California Governor Signs Two Housing Tax Credit Bills

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California Gov. Arnold Schwarzenegger (R) in late September signed into law two bills revising the state’s low-income housing and farmworker housing tax credit programs.

One measure (S.B. 585) will permit the “bifurcation” of the California state low-income housing tax credit from the federal low-income housing tax credit, for state credits allocated during 2009-2015. This will permit the state and federal housing credits to be allocated and sold for the first time to separate investors. Now, both credits must be claimed by the same investor(s).

The law provides for the state housing credit to be allocated among the partners in a partnership according to the terms of the partnership agreement. State credits may be allocated among partners differently from the federal housing credit, and allocated differently from the partner’s ownership share and regardless of whether the allocation has “substantial economic effect” – a tax law doctrine. If a state credit allocation lacks substantial economic effect, the law bars the state credit investor from taking losses or deductions stemming from the sale or disposition of the investor’s partnership interest until after the 10-year federal tax credit period.

In California, the federal and state housing credits are allocated by the California Tax Credit Allocation Committee (CTCAC) in competitive funding rounds. Projects are awarded either the federal credit alone or both the state and federal credits. The California credit, established in 1987, is claimed over four years, and expressed as the full four-year dollar amount rather than an annual amount as with the federal credit. The annual state credit ceiling for 2007 was about $80 million. The California credit can be used to offset state corporate or individual income tax liability, and is generally limited to projects in federally designated high-cost areas.

Syndicator Ronne Thielen, Centerline Capital Group, Irvine, CA, and Jeanne Peterson, a principal in the Sacramento, CA, office of Reznick Group, an accounting and consulting firm, both welcomed the new law. Thielen said it will provide syndicators with more flexibility to find investors for tax credit deals in California with both federal and state housing credits, once the housing credit market rebounds, since syndicators will no longer have to find companies that have both federal and California tax liability. California’s housing credit can be used against state taxes on personal, corporate, or insurance company income.

Peterson, who pushed for a similar bifurcation bill ultimately vetoed by then-Gov. Gray Davis (D) eight years ago, portrayed the new law as a positive change, particularly when paired with a California court decision that held that the award of the state’s housing credit to a project doesn’t trigger payment of state prevailing wages – a court decision that ended a period of uncertainty. These two actions, Peterson said, “will both be good things for the program, and hopefully will bring more equity into deals.”

A California legislative analysis of S.B. 585 notes at least 12 other states have state housing credits that can be bifurcated from the federal housing credit.

Farmworker Credit

Also signed was a measure (S.B. 1247) that eliminates, as of 1/1/09, the separate California farmworker housing tax credit. In its place, the law establishes a separate annual set-aside of state housing low-income housing tax credits for farmworker housing projects. These set-aside credits may be sought without a reservation of federal “9%” or “4%” housing credits.

CTCAC is authorized to allocate up to $500,000 in state credits annually for these projects, on top of its regular annual state housing credit supply.

(http://www.treasurer.ca.gov/ctcac/2008/legislation.pdf)