California To Allocate $986 Million in Low-Income Housing Tax Credits For Fire Disaster Areas
By: Jason Vargelis, Partner
Last week, the California Tax Credit Allocation Committee (CTCAC) authorized approximately $986 million ($98.6 million annually for ten years) in federal low-income housing tax credits for California wildfire disaster areas. The disaster credits will be awarded to multifamily housing project owners/developers in up to three competitive application rounds. Applications for the first round are due on July 1, 2020. Applications for the remaining two rounds are expected to be due in March 2021 and July 2021 (exact dates to be determined if credits remain after the first round). The disaster credits will be available for projects in the 13 California counties most impacted by the 2017 and 2018 wildfires. Allocation is based on percentage of lost units; however, each impacted county will receive a minimum total of $25 million ($2.5 million annually). The largest total allocation will be Butte County, with approximately $400 million ($40 million annually); and the second largest will be Sonoma County, with approximately $163 million ($16.3 million annually). The maximum award per project is $50 million ($5 million annually). The disaster credit will only be awarded for “(1) new construction projects also including projects that involve the demolition or rehabilitation of existing residential units that increase the unit count by (i) 25 or (ii) 50% of the existing units, whichever is greater, and adaptive re-use of non-residential structures, or (2) reconstruction or rehabilitation of an existing project located … within a FCAA disaster area fire perimeter, as designated by CAL FIRE and available on the CTCAC website, and directly damaged by the fire….” The Further Consolidated Appropriations Act, 2020 (FCAA) is the federal budget legislation that granted the disaster credit to CTCAC.
The disaster credit is part of the larger low-income housing tax credit program and can be used in the same manner as federal tax credits. The program is a well-established and, by most accounts, effective combination of public funds and private capital. Investors (typically banks and insurance companies) provide funds in exchange for tax credits, which reduce investor tax liability on a dollar-for-dollar basis. Federal tax credits are claimed over a ten-year period, but investors pay with installments during a two-to-three year construction/rehabilitation and lease up period. The federal tax credit investment also provides depreciation deductions. Finally, bank investors receive Community Reinvestment Act credit, which regulators consider when reviewing acquisitions and expansion. These and other factors lead to a “price” for each project, which determines what investors pay for the tax credit, and the investor funds available as a source for construction/rehabilitation.
Federal tax credit pricing was over one dollar in 2016 (investors paid more than $1.00 for each $1.00 of tax credit). Then, as a result of the corporate tax rate reduction from 35% to 21% (and the corresponding decrease in the value of a depreciation deduction), pricing dropped to the low to mid-90s (e.g., at 95 cents, investors would pay $0.95 for each $1.00 of tax credit). Pricing varies, but has held during the COVID-19 crisis, so far. Notwithstanding the price, however, an additional $986 million of federal low-income housing tax credits for California wildfire disaster areas is a welcome and significant benefit.
For more information, contact Jason Vargelis at firstname.lastname@example.org or at (707) 526-4200.