State of the Golden State

12 min read

Governor Brown gives affordable housing attention

Multifamily affordable housing developers who work in California have a lot to keep track of right now. Governor Jerry Brown recently acknowledged the state’s housing crisis and laid out solutions to spur development. With 45 million residents and growing, America’s largest state’s four housing agencies are seeing rising demand for their programs and products and reacting with new regulations. For a full accounting of these notable changes, National Housing & Rehabilitation Association brought the leaders of the California Department of Housing and Community Development, Housing Finance Agency, Tax Credit Allocation Committee, and Debt Limit Allocation Committee, as well as legislative advocates, to talk with developers about regulation and program changes and the legislation in play that could bolster development in the state. These conversations took place at NH&RA’s 2016 Spring Developers Forum in May in Marina del Rey, CA.

Governor Brown Looks to Fast-Track Housing Development, Avoid New Subsidies
“It was a huge statement to finally hear the governor admit that there is a housing crisis and that something needs to be done about it,” said Marina Wiant, Policy Director for the California Housing Consortium.

On May 13, Governor Brown announced his “May Revise,” a revision to the budget he released in January that takes 2015 tax receipts into consideration. The Governor was careful to note that receipts were lower than expected and he does not intend to fund housing programs that would require new subsidy. At the same time, he expressed a commitment to ease the housing crisis. Governor Brown proposed to streamline the approval process for housing developments that meet specific criteria, like developments in infill locations and transit-rich areas that include units affordable to low-income residents and avoid major environmental concerns. In order to qualify for the expedited process, the housing development would need to provide units that are affordable to residents making less than the area’s median income. In transit priority areas, developments would need to set-aside 10% of units for low-income residents or 5% for very low-income residents. In all other areas, developers would need to set-aside 20% of units for low-income residents (up to 80% of AMI). In order to be considered a “by right” development, the project would also need to be consistent with local zoning and the area’s local plan and built on a designated housing site.

“For those kinds of projects, I think we can all agree that we just need more of them,” said Ben Metcalf, Executive Director of California Department of Housing and Community Development. “The proposal that these would have ‘by-right’ status, which is to say that if they conform to zone, if they conform to general plan, then let’s just let them get built. Let’s preclude the ability of local governments to impose drawn out, often discretionary processes.”

Metcalf noted that the proposed legislation does not reform the California Environmental Quality Act (CEQA), but it could remove discretionary events that trigger CEQA.  Under CEQA, state and local agencies cannot approve projects that would have a significant environmental impact. Interest groups that are opposed to housing development have filed CEQA complaints as a means of slowing down or stopping housing development in their communities.

Governor Brown’s proposal is a major victory for the development community. The expedited process will be a significant tool for developers in overcoming “Not-in-My-Backyard” (NIMBY) opposition that some communities have toward affordable housing development. By making the process less obstacle-ridden, the proposal would likely attract market-rate developers, in addition to traditional tax credit developers, and achieve the goal of building up housing stock that is affordable to various income levels across the state.

Generally, Governor Brown’s proposals to address the housing crisis are focused on investing existing subsidy dollars and new initiatives in places that align with the state’s overarching priorities. According to Ben Metcalf, Executive Director of California Department of Housing and Community Development, these priorities include driving growth in transit rich areas, leveraging the relationship between housing and healthcare, and supporting homeless veterans. In this effort, Governor Brown endorsed California State Senate pro Tempore, Kevin de Leon’s, No Place Like Home proposal, which includes a $2 billion bond to construct permanent supportive housing for chronically homeless persons with mental illnesses. “It’s not two billion new dollars,” Wiant emphasized. “It’s a very clever way of financing existing dollars and it’s a very good step forward, but it’s also a very niche proposal to help the chronically homeless and mentally ill.”

With his reluctance to encourage new subsidies, Governor Brown did not endorse the California State Assembly’s proposal to invest $1.3 billion into solving the housing crisis. Wiant cautions that Governor Brown’s By-Right proposal is not a panacea. Additional subsidies, like those under consideration by the Assembly, are necessary for a robust and effective response to the housing crisis.“Making more housing ‘by right’ is not going to solve deep targeted issues,” said Wiant.

Wiant predicts that the Governor’s By Right proposal could face opposition from local governments and environmental advocates. She sees this as an opportunity for compromise and suggests that the reversal of the Palmer Decision, which forbids local governments from passing inclusionary zoning ordinances, could be an appropriate policy trade.

Bills Under Consideration Offer Complements and Alternatives to Governor’s Proposal
There are several bills at play in the California State Senate and Assembly that do not require quite as quick of a turnaround as the state budget. If they pass this year, the bills will need to be approved by both legislative bodies by the end of August.

One bill, SB 879, would create a $3 billion general obligation housing bond. Wiant sees this proposal as another potential policy trade for the Governor’s By Right proposal during budget negotiations. Another bill (AB 2817) in the State Assembly would expand the state credit program by $300 million. The bill already passed the

Assembly Housing and Community Development Committee unanimously and now awaits consideration by the Assembly Revenue and Taxation Committee.

Senator Beall also introduced a bill (SB 873) that would reinstate the ability to bifurcate credits. California used to allow this, but the provision sunset last January. The bill would also allow for the certification of state credits, which would allow developers to sell the credits outright instead of sharing ownership of the project with a limited partner. The same bill was passed unanimously by the state legislature last year and vetoed by the Governor, along with a larger package of bills. According to Stivers, the Senate Budget Subcommittee wants to add this year’s iteration of the bill to one of the budget trailer bills. If the bill passes, the provision regarding bifurcation would apply retroactively back to January 1, 2016. The credit certification provision would go into effect on January 1, 2017.

TCAC Priorities Focus on Rising Costs and Demand
Rising development costs are a major concern for California’s housing agencies. While CTCAC and CDLAC’s executive directors did not articulate any explicit new policies to address their concerns, they are exploring the issues through a new working group.

Their more near-term regulations will address the over allocation of state Low-Income Housing Tax Credits, which became an issue for the first time last year. TCAC Executive Director Mark Stivers expects to continue to see the demand for the credits rise as HUD’s Difficult Development Areas (DDAs) take effect on July 1, 2016 and former DDAs expire. In California, projects are eligible for state credits if they do not get the federal basis boost that a project in a DDA receives. In order to address this impending demand, Stivers articulated a few changes TCAC plans to make to the 9% tax credit regulations. Special needs projects would continue to get federal basis boost and qualify for state credits, but moving forward, TCAC wants to require them to maximize the federal basis boost before they apply for state credits. TCAC also plans to create a set-aside of federal credits to allocate to projects that qualify for state credits after they run out of state credits.

TCAC also struggles to keep up with projects that have already received their financing. Stivers estimates that TCAC is about six months behind in processing.

“Over time, we have brought in interns and retirees. I’ve done them myself. We still haven’t cracked the nut in breaking this logjam,” Stivers said.

TCAC Begins Processing Recapitalization Under New Equity Takeout Regulations
Last year, TCAC made a significant change to California’s Low-Income Housing Tax Credit program regulations as it pertains to backend equity takeout during a recapitalization.

“While we all want people to be financially successful and make money from projects so they continue to do them, at some level we had a headline risk,” said Mark Stivers, Executive Director of TCAC. “We were also feeling a little bit of angst over the fact that we were seeing large equity takeouts and then those projects were turning right around and coming in for additional tax credits to pay for rehab.”

Under the revised regulations, TCAC now requires a capital needs assessment at a sale or refinance of a LIHTC property when there are net proceeds being distributed. The short-term work costs identified by the CNA must be put aside into a rehab reserve account and the annual contributions will need to be right-sized for the remainder of the 15 year term.

“Straight sale and refinances have gone very smoothly. We have processed probably 20 to 25 so far with capital needs agreements. The short-term work amounts have been fairly small,” Stivers said. “In the context of a resyndication, it has been a little bit more complicated for us to work through all of the nuances.”

Stivers said that TCAC had originally planned on having a reserve that was basis ineligible, but they decided to allow the short-term work amount that is set aside as part of the resyndication to be used in construction. Developers can take basis on that work amount if one of three conditions are met:

  1. The short-term work amount is covered by seller credit
  2. A reduction in price
  3. A general partner equity contribution

Currently, the short-term work amount includes years one and two, in addition to immediate needs of the property. Stivers said TCAC is considering adding year three to that amount and is open to feedback from the community on that decision.

CDLAC Forecasts Competitive Allocation Rounds for Tax-Exempt Bonds
Last year was the first year since the 2008 economic downturn that CDLAC came close to allocating its full bond authority, according to Executive Director Jeree Glasser-Hedrick. After allocating $1.9 billion in 2014, the agency allocated $4.6 billion last year.

Glasser-Hedrick expects the number of applications to increase when HUD’s new Difficult Development Areas goes into effect July 1, 2016. Applications must have been submitted by June 14 for a project in an expiring DDA. Once CDLAC deems an application complete, developers have 760 days to close the transaction.

“I’m expecting more than 100 applications,” Glasser-Hedrick said. “The question becomes how many of those applications really need resources immediately and how many of those projects, for local approval and entitlement issues, need to be pushed to 2017 and 2018.”

The fact that CDLAC has been carrying forward allocations for several years offers some relief. Glasser-Hedrick said they have a significant amount of carry forward allocations on hand from 2013, 2014, and 2015 and they are working to use them before they expire. The individual issuers, not CDLAC, actually carry forward the bond allocations, which can make allocating them difficult.

“There is a potential for mismatch between who holds the allocation and where projects are,” said Glasser-Hedrick. “Once bonds are carried forward, they’re locked into the issuer. Resources cannot be transferred to a different issuer.”

CalHFA Boosts Offering of Multifamily Lending Programs
“CalHFA is back with a force, in my view, to be a major player in the state’s housing production policies, as well as funders of the same,” said Roope.

When Tia Boatman Patterson first joined CalHFA as Executive Director, she oversaw an internal assessment of all of the agency’s programs because they did not have a particular product for multifamily affordable housing development. Following that assessment, the agency focused on training staff for lending programs. They now offer four multifamily lending programs:

  1. Acquisition Rehab Program
  2. Permanent Program
  3. Permanent Takeout Loan Program
  4. Small Loan Program

Boatman Patterson sees the Permanent Program, which is an FFB HUD Risk Share program, as a product that is “going to go like gangbusters.” It is designed for light rehab projects and allows refinancing with some equity takeout.

Boatman Patterson said they have also seen their Conduit Issuance program, which they built up after CalHFA’s internal assessment, grow significantly in recent years.

CalHFA is also considering ways to support the development of workforce housing for residents who earn between 60% and 100% of area median income. Boatman Patterson said they are looking into products to use in conjunction with a property tax exemption to finance market-rate units that serve residents earning 80% or less of AMI.

“We would like to be able to use our FFB Risk Share product as a tool to help acquire a market-rate development and then write it down to affordability levels. One of the things we are looking at is what gap would that take to make that happen. That is one of the things we are very interested in working with [developers] on and getting feedback from [developers] on how to make that happen.”

HCD Prepares Comprehensive Assessment of Housing Landscape in California
“We will be rolling out in July, for the first time since 2001, I believe, a comprehensive assessment of the state of affairs for California,” said Metcalf. “It will underscore the depth and breadth of the affordability challenge.”

This statewide housing plan will include new research that looks to hold jurisdictions more accountable with regard to production relative to what they are planning, according to Metcalf. When Governor Brown announced his revised budget on May 13, he explicitly endorsed this effort. HCD will release a draft of the report in July and hold a series of workshops to engage stakeholders in the revision process.

Thom joined National Housing & Rehabilitation Association (NH&RA) in 2004 and currently serves as its as Executive Vice-President and Executive Director. NH&RA is a national trade association and peer-network for affordable housing and tax credit developers and related professionals including: investors, lenders, public agencies and professional advisers. Thom directs the association’s day-to-day operations including legislative and regulatory advocacy, committee activities, conferences and events, publications, financial management and strategic planning. Thom also serves as the Executive Director of the Tennessee Developers Council, a state-wide trade association for affordable housing developers and professionals active in Tennessee. In 2013 he spearheaded the launch of NH&RA's Preservation through Energy Efficiency Project, a major educational initiative supported by the John D. and Catherine T. MacArthur Foundation. Thom also serves on the Board of Directors for International Center for Appropriate & Sustainable Technology (iCAST) as well as the Advisory Board for its ResourceSmart program, a turn-key, cost-effective, green rehab provider for multifamily affordable and market-rate housing communities and nonprofit facilities. Thom is a frequent speaker at affordable housing, sustainable development and tax credit industry events and has been published in a variety of industry journals including Tax Credit Advisor, Independent Banker, and the Novogradac Journal of Tax Credit Housing. Thom also serves as the Associate Publisher of Tax Credit Advisor, a monthly magazine for tax credit and affordable housing professionals and is an Executive Vice-President at Dworbell Inc., a boutique association management and communications firm in Washington, DC. Thom was previously employed at a national lobbying firm focusing on financial services and technology issues. Prior to moving to Washington, Thom worked in media relations in the New York State Assembly and as a research assistant for New Hampshire Governor Jeanne Shaheen. Thom graduated Magna Cum Laude from Tufts University with a double major in Political Science and History.