects awarded LIHTCs to maintain affordability.

Comments

1. Purpose. The author states that federal LIHTCs are the backbone of affordable housing finance in California. This bill grants HCD broad authority to adjust interest rates on MHP loans that utilize LIHTCs in order to make affordable housing projects feasible. The author states that local public agencies have been adjusting their interest rates for years to make affordable projects feasible; this bill will provide flexibility at the state level as well. This flexibility can result in more equity leveraged from tax credit investors to pay for affordable housing.
2. MHP and LIHTC. HCD’s loans for affordable rental housing are “soft” loans, meaning that most principal and interest payments are deferred to the end of the loan term rather than being due on a monthly basis. MHP provides deferred payment loans to developers for the construction of affordable housing for low- and very low-income individuals; lowering the developer’s debt service expenditures enables the developer to offer lower rents. For these loans to be considered a loan rather than a grant for LIHTC purposes, a project sponsor must be able to demonstrate how it could plausibly repay the loan. Because MHP loans carried a 3% deferred interest rate, it sometimes created conflicts for projects that received an MHP loan, reducing the amount of federal LIHTCs for which the project could qualify.

In addition, to receive the benefits of the federal LIHTC, owners of qualifying rental housing must maintain compliance with low-income occupancy requirements for a minimum of 15 years. Once the 15-year compliance period is complete, an investor typically no longer has an economic interest in the investment and wants to dispose of it. In some cases, this left the developer liable for a large amount of “exit taxes,” potentially putting the development at risk.

To address these issues, AB 523 (Ammiano, 2014) authorized HCD to, in limited circumstances, reduce the interest rate on a project that receives an MHP loan and is also awarded an LIHTC. To qualify, a sponsor has to demonstrate to HCD that without the reduction in 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 payments. This bill provides additional flexibility in the circumstances under which HCD may adjust the interest rate on an MHP loan.

1. Recent amendments. This bill was amended in the Senate Appropriations Committee to specify that MHP and any other multifamily loans to the programs issued by HCD are eligible for a loan extension, subordination of the loan to existing debt, or an investment of tax credit equity. It was further amended on the Senate Floor to remove a provision relating to combining MHP loans with other loans, due to technical implementation concerns.

Related/Prior Legislation

AB 523 (Ammiano, Chapter 445, Statutes of 2014) allowed HCD to reduce the interest rate on any loan it has issued to a rental housing development under specified conditions.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Senate Appropriations Committee:

• HCD estimates administrative costs of approximately $1.2 million annually beginning in 2019-20 to perform loan modifications on existing loans, assuming 17 scattered-site re-syndication requests are received annually. HCD assumes that the vast majority of loan modifications would occur during initial project development. (Various funds, primarily Housing Rehabilitation Loan Fund).
• Unknown, significant loss of interest revenues, the proceeds of which are used to fund HCD loan administration costs and 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).
• Unknown loss of revenues as a result of the provision that provides HCD with discretion to charge an administrative fee for loan modifications, rather than requiring the fee. (Various funds, primarily Housing Rehabilitation Loan Fund).
• Unknown future impacts as a result of provisions that allow HCD loans to be subordinate to other debt on developments. These provisions constitute a risk to future HCD debt repayments in the event of a default. (Various funds, primarily Housing Rehabilitation Loan Fund)

SUPPORT: (Verified 8/23/18)

City of San Jose

Corporation for Supportive Housing

LeadingAge California

Non-Profit Housing Association of Northern California

OPPOSITION: (Verified 8/23/18)

None received

ARGUMENTS IN SUPPORT: The Non-Profit Housing Association of Northern California states that this bill will support continued development of affordable housing despite federal disinvestment, result in more affordable homes by ensuring financial feasibility and compatibility of state and federal funding resources, and provide the state with an effective tool and flexibility to ensure that affordable homes get built.

ASSEMBLY FLOOR: 54-24, 5/30/18

AYES: Aguiar-Curry, Arambula, Berman, Bloom, Bonta, Burke, Caballero, Calderon, Carrillo, Cervantes, Chau, Chiu, Chu, Cooley, Cooper, Daly, Eggman, Frazier, Friedman, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gonzalez Fletcher, Gray, Grayson, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager-Dove, Levine, Limón, Low, McCarty, Medina, Mullin, Muratsuchi, Nazarian, O'Donnell, Quirk, Quirk-Silva, Reyes, Rodriguez, Rubio, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Weber, Wood, Rendon

NOES: Acosta, Travis Allen, Baker, Bigelow, Brough, Chávez, Chen, Choi, Cunningham, Dahle, Flora, Fong, Gallagher, Harper, Kiley, Lackey, Maienschein, Mathis, Mayes, Melendez, Obernolte, Patterson, Voepel, Waldron

Prepared by:

8/23/18 16:04:27

**** END ****

 THIRD READING  

Bill No: AB 2562

Author:

:

Vote:

SENATE TRANS. & HOUSING COMMITTEE: 9-3, 6/26/18

AYES: Beall, Cannella, Allen, Dodd, Galgiani, McGuire, Roth, Skinner, Wiener

NOES: Gaines, Morrell, Vidak

NO VOTE RECORDED: Wieckowski

SENATE APPROPRIATIONS COMMITTEE: 5-2, 8/16/18

AYES: Portantino, Beall, Bradford, Hill, Wiener

NOES: Bates, Nielsen

ASSEMBLY FLOOR: 54-24, 5/30/18 - See last page for vote

SUBJECT:

SOURCE: Author

DIGEST:

This bill authorizes the state Department of Housing and Community Development (HCD) to adjust interest rates on loans issued to low-income rental housing projects and to provide flexibility on refinancing certain project loans.

ANALYSIS:

Existing law:

1. Creates the state low income housing tax credit (LIHTC) program within the Tax Credit Allocation Committee (TCAC) in the State Treasurer’s Office. TCAC administers state LIHTCs to augment federal LIHTCs.
2. Authorizes HCD to reduce the interest rate on any loan it issues to a rental housing development to as low as 0.42% per year, or a rate determined by HCD that is sufficient to cover the costs of project monitoring, whichever is greater, if the development meets all of the following requirements:
   1. The development has no other debt with regularly scheduled or amortizing debt service payments. HCD may impose a default interest rate of 3% should amortizing debt be placed on the project.
   2. The development will utilize LIHTCs.
   3. The sponsor determines that the loan issued by HCD is not eligible to be treated as debt for federal or state LIHTC purposes without a reduction in the interest rate of the loan. The determination must be acceptable to HCD, who may contract with a third-party tax professional for verification, the cost of which shall be borne by the sponsor.
   4. The development has no debt in a senior lien position to HCD’s debt.
   5. The development has 35% or more of the total units in the project serving households with income not exceeding 30% of area median income.
   6. The new HCD loan shall not be used to supplant or replace an existing HCD loan.
3. Authorizes HCD to change the current interest rate for any loan for which it receives a loan extension request associated with an award of federal or state low-income housing tax credits made on or after January 1, 2014, to the applicable federal rate most recently published by the Internal Revenue Service.
4. Requires HCD to charge a fee to cover administrative costs.
5. Authorizes a sponsor to apply for loans for rental or transitional housing developments under the Multifamily Housing Program (MHP).
6. Authorizes HCD to approve an extension of an existing MHP loan, the subordination of an existing loan to new debt, or an investment of tax credit equity under specified circumstances. Requires all MHP loan payments to be deferred for the full term of the loan, except for residual receipts payments, which shall be structured to avoid reducing the amount of payments on local public agency loans as specified.
7. Authorizes HCD to charge a transaction fee to cover its restructuring costs, though it may waive the fee if it determines that a particular development does not have the ability to make these payments.
8. Authorizes a sponsor to apply for MHP loans for loans for one or more rental or transitional housing developments, as specified.

This bill:

1. Revises the conditions a rental housing development must meet in order for HCD to reduce the interest rate on its loan, as follows:
   1. Eliminates the requirement that the development have no other debt with regularly scheduled or amortizing debt service payments.
   2. Provides that HCD (rather than the sponsor) must determine if the loan is eligible to be treated as debt for federal or state LIHTC purposes without a reduction in the interest rate, or if the development is not able to syndicate due to projected negative capital account balances. (A syndicated loan is one in which two or more lenders jointly provide loans for one or more borrowers on the same loan terms and the same loan agreement.) Authorizes HCD to require a third-party tax professional to verify the determination, the cost of which shall be borne by the sponsor.
   3. Eliminates the requirement that the development have no debt in a senior lien position to HCD’s debt.
   4. Eliminates the requirement that the development have 35% or more of the total units in the project serving households with income at or below 30% AMI.
   5. Adds a requirement that the change in the interest rate will materially increase the feasibility of the proposed project and will ensure long-term affordability for residents.
2. Modifies the authority for HCD to change the current interest rate pursuant to a loan extension request associated with an award of federal or state LIHTCs made on or after January 1, 2014, by specifying that HCD can use the applicable federal rate in effect at the time of the project closing rather than the most recent rate published by the IRS.
3. Authorizes (rather than requires) HCD to charge a fee to cover administrative costs.
4. Provides that this bill shall not affect any interest rate reduction authorized by HCD prior to this bill being enacted.
5. Specifies that MHP and other multifamily loans under HCD are eligible for a loan extension, subordination of the loan to existing debt, or an investment of tax credit equity.
6. Authorizes each extension of an existing loan, subordination of an existing loan, or investment of tax credit equity under MHP to be made in connection with the combining of multiple sites or collateral as if the existing loan were a new loan.

Background

The LIHTC is an indirect federal subsidy developed in 1986 to incentivize the private development of affordable rental housing for low-income households. The federal LIHTC program enables low-income housing sponsors and developers to raise project equity through the allocation of tax benefits to investors. TCAC administers the 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. In 1987, the Legislature authorized a state LIHTC program to augment the federal 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 2017 federal tax reform bill, the Tax Cuts and Jobs Act, lowered the corporate tax rate from 35% to 21%. As a result, the value of the LIHTC, which provides a way for corporations to offset some of their federal tax liability, has declined. Though the 2018 federal omnibus spending bill increased LIHTC allocations by 12.5%, experts estimate that the net effect of the two bills will result in a loss of about 204,000 affordable rental homes nationwide over the next decade. In California specifically, the 12.5% increase is worth about $125 million annually over the four-year term of the increase, but the corporate rate change will cause a loss of $500 million per year in LIHTC value on a permanent basis. The modifications in this bill could prevent existing affordable rental housing developments that utilize LIHTCs from losing their affordability and make it easier for future projects awarded LIHTCs to maintain affordability.

Comments

1. Purpose. The author states that federal LIHTCs are the backbone of affordable housing finance in California. This bill grants HCD broad authority to adjust interest rates on MHP loans that utilize LIHTCs in order to make affordable housing projects feasible. The author states that local public agencies have been adjusting their interest rates for years to make affordable projects feasible; this bill will provide flexibility at the state level as well. This flexibility can result in more equity leveraged from tax credit investors to pay for affordable housing.
2. MHP and LIHTC. HCD’s loans for affordable rental housing are “soft” loans, meaning that most principal and interest payments are deferred to the end of the loan term rather than being due on a monthly basis. MHP provides deferred payment loans to developers for the construction of affordable housing for low- and very low-income individuals; lowering the developer’s debt service expenditures enables the developer to offer lower rents. For these loans to be considered a loan rather than a grant for LIHTC purposes, a project sponsor must be able to demonstrate how it could plausibly repay the loan. Because MHP loans carried a 3% deferred interest rate, it sometimes created conflicts for projects that received an MHP loan, reducing the amount of federal LIHTCs for which the project could qualify.

In addition, to receive the benefits of the federal LIHTC, owners of qualifying rental housing must maintain compliance with low-income occupancy requirements for a minimum of 15 years. Once the 15-year compliance period is complete, an investor typically no longer has an economic interest in the investment and wants to dispose of it. In some cases, this left the developer liable for a large amount of “exit taxes,” potentially putting the development at risk.

To address these issues, AB 523 (Ammiano, 2014) authorized HCD to, in limited circumstances, reduce the interest rate on a project that receives an MHP loan and is also awarded an LIHTC. To qualify, a sponsor has to demonstrate to HCD that without the reduction in 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 payments. This bill provides additional flexibility in the circumstances under which HCD may adjust the interest rate on an MHP loan.

1. Combining project loans. The author states that although the MHP regulations allow new MHP-funded projects to be “scattered site” (e.g., affordable units located on different sites), HCD does not feel it has legal authority to back this up. As MHP loans hit their post-year 15 phase and sponsors want to refinance in order to rehabilitate and recapitalize the projects, there is an increasing need to combine smaller properties to achieve economies of scale. This bill provides explicit authority to combine old MHP deals with other projects into a scattered site during a refinancing.
2. Appropriations amendments. This bill was amended in the Senate Appropriations Committee to specify that MHP and any other multifamily loans to the programs issued by HCD are eligible for a loan extension, subordination of the loan to existing debt, or an investment of tax credit equity.

Related/Prior Legislation

AB 523 (Ammiano, Chapter 445, Statutes of 2014) allowed HCD to reduce the interest rate on any loan it has issued to a rental housing development under specified conditions.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Senate Appropriations Committee:

• HCD estimates administrative costs of approximately $1.2 million annually beginning in 2019-20 to perform loan modifications on existing loans, assuming 17 scattered-site re-syndication requests are received annually. HCD assumes that the vast majority of loan modifications would occur during initial project development. (Various funds, primarily Housing Rehabilitation Loan Fund).
• Unknown, significant loss of interest revenues, the proceeds of which are used to fund HCD loan administration costs and 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).
• Unknown loss of revenues as a result of the provision that provides HCD with discretion to charge an administrative fee for loan modifications, rather than requiring the fee. (Various funds, primarily Housing Rehabilitation Loan Fund).
• Unknown future impacts as a result of provisions that allow HCD loans to be subordinate to other debt on developments. These provisions constitute a risk to future HCD debt repayments in the event of a default. (Various funds, primarily Housing Rehabilitation Loan Fund)

SUPPORT: (Verified 8/16/18)

City of San Jose

Corporation for Supportive Housing

LeadingAge California

Non-Profit Housing Association of Northern California

OPPOSITION: (Verified 8/16/18)

None received

ARGUMENTS IN SUPPORT: The Non-Profit Housing Association of Northern California states that this bill will support continued development of affordable housing despite federal disinvestment, result in more affordable homes by ensuring financial feasibility and compatibility of state and federal funding resources, and provide the state with an effective tool and flexibility to ensure that affordable homes get built.

ASSEMBLY FLOOR: 54-24, 5/30/18

AYES: Aguiar-Curry, Arambula, Berman, Bloom, Bonta, Burke, Caballero, Calderon, Carrillo, Cervantes, Chau, Chiu, Chu, Cooley, Cooper, Daly, Eggman, Frazier, Friedman, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gonzalez Fletcher, Gray, Grayson, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager-Dove, Levine, Limón, Low, McCarty, Medina, Mullin, Muratsuchi, Nazarian, O'Donnell, Quirk, Quirk-Silva, Reyes, Rodriguez, Rubio, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Weber, Wood, Rendon

NOES: Acosta, Travis Allen, Baker, Bigelow, Brough, Chávez, Chen, Choi, Cunningham, Dahle, Flora, Fong, Gallagher, Harper, Kiley, Lackey, Maienschein, Mathis, Mayes, Melendez, Obernolte, Patterson, Voepel, Waldron

Prepared by:

8/19/18 13:34:16

**** END ****

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2017 - 2018 Regular Session

AB 2562 (Mullin) - Department of Housing and Community Development loans

Bill Summary:

AB 2562 would require the Department of Housing and Community Development (HCD) to adjust interest rates on loans issued to low-income rental housing projects under specified conditions, and to provide flexibility on refinancing certain project loans, as specified.

*********** ANALYSIS ADDENDUM – SUSPENSE FILE ***********

The following information is revised to reflect amendments

adopted by the committee on August 16, 2018

Fiscal Impact:

• HCD estimates administrative costs of approximately $1.2 million annually beginning in 2019-20 to perform loan modifications on existing loans, assuming 17 scattered-site re-syndication requests are received annually. The department assumes that the vast majority of loan modifications would occur during initial project development. (various funds, primarily Housing Rehabilitation Loan Fund).
  
• Unknown, significant loss of interest revenues, the proceeds of which are used to fund HCD loan administration costs and 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).
  
• Unknown loss of revenues as a result of the provision that provides HCD with discretion to charge an administrative fee for loan modifications, rather than requiring the fee. (various funds, primarily Housing Rehabilitation Loan Fund).
  
• Unknown future impacts as a result of provisions that allow HCD loans to be subordinate to other debt on developments. These provisions constitute a risk to future HCD debt repayments in the event of a default. (various funds, primarily Housing Rehabilitation Loan Fund)

Author Amendments:

Specify that loans under the Multifamily Housing Program and any other multifamily housing loans issued and monitored by HCD are eligible for a loan extension, subordination of the loan to existing debt, or an investment of tax credit equity.

-- END --

SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2017 - 2018 Regular Session

AB 2562 (Mullin) - Department of Housing and Community Development loans

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

AB 2562 would require the Department of Housing and Community Development (HCD) to adjust interest rates on loans issued to low-income rental housing projects under specified conditions, and to provide flexibility on refinancing certain project loans, as specified.

Fiscal Impact:

• HCD estimates administrative costs of approximately $1.2 million annually beginning in 2019-20 to perform loan modifications on existing loans, assuming 17 scattered-site re-syndication requests are received annually. The department assumes that the vast majority of loan modifications would occur during initial project development. (various funds, primarily Housing Rehabilitation Loan Fund).
  
• Unknown, significant loss of interest revenues, the proceeds of which are used to fund HCD loan administration costs and 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).
  
• Unknown loss of revenues as a result of the provision that provides HCD with discretion to charge an administrative fee for loan modifications, rather than requiring the fee. (various funds, primarily Housing Rehabilitation Loan Fund).
  
• Unknown future impacts as a result of provisions that allow HCD loans to be subordinate to other debt on developments. These provisions constitute a risk to future HCD debt repayments in the event of a default. (various funds, primarily Housing Rehabilitation Loan Fund)

Background:

HCD administers several programs that provide loans to developers of affordable rental housing. HCD provides deferred payment loans under the Multifamily Housing Program (MHP) for the acquisition, construction, or rehabilitation of housing affordable to low and very-low income families and individuals. MHP loans have a term of not less than 55 years at a 3% simple interest rate, and principle and interest payments are deferred until loan maturity, although HCD collects residual payments to cover costs of administering the loan.

Existing law authorizes HCD to reduce the interest rate on any loan it issues to a rental housing development to as low as 0.42% per year, or a rate determined by HCD that is sufficient to cover the costs of project monitoring, whichever is greater, if the development meets specified requirements. The development cannot have other debt with regular debt service payments, or debt in a senior lien position to the HCD loan. Existing law authorizes HCD to approve an extension of an existing MHP loan, the subordination of an existing loan to new debt, or an investment of tax credit equity under specified circumstances.

Federal law establishes the Low-Income Housing Tax Credit Program, which is administered in this state by the California Tax Credit Committee (TCAC) in conjunction with a State Low-Income Housing Tax Credit Program. Federal law counts towards the “eligible basis” on which the credit is based, development costs supported by debt 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. To do this, developers run a “true debt” analysis showing the project could conceivably generate enough net operating income to repay all debt, typically by showing the rents that can be charged at market rate at the end of the loan term. If the debt cannot be shown to be supportable by the project after running this test, federal tax law considers the loan a grant, and the project loses an equivalent amount of tax credit basis.

In addition, when a developer seeks low-income housing tax credits to acquire and rehabilitate an existing affordable housing development, federal tax rules require that the eligible basis be reduced by the difference between the long-term cost of below-market-rate debt, such as an 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. Existing law allows HCD to change the interest rate on any loan for which it receives a loan extension request associated with an award of low-income housing tax credits to the applicable federal rate most recently published by the Internal Revenue Service.

Proposed Law:

AB 2562 would require, rather than authorize, HCD to reduce the interest on any loan issued to low-income rental housing developments and revise the conditions that a development must meet to qualify for a rate reduction. Specifically, this bill would:

• Delete the requirement that a development have no other debt with regularly scheduled or amortizing debt service payments.
• Delete the requirement that a development have no debt in a senior lien position to the HCD’s debt.
• Delete the requirement that the development have 35% or more of the total units in the project serving households with income at or below 30% of the area median income.
• Delete a provision that prohibits an HCD loan from being used to supplant or replace an existing HCD loan.
• Require HCD to determine either of the following as a condition of reducing the interest rate:
  • Whether an HCD loan is eligible to be treated as debt for federal or state LIHTC purposes. (previously the project sponsor would make that determination)
  • The rental housing development is not able to syndicate due to projected negative capital balances.
• Require the change in interest rate to materially increase the feasibility of the proposed project and ensure long-term affordability for the residents.
  

The bill would also make the following changes:

• Authorize HCD to change the current rate on a loan extension request to the applicable federal rate in effect at the time of the project closing, rather than the most recently published rate, when modifying a rate in connection with the award of state or federal LIHTCs.
• Authorize, rather than require, HCD to charge a fee to cover its administrative costs associated with a loan modification request.
• Authorize each extension of an existing loan, subordination of an existing loan, or investment of tax credit equity under MHP to be made in connection with the combining of multiple sites or collateral as if the existing loan were a new loan. (scattered-site re-syndication).

Related Legislation:

AB 523 (Ammiano), Chap. 445/2013, authorized HCD to reduce or eliminate the interest rate on loans for affordable housing developments that meet specified criteria. The bill also authorized HCD to change the interest rate and forgive accrued interest on specified loans if it receives a loan extension request associated with the award of low-income housing tax credits.

SB 77 (Leno), which died in Senate Rules Committee in 2012, was identical to the introduced version of AB 523. SB 77 was originally a budget trailer bill, but was amended in the Assembly to delete the budget-related contents and add the housing provisions. That bill was never heard in a policy committee.

Staff Comments:

This bill is intended to expand the availability of affordable rental housing by allowing a reduced interest rate when it makes the difference in terms of a project passing the “true debt” tests in federal law, to maximize the amount of low-income housing tax credits that may be claimed.

HCD assumes that most requests for loan modifications would occur during initial project development, and attributes most of its administrative costs to requests for scattered-site re-syndications of MHP loans. The department estimates there will be 17 such requests annually. HCD’s ongoing monitoring activities related to a particular loan are paid for out of the residual simple interest that is collected, which is the equivalent of 0.42% interest rate. Staff notes that any reduction of interest below that amount would have to be paid from increased collection of residual interest on other loans, where it is authorized.

This bill would create future cost pressures to increase funding for affordable housing loan programs to the extent that reduced interest payments from interest reductions significantly reduces the amount of program funding available for future loans. Reductions in interest payments that would otherwise be used to capitalize new loans inhibit the ability of HCD to maintain programs at current levels.

-- END --

SENATE COMMITTEE ON TRANSPORTATION AND HOUSING

Senator Jim Beall, Chair

2017 - 2018 Regular

Bill No: AB 2562 Hearing Date: 6/26/2018

SUBJECT: Department of Housing and Community Development loans

DIGEST: This bill authorizes the state Department of Housing and Community Development (HCD) to adjust interest rates on loans issued to low-income rental housing projects and to provide flexibility on refinancing certain project loans.

ANALYSIS:

Existing law:

1. Creates the state low income housing tax credit (LIHTC) program within the Tax Credit Allocation Committee (TCAC) in the State Treasurer’s Office. TCAC administers state LIHTCs to augment federal LIHTCs.
2. Authorizes HCD to reduce the interest rate on any loan it issues to a rental housing development to as low as 0.42% per year, or a rate determined by HCD that is sufficient to cover the costs of project monitoring, whichever is greater, if the development meets all of the following requirements:
   1. The development has no other debt with regularly scheduled or amortizing debt service payments. HCD may impose a default interest rate of 3% should amortizing debt be placed on the project.
   2. The development will utilize LIHTCs.
   3. The sponsor determines that the loan issued by HCD is not eligible to be treated as debt for federal or state LIHTC purposes without a reduction in the interest rate of the loan. The determination must be acceptable to HCD, who may contract with a third-party tax professional for verification, the cost of which shall be borne by the sponsor.
   4. The development has no debt in a senior lien position to HCD’s debt.
   5. The development has 35% or more of the total units in the project serving households with income not exceeding 30% of area median income.
   6. The new HCD loan shall not be used to supplant or replace an existing HCD loan.
3. Authorizes HCD to change the current interest rate for any loan for which it receives a loan extension request associated with an award of federal or state low-income housing tax credits made on or after January 1, 2014, to the applicable federal rate most recently published by the Internal Revenue Service.
4. Requires HCD to charge a fee to cover administrative costs.
5. Authorizes a sponsor to apply for loans for rental or transitional housing developments under the Multifamily Housing Program (MHP).
6. Authorizes HCD to approve an extension of an existing MHP loan, the subordination of an existing loan to new debt, or an investment of tax credit equity under specified circumstances. Requires all MHP loan payments to be deferred for the full term of the loan, except for residual receipts payments, which shall be structured to avoid reducing the amount of payments on local public agency loans as specified.
7. Authorizes HCD to charge a transaction fee to cover its restructuring costs, though it may waive the fee if it determines that a particular development does not have the ability to make these payments.
8. Authorizes a sponsor to apply for MHP loans for loans for one or more rental or transitional housing developments, as specified.

This bill:

1. Revises the conditions a rental housing development must meet in order for HCD to reduce the interest rate on its loan, as follows:
   1. Eliminates the requirement that the development have no other debt with regularly scheduled or amortizing debt service payments.
   2. Provides that HCD (rather than the sponsor) must determine if the loan is eligible to be treated as debt for federal or state LIHTC purposes without a reduction in the interest rate, or if the development is not able to syndicate due to projected negative capital account balances. (A syndicated loan is one in which two or more lenders jointly provide loans for one or more borrowers on the same loan terms and the same loan agreement.) Authorizes HCD to require a third-party tax professional to verify the determination, the cost of which shall be borne by the sponsor.
   3. Eliminates the requirement that the development have no debt in a senior lien position to HCD’s debt.
   4. Eliminates the requirement that the development have 35% or more of the total units in the project serving households with income at or below 30% AMI.
   5. Adds a requirement that the change in the interest rate will materially increase the feasibility of the proposed project and will ensure long-term affordability for residents.
2. Modifies the authority for HCD to change the current interest rate pursuant to a loan extension request associated with an award of federal or state LIHTCs made on or after January 1, 2014, by specifying that HCD can use the applicable federal rate in effect at the time of the project closing rather than the most recent rate published by the IRS.
3. Authorizes (rather than requires) HCD to charge a fee to cover administrative costs.
4. Provides that this bill shall not affect any interest rate reduction authorized by HCD prior to this bill being enacted.
5. Authorizes each extension of an existing loan, subordination of an existing loan, or investment of tax credit equity under MHP to be made in connection with the combining of multiple sites or collateral as if the existing loan were a new loan.

COMMENTS

1. Purpose. The author states that federal LIHTCs are the backbone of affordable housing finance in California. This bill grants HCD broad authority to adjust interest rates on MHP loans that utilize LIHTCs in order to make affordable housing projects feasible. The author states that local public agencies have been adjusting their interest rates for years to make affordable projects feasible; this bill will provide flexibility at the state level as well. This flexibility can result in more equity leveraged from tax credit investors to pay for affordable housing.
2. LIHTC programs. The LIHTC is an indirect federal subsidy developed in 1986 to incentivize the private development of affordable rental housing for low-income households. The federal LIHTC program enables low-income housing sponsors and developers to raise project equity through the allocation of tax benefits to investors. TCAC administers the 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. In 1987, the Legislature authorized a state LIHTC program to augment the federal program. State tax credits can only be awarded to projects that have also received, or are concurrently receiving, an allocation of the federal LIHTCs.
3. MHP and LIHTC. HCD’s loans for affordable rental housing are “soft” loans, meaning that most principal and interest payments are deferred to the end of the loan term rather than being due on a monthly basis. MHP provides deferred payment loans to developers for the construction of affordable housing for low- and very low-income individuals; lowering the developer’s debt service expenditures enables the developer to offer lower rents. For these loans to be considered a loan rather than a grant for LIHTC purposes, a project sponsor must be able to demonstrate how it could plausibly repay the loan. Because MHP loans carried a 3% deferred interest rate, it sometimes created conflicts for projects that received an MHP loan, reducing the amount of federal LIHTCs for which the project could qualify.

In addition, to receive the benefits of the federal LIHTC, owners of qualifying rental housing must maintain compliance with low-income occupancy requirements for a minimum of 15 years. Once the 15-year compliance period is complete, an investor typically no longer has an economic interest in the investment and wants to dispose of it. In some cases, this left the developer liable for a large amount of “exit taxes,” potentially putting the development at risk.

To address these issues, AB 523 (Ammiano, 2014) authorized HCD to, in limited circumstances, reduce the interest rate on a project that receives an MHP loan and is also awarded an LIHTC. To qualify, a sponsor has to demonstrate to HCD that without the reduction in 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 payments. This bill provides additional flexibility in the circumstances under which HCD may adjust the interest rate on an MHP loan.

1. Combining project loans. The author states that although the MHP regulations allow new MHP-funded projects to be “scattered site” (e.g., affordable units located on different sites), HCD does not feel it has legal authority to back this up. As MHP loans hit their post-year 15 phase and sponsors want to refinance in order to rehabilitate and recapitalize the projects, there is an increasing need to combine smaller properties to achieve economies of scale. This bill provides explicit authority to combine old MHP deals with other projects into a scattered site during a refinancing.
2. Federal tax reform. The 2017 federal tax reform bill, the Tax Cuts and Jobs Act, lowered the corporate tax rate from 35% to 21%. As a result, the value of the LIHTC, which provides a way for corporations to offset some of their federal tax liability, has declined. Though the 2018 federal omnibus spending bill increased LIHTC allocations by 12.5%, experts estimate that the net effect of the two bills will result in a loss of about 204,000 affordable rental homes nationwide over the next decade. In California specifically, the 12.5% increase is worth about $125 million annually over the four-year term of the increase, but the corporate rate change will cause a loss of $500 million per year in LIHTC value on a permanent basis. The modifications in this bill could prevent existing affordable rental housing developments that utilize LIHTCs from losing their affordability and make it easier for future projects awarded LIHTCs to maintain affordability.

Related Legislation:

AB 523 (Ammiano, Chapter 445, Statutes of 2014) — allowed HCD to reduce the interest rate on any loan it has issued to a rental housing development under specified conditions.

Assembly Votes:

Floor: 54-24

Approps: 12-4

H&CD: 6-1

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

POSITIONS: (Communicated to the committee before noon on Wednesday,

June 20, 2018.)

SUPPORT:

City of San Jose

Corporation for Supportive Housing

LeadingAge California

Non-Profit Housing Association of Northern California

OPPOSITION:

None received.

-- END --

ASSEMBLY THIRD READING

ATR Bill Id:AB 2562

Author:(Mullin)

As Amended Ver:April 26, 2018

Majority vote

SUMMARY: Authorizes the Department of Housing and Community Development (HCD) to change interest rates on loans issued to low-income rental housing projects. Specifically, this bill:

1. Authorizes HCD to reduce the interest rate on any loan issued to a rental housing development to a rate determined by HCD that is sufficient to cover the costs of project monitoring.
2. Modifies the requirements for HCD to reduce the interest rate on a loan to such a development by:
   1. Repealing the requirement that the development have no other debt with regularly scheduled or amortizing debt service payments;
   2. Requiring HCD, rather than the sponsor, to determine that the HCD loan is not eligible to be treated as debt for federal or state low-income housing tax credit (LIHTC) purposes without a reduction in the interest rate of the loan;
   3. Repealing the requirement that the development have no debt in a senior lien position to HCD's debt;
   4. Repealing the requirement that the development have 35% or more of the total units in the project serving households with income not exceeding 30% of area median income; and
   5. Requiring the change in the interest rate to increase the feasibility of the proposed project and to further the goals and purpose of HCD and the appropriate loan program.
3. Authorizes HCD to change the current interest rate for any HCD loan for which it receives a loan extension request associated with an award of federal or state LIHTC on or after January 1, 2014, to the applicable federal rate (AFR) published by the United States Internal Revenue Service (IRS) and in effect at the time of closing.
4. Specifies that loans that have already received an interest rate reduction from HCD shall not be altered.
5. Makes other minor technical changes.

FISCAL EFFECT: According to the Assembly Committee on Appropriations: Unknown, but significant costs to HCD to review and process loan modifications in an expedited manner. For example, if 20% of HCD's loan portfolio requested a modification, estimated annual costs are $1.7 million (GF) in the first year and $1.5 million ongoing for nine positions, including two attorneys, necessary to perform the work.

COMMENTS:

Background: 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 ("soft" loans) to developers for the construction of affordable housing to low and very low income residents. All loans are for 45 years at 3% simple interest and payments of principal and the accumulated interest are due at the end of the loan period. 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.

For such soft loans to be considered a loan and not a grant for LIHTC purposes, however, a project sponsor must be able to demonstrate some plausible set of circumstances under which it could repay the loan. Because MHP loans carry a 3% deferred interest rate, this can create a conflict for projects that receive an MHP loan, reducing the amount of federal tax credits for which such a project can qualify. In some cases, the developer would be liable for a large amount of "exit taxes" once the tax credit investor leaves the partnership after year 15, which could put the affordable housing at risk.

In an attempt to address this problem, AB 523 (Ammiano), Chapter 445, Statutes of 2014, gave HCD discretion in limited circumstances to reduce the interest rate on a project that receives an MHP loan and is also awarded a LIHTC. To qualify, a sponsor has 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. That bill provided a minimum floor of 0.42% interest per year.

This bill removes the 0.42% minimum interest rate on loans and instead allows HCD to set any interest rate sufficient to cover project monitoring costs. This bill also loosens requirements on development eligibility in order to allow more low-income rental housing projects receiving HCD loans, such as projects in the Affordable Housing and Sustainable Communities Program or the Veterans Housing and Homelessness Prevention Program, to qualify for this interest rate modification. Additionally, this bill permits HCD to increase interest rates on any extended HCD loans to the AFR, which may be needed to preserve project feasibility in some instances where loans are being extended for more than five years or otherwise modified.

Federal tax reform: The 2017 federal tax reform bill, the Tax Cuts and Jobs Act, lowered the corporate tax rate from 35% to 21%. As a result, the value of the LIHTC, which provides a way for corporations to offset some of their federal tax liability, has declined. Though the 2018 federal omnibus spending bill increased LIHTC allocations by 12.5%, experts estimate that the net effect of the two bills will result in a loss of about 204,000 affordable rental homes nationwide over the next decade.^[1] In California specifically, the 12.5% increase is worth about $125 million annually over the four-year term of the increase, but the corporate rate change will cause a loss of $500 million per year in LIHTC value on a permanent basis.^[2] The modifications in this bill could prevent existing affordable rental housing developments that utilize LIHTC from losing their affordability, and make it easier for future projects awarded LIHTC to maintain affordability.

According to the author: This bill will grant HCD authority to adjust (increase or decrease) the interest rate (if requested by the project sponsor) on any loan from any program for projects that will also be using federal LIHTC to as low as 0.42% to as high as the AFR in place at the time of closing. Local public agencies have been assisting affordable housing development by being flexible in the terms of their affordable housing loans. This bill would enable HCD to provide the same kind of flexibility as local public agencies have. This flexibility will generally result in more equity leveraged from tax credit investors to pay for affordable housing.

Analysis Prepared by: Lisa Engel / H. & C.D. / (916) 319-2085 FN: 0003086

1. Michael Novogradac and Peter Lawrence, "How Many Jobs, Affordable Rental Homes Each State Would Gain Under FY 2018 Omnibus?," Novogradac & Company, Notes from Novogradac (blog), April 4, 2018. ↑

2. Matt Schwartz, "Spending Bill Increases LIHTC and Affordable Housing Funding for FY2018," California Housing Partnership Corporation, March 22, 2018. ↑

Date of Hearing: May 16, 2018

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

ABPCA Bill Id:AB 2562

Author:(Mullin) – As Amended Ver:April 26, 2018

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill authorizes the Department of Housing and Community Development (HCD) to change interest rates on loans issued to low-income rental housing projects. Specifically, this bill:

1. Authorizes HCD to reduce the interest rate on any loan issued to a rental housing development to a rate determined by HCD that is sufficient to cover the costs of project monitoring.
2. Modifies the requirements for HCD to reduce the interest rate on a loan to such a development by:
3. Repealing the requirements that the development have no other debt with regularly scheduled or amortizing debt service payments and have no debt in a senior lien position to HCD’s debt.
4. Requiring HCD, rather than the sponsor, to determine t the HCD loan is not eligible to be treated as debt for federal or state low-income housing tax credit (LIHTC) purposes without a reduction in the interest rate of the loan.
5. Repealing the requirement that the development have 35% or more of the total units in the project serving households with income not exceeding 30% of area median income and instead requiring the change in the interest rate to increase the feasibility of the proposed project and to further the goals and purpose of HCD and the appropriate loan program.
6. Authorizes HCD to change to the applicable federal rate (AFR) the current interest rate for any HCD loan for which it receives a loan extension request associated with an award of federal or state LIHTC on or after January 1, 2014. (The AFR is the applicable federal rate published by the United States Internal Revenue Service (IRS) and in effect at the time of closing.)

FISCAL EFFECT:

Unknown, but significant costs to HCD to review and process loan modifications in an expedited manner. For example, if 20% of HCD’s loan portfolio requested a modification, estimated annual costs are $1.7 million (GF) in the first year and $1.5 million ongoing for nine positions, including two attorneys, necessary to perform the work.

COMMENTS:

1. Purpose. This bill seeks to improve the feasibility of affordable housing projects by granting HCD the authority to adjust (increase or decrease) the interest rate, if requested by the project sponsor, on any loan from any program for projects that will use the federal LIHTC. According to the author, “local public agencies have been assisting affordable housing development by being flexible in the terms of their affordable housing loans. AB 2562 would enable HCD to provide the same kind of flexibility as local public agencies have.”
2. Background. 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 such financing are the Multifamily Housing Program (MHP) and the 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.

In order to make multiple sources of financing work together within the federal tax framework, existing law gives HCD discretion in limited circumstances to reduce the interest rate to as low as 0.42% interest per year on a project that receives an MHP loan and is also awarded an LIHTC. To qualify, a sponsor has to prove to the satisfaction of HCD that a) without the reduction in the interest rate on the MHP loan, the amount of tax credit would be reduced, and b) there are no other loans on the development that require ongoing debt payments.

This bill removes the 0.42% minimum interest rate on loans and instead allows HCD to set any interest rate sufficient to cover project monitoring costs. This bill also loosens requirements on development eligibility to allow more low-income rental housing projects receiving HCD loans, such as projects in the Affordable Housing and Sustainable Communities Program or the Veterans Housing and Homelessness Prevention Program, to qualify for this interest rate modification. Additionally, this bill permits HCD to increase interest rates to the AFR on any extended HCD loans, which may be needed to preserve project feasibility in some instances where loans are being extended for more than five years or otherwise modified.

1. Prior Legislation.

AB 523 (Ammiano), Chapter 445, Statutes of 2014, gave HCD discretion in limited circumstances to reduce the interest rate on a project that receives a MHP loan and an LIHTC.

SB 77 (Leno), of the 2011-12 Legislative Session, would have given HCD discretion in limited circumstances to reduce the interest rate to as low as 0% on a project that receives an MHP loan and an LIHTC. This bill died in the Assembly Rules Committee.

Analysis Prepared by: Jennifer Swenson / APPR. / (916) 319-2081

Date of Hearing: April 25, 2018

ASSEMBLY COMMITTEE ON HOUSING AND COMMUNITY DEVELOPMENT

David Chiu, Chair

ABPCA Bill Id:AB 2562 (

Author:Mullin) – As Amended Ver:March 14, 2018

SUBJECT: Department of Housing and Community Development loans

SUMMARY: Authorizes the Department of Housing and Community Development (HCD) to change interest rates on loans issued to low-income rental housing projects. Specifically, this bill:

1. Authorizes HCD to reduce the interest rate on any loan issued to a rental housing development to a rate determined by HCD that is sufficient to cover the costs of project monitoring.
2. Modifies the requirements for HCD to reduce the interest rate on a loan to such a development by:
3. Repealing the requirement that the development have no other debt with regularly scheduled or amortizing debt service payments;
4. Requiring HCD, rather than the sponsor, to determine that the HCD loan is not eligible to be treated as debt for federal or state low-income housing tax credit (LIHTC) purposes without a reduction in the interest rate of the loan;
5. Repealing the requirement that the development have no debt in a senior lien position to HCD’s debt;
6. Repealing the requirement that the development have 35% or more of the total units in the project serving households with income not exceeding 30% of area median income; and
7. Requiring the change in the interest rate to increase the feasibility of the proposed project and to further the goals and purpose of HCD and the appropriate loan program.
8. Authorizes HCD to change the current interest rate for any HCD loan for which it receives a loan extension request associated with an award of federal or state LIHTC on or after January 1, 2014, to the applicable federal rate (AFR) published by the United States Internal Revenue Service (IRS) and in effect at the time of closing.
9. Specifies that loans that have already received an interest rate reduction from HCD shall not be altered.
10. Makes other minor technical changes.

EXISTING LAW:

1. Establishes the Multifamily Housing Program (MHP) to provide deferred payment loans for the acquisition, construction, or rehabilitation of housing affordable to low- and very low- income families and individuals.
2. Requires MHP loans to be for a term of not less than 55 years and at 3% simple interest with payments due at the end of the term of the loan.
3. Authorizes HCD to reduce the interest rate on any loan issued by the department to a rental housing development to as low as 0.42% per year, or a rate determined by HCD that is sufficient to cover the costs of project monitoring, whichever is greater, if the development meets the following requirements:
   1. The development has no other debt with regularly scheduled or amortizing debt service payments.
   2. The development will utilize LIHTCs.
   3. The sponsor determines that the loan issued by HCD is not eligible to be treated as debt for federal or state LIHTC purposes without a reduction in the interest rate of the loan, and HCD approves the determination.
   4. The development has no debt in a senior lien position to HCD’s debt.
   5. The development has 35% or more of the total units in the project serving households with income not exceeding 30% of area median income (AMI).
   6. The new HCD loan will not be used to supplant or replace an existing HCD loan.
4. Authorizes HCD to change the current interest rate for any loan for which it receives a loan extension request associated with an award of federal or state LIHTCs made on or after January 1, 2014, to the AFR most recently published by the IRS. Requires the additional tax credit equity generated by the interest rate change to be used for rehabilitation of the development.
5. Requires HCD to charge a fee in an amount sufficient to cover administrative costs associated with a loan modification requested by a borrower.

FISCAL EFFECT: Unknown.

COMMENTS:

Background: 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 (“soft” 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. 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.

For such soft loans to be considered a loan and not a grant for LIHTC purposes, however, a project sponsor must be able to demonstrate some plausible set of circumstances under which it could repay the loan. Because MHP loans carry a 3% deferred interest rate, this can create a conflict for projects that receive an MHP loan, reducing the amount of federal tax credits for which such a project can qualify. In some cases, the developer would be liable for a large amount of “exit taxes” once the tax credit investor leaves the partnership after year fifteen, which could put the affordable housing at risk.

In an attempt to address this problem, AB 523 (Ammiano), Chapter 445, Statutes of 2014 gave HCD discretion in limited circumstances to reduce the interest rate on a project that receives an MHP loan and is also awarded a LIHTC. To qualify, a sponsor has 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. That bill provided a minimum floor of 0.42% interest per year.

This bill removes the 0.42% minimum interest rate on loans and instead allows HCD to set any interest rate sufficient to cover project monitoring costs. This bill also loosens requirements on development eligibility in order to allow more low-income rental housing projects receiving HCD loans, such as projects in the Affordable Housing and Sustainable Communities Program or the Veterans Housing and Homelessness Prevention Program, to qualify for this interest rate modification. Additionally, this bill permits HCD to increase interest rates on any extended HCD loans to the AFR, which may be needed to preserve project feasibility in some instances where loans are being extended for more than five years or otherwise modified.

Federal tax reform: The 2017 federal tax reform bill, the Tax Cuts and Jobs Act, lowered the corporate tax rate from 35% to 21%. As a result, the value of the LIHTC, which provides a way for corporations to offset some of their federal tax liability, has declined. Though the 2018 federal omnibus spending bill increased LIHTC allocations by 12.5%, experts estimate that the net effect of the two bills will result in a loss of about 204,000 affordable rental homes nationwide over the next decade.^[1] In California specifically, the 12.5% increase is worth about $125 million annually over the four-year term of the increase, but the corporate rate change will cause a loss of $500 million per year in LIHTC value on a permanent basis.^[2] The modifications in this bill could prevent existing affordable rental housing developments that utilize LIHTC from losing their affordability, and make it easier for future projects awarded LIHTC to maintain affordability.

According to the author: This bill will grant HCD authority to adjust (increase or decrease) the interest rate (if requested by the project sponsor) on any loan from any program for projects that will also be using federal LIHTC to as low as 0.42% to as high as the AFR in place at the time of closing. Local public agencies have been assisting affordable housing development by being flexible in the terms of their affordable housing loans. AB 2562 would enable HCD to provide the same kind of flexibility as local public agencies have. This flexibility will generally result in more equity leveraged from tax credit investors to pay for affordable housing.

Committee amendment:

To better reflect the author’s intent to give HCD discretion in implementing this section, the below amendment is proposed:

1. On page 3, in line 17, strike out “shall” and insert, "may"

Related legislation:

AB 523 (Ammiano), Chapter 445, Statutes of 2014: Gave HCD discretion in limited circumstances to reduce the interest rate on a project that receives an MHP loan and is also awarded a LIHTC.

SB 77 (Leno), 2012: Would have given HCD discretion in limited circumstances to reduce the interest rate to as low as 0% on a project that receives an MHP loan and is also awarded a LIHTC. This bill died in the Assembly Rules Committee.

REGISTERED SUPPORT / OPPOSITION:

Support

City of San Jose

Corporation for Supportive Housing

LeadingAge California

Non-Profit Housing Association of Northern California

Opposition

None on file

Analysis Prepared by: Nicole Restmeyer / H. & C.D. / (916) 319-2085

1. Michael Novogradac and Peter Lawrence, “How Many Jobs, Affordable Rental Homes Each State Would Gain Under FY 2018 Omnibus?,” Novogradac & Company, Notes from Novogradac (blog), April 4, 2018. ↑

2. Matt Schwartz, “Spending Bill Increases LIHTC and Affordable Housing Funding for FY2018,” California Housing Partnership Corporation, March 22, 2018. ↑