Expanding & Improving the CA Low Income Housing Tax Credit. NPH Annual Conference October 5, 2015

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Howard Lamb
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1 Expanding & Improving the CA Low Income Housing Tax Credit NPH Annual Conference October 5, 2015

2 Workshop Panelists 1. Mark Stivers, Executive Director, California Tax Credit Allocation Committee 2. Vihar Sheth, SVP for Affordable Housing Tax Credit Investments, US Bank 3. Kevin Knudtson, Community Economics Moderator: Matt Schwartz, President & CEO, California Housing Partnership

3 Workshop Agenda 1. Introduc,ons & Workshop Goals 2. Overview of the California LIHTC 3. SB 377 a. What would SB 377 do? b. Why is SB 377 impact and implementa,on? 4. AB 35 a. What would AB 35 do? b. How will it be implemented? 5. NEXT STEPS

4 Senate Bill 377 (Beall) Co- Sponsored By: California Treasurer California Housing Partnership California Housing Partnership 4

5 CA Low Income Housing Tax Credit Basics 1. State LIHTC created in 1987 as a complement to the federal Low Income Housing Tax Credit 2. Designed to equalize 130% basis boost for developments not eligible for federal 9% Tax Credit awards because not in a DDA or QCT 3. Base statutory amount $70 million/year 4. Indexed for infla,on - $94 million in Amount available adjusted annually by TCAC based on whether prior year alloca,ons had balance remaining or over alloca,on. California Housing Partnership 5

6 What SB 377 Would Do: The Simple Version Allows the CA Credit to be cer,ficated and sold separately from federal Credit so that nonprofit sponsors can sell it to investors without having to pay federal taxes on the proceeds Effec,vely increases the net value of each $1 of state Credit from current $0.65 to $0.85- $0.90 Other states have cer,ficated their credits so that nonprofit organiza,ons can sell them without paying federal taxes due to exemp,on California Housing Partnership 6

7 Current CA Credit Use Mechanics 1. Investor receiving CA Credits must have ownership interest to claim credits and losses 2. CA Credit allocated by TCAC to property owner, typically limited partnership or limited liability company 3. Credits sold to investor via owner s sale of 99.99% interest in the partnership (or LLC) 4. State Housing Credits can be sold separately from federal Credits (bifurcated) California Housing Partnership 7

8 Current CA Credit Federal Tax Hit 1. Allocated state Credits reduce an investor s state tax liability 2. Because state taxes are deduc,ble against federal taxable income, allocated state Credits reduce an investor s federal tax deduc,ons 3. Net impact is to cap economic value of state tax credit at approximately $0.65, assuming 35% federal income tax rate California Housing Partnership 8

9 SB 377 Solution: Certificating the Credit 1. TCAC issues cer,ficate (via FTB) giving right to claim CA Credits in connec,on with development of qualified lowincome housing 2. Cer,ficated CA credits sold to investor separately with no requirement for buyer to have a stake in developer/owner en,ty 3. Because IRS considers a Cer,ficated credit to be property (not redeemable as cash), it does NOT reduce investor s ability to deduct state tax liability from federal taxable income California Housing Partnership 9

10 Sale by NonProfit sponsor is Key 1. Selling cer,ficated credits triggers capital gains tax because ini,al recipient (sponsor developer) has no tax tax basis in cer,ficated credits that it receives 2. Solu,on is allowing transfer to a nonprofit en,ty that does not have to pay federal taxes on sale or gain 3. Investor can then pay up to face value of credit without paying significant capital gains (higher price, lower CG) 4. Given mul,year present value calcula,on, will likely increase price into the upper $0.80s and possibly $0.90s 5. The nonprofit then loans or contributes sale proceeds to the partnership for the benefit of project California Housing Partnership 10

11 SB 377: Experience in other States 12 states have cer,ficated various state tax credits MA is the only one to have cer,fied a state LIHTC What has been the experience using this in MA? Will pricing be the same in CA or bemer? California Housing Partnership 11

12 Assembly Bill 35 (Chiu/Atkins) Co- Sponsored By: California Housing Partnership NPH California Housing Consor,um amended on September 10 th to address Governor s office concerns California Housing Partnership 12

13 Federal 4% LIHTCs An Underused Resource 9% federal Low Income Housing Tax Credit is an oversubscribed capped per capita resource (requests 2 X amount available annually) 4% federal Housing Credit, while much lower in value, is a virtually uncapped federal resource Ability of California developers to use the lower value 4% Credits is highly dependent on availability of state and local funding to fill gap Losses of $1.5 billion/year in state funding and federal $$ have reduced available gap funding California Housing Partnership 13

14 The end of redevelopment, exhaustion of state bonds, and federal budget cuts have reduced CA affordable housing funding to historic lows. 3,000,000,000 2,500,000,000 2,000,000,000 1,500,000,000 1,000,000, ,000,000 * Redevelopment HCD HUD 0 California Housing Partnership 14

15 AB 35: Summary of Key Provisions 1. Expands annual amount of CA Credit by $100 million but only for 4% federal credit deals 2. Increases credit rate on 4% federal deals from 13% to 50%, equalizing for high cost basis boost 3. Increases CA Credit rate to 95% for buildings a. >15 years old b. Average Area Median Income served < 45% c. low appraised value would otherwise make infeasible 4. Acquisi,on basis credit rate on 4% deals would remain at 13% but now be accessible to all 4% deals not just at- risk 5. Sunsets in 2021 unless Legislature votes to renew California Housing Partnership 15

16 AB 35 Implementation Questions 1. Should 15% of exis,ng CA credits ($13 million in 2015) con,nue to be reserved for 4% projects? 2. How much AB 35 credit should be allocated to the 95% rehab credit vs. general 50% credit? 3. What scoring criteria should be used for AB 35? 1. Income targe,ng same as 9%? 2. Other point categories? 3. Geographic appor,onment? 4. Should scoring be different for the 95% credit? 5. Next steps? California Housing Partnership 16

LOW-INCOME HOUSING TAX CREDIT IMPACT IN CALIFORNIA 311,351 homes developed or preserved 351,827 jobs supported for one year $33.53 billion local income generated $13.

8 million affordable rental homes in the U.S. since 1986, leveraging nearly $100 billion in private equity capital.

17 LOW-INCOME HOUSING TAX CREDIT IMPACT IN CALIFORNIA 311,351 homes developed or preserved 351,827 jobs supported for one year $33.53 billion local income generated $13.20 billion tax revenue generated Housing Credit results in California, THE MOST SUCCESSFUL AFFORDABLE HOUSING PRODUCTION TOOL The Housing Credit has financed nearly 2.8 million affordable rental homes in the U.S. since 1986, leveraging nearly $100 billion in private equity capital. Tax-Exempt Multifamily Housing Bonds (Housing Bonds) have been used in more than 40 percent of these homes, and are vital to the Housing Credit s success. Without these tools, it is uneconomic for the private sector to build affordable homes for the families that need them most. JOB CREATOR AND ECONOMIC CATALYST Housing Credit development supports nearly 96,000 jobs nationwide annually, mostly in the small business sector. It also adds roughly $3.5 billion in taxes and other revenues to local economies in the U.S. each year, according to the National Association of Home Builders. UNIQUELY ACCOUNTABLE The Housing Credit is pay-for-performance credits can be claimed only after properties are successfully completed, and can be recaptured for non-compliance. Private sector investors not taxpayers bear the financial risk. THE AFFORDABLE RENTAL HOUSING CRISIS The number of cost-burdened renters is at an all-time high. Roughly 11 million lowincome renter households - more than 1 in 4 renters in the U.S. - spend over half of their monthly income on rent. This leaves too little for other necessary expenses like health care, transportation and nutritious food. 1,749,020 CALIFORNIA HOUSEHOLDS pay more than half of their income on rent Source: 2013 American Community Survey The ACTION Campaign calls on Congress to protect, strengthen and expand the Housing Credit and preserve Housing Bonds.

FEDERAL AND STATE HOUSING TAX CREDIT PROGRAMS

FEDERAL AND STATE HOUSING TAX CREDIT PROGRAMS CALIFORNIA TAX CREDIT ALLOCATION COMMITTEE 915 Capitol Mall, Suite 485 MEMBERS Sacramento, CA 95814 JOHN CHIANG, CHAIRMAN p (916) 654-6340 State Treasurer f (916) 654-6033 BETTY YEE ctcac@treasurer.ca.gov