AB 913 adds Section 50406.4 to the Health and Safety Code to let the Department of Housing and Community Development (HCD) transfer ‘‘excess reserves’’ or ‘‘excess operating income’’ from one rental housing development to another development owned by the same sponsor or affiliate. The bill also authorizes HCD to waive residual receipts or minimum annual loan payments tied to those regulatory agreements.
The department’s authority is discretionary—not mandatory.
This is a targeted financing tool: it lets HCD redeploy surplus cash or reserves inside a sponsor’s portfolio to stabilize developments that otherwise might miss payments or fall into distress. That flexibility can preserve affordable housing operations but also raises questions about creditor rights, reserve adequacy, transparency, and the criteria HCD will use when exercising its discretion.
At a Glance
What It Does
The bill authorizes HCD, at its sole discretion, to transfer excess operating income or excess reserves from one rental housing development to another development with the same sponsor or affiliate and to waive residual receipts or minimum annual loan payments under the applicable regulatory agreements. It defines ‘‘excess operating income’’ and ‘‘excess reserves.’
Who It Affects
Directly affected parties include rental housing sponsors and their affiliated project portfolios subject to HCD regulatory agreements, HCD as the decisionmaker, and third parties tied to project finance—lenders, bond trustees, and investors. Tenants of stressed properties and projects providing the transferred funds are also materially affected.
Why It Matters
This creates a statutory mechanism for intra-portfolio cross-subsidization and ad hoc loan-payment relief without creating new funding. For compliance officers, servicers, and lenders, it alters the enforcement landscape for regulatory agreements and introduces a discretionary administrative tool that can change cash flows and covenant enforcement across multiple projects.
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What This Bill Actually Does
AB 913 gives HCD a narrowly framed but potent power: it may move surplus cash or reserve balances from one rental property to another when both properties are covered by HCD regulatory agreements and are owned by the same sponsor or an affiliate. The bill uses two financial concepts to limit transfers: ‘‘excess operating income’’—income above a defined coverage threshold—and ‘‘excess reserves’’—reserve balances beyond department-required minimums.
HCD may also waive payments that otherwise flow to the department from a donor property, including residual receipts or scheduled minimum annual loan payments.
The statute makes clear this authority is discretionary; HCD may act ‘‘to improve the fiscal integrity of a development financed with departmental resources.’’ It does not prescribe mandatory criteria, procedural steps, notice to other stakeholders, or a mandatory repayment schedule for transferred amounts. The law requires owners to demonstrate sufficient net operating income over a 15-year period to qualify operating income as ‘‘excess,’’ and it ties the excess definition to a 1.15-times annual debt service coverage metric.Practically, AB 913 creates an administrative option to stabilize a troubled development by temporarily redirecting surplus cash from another project in the same ownership group or by forgiving payments owed to HCD.
That option can prevent immediate defaults or service disruptions, but because the bill does not require creditor consent, change reporting, or set transparency standards, exercising the power will intersect with preexisting loan documents, bond covenants, and federal subsidy agreements. The department’s exercise of ‘‘sole discretion’’ will therefore be the critical implementation moment where policy questions about priorities and protections surface.
The Five Things You Need to Know
The bill authorizes HCD to transfer excess reserves or excess operating income only between rental developments that are both subject to HCD regulatory agreements and owned by the same sponsor or an affiliate.
It defines ‘‘excess operating income’’ as annual net operating income exceeding 1.15 times required annual debt service, and requires the owner to demonstrate sufficient net operating income over a 15‑year period.
‘‘Excess reserves’’ are defined as replacement, operating, or transition reserves that exceed the minimum amounts required by the department’s regulatory agreement.
HCD may waive payment of residual receipts or minimum annual loan payments under the specified regulatory agreements as part of exercising this authority.
HCD’s authority is discretionary and the text contains no statutory procedural safeguards, creditor-consent requirement, reporting mandate, or repayment schedule for transfers or waived payments.
Section-by-Section Breakdown
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Authority to transfer excess reserves or excess operating income
This subsection gives HCD explicit power to move surplus funds between two rental housing developments when both are subject to HCD regulatory agreements and share the same sponsor or affiliate. The transfer is limited to ‘‘excess’’ funds as defined elsewhere in the section; it is not a blanket permission to move any cash between projects. For practitioners, this provision will require portfolio-level accounting to show which projects have transferable surpluses and to document chain-of-ownership linking sponsor and affiliate.
Authority to waive residual receipts and minimum loan payments
This clause lets HCD waive amounts that owners would otherwise remit under their regulatory agreements—specifically residual receipts (cash flow distributions to the department) and minimum annual loan payments. The waiver can be used in tandem with transfers or on its own as a liquidity relief measure. Because waivers reduce expected departmental receipts, servicers and fiscal officers will need to assess the downstream impact on program cash flow and compliance monitoring.
Definition and test for excess operating income
The bill sets a numerical test: excess operating income exists when annual net operating income exceeds 1.15 times required annual debt service, but the owner must also demonstrate sufficient net operating income across a 15‑year period. That dual requirement combines a single-year coverage threshold with a long-term ability-to-pay showing. Analysts will need to reconcile year-to-year volatility with a long-run demonstration; the 15‑year lookback/lookforward is likely to drive disputes about permissible assumptions and accounting conventions.
Definition of excess reserves
‘‘Excess reserves’’ are limited to replacement, operating, or transition reserves that are ‘‘no longer required by, or in excess of the minimum amount required by’’ the department’s regulatory agreement. The provision does not instruct how to value reserve accounts, whether projected uses affect excess status, or how frequently HCD will review reserve adequacy—leaving those operational determinations to HCD guidance or later practice.
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Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Portfolio sponsors and owners: They gain flexibility to move surplus cash between affiliated projects, which can be used to stabilize a struggling property without raising new capital or immediately restructuring debt.
- Financially troubled developments and their tenants: Projects facing shortfalls may avoid service cuts, layoffs, or defaults if HCD authorizes transfers or waivers that plug liquidity gaps, preserving operations in the near term.
- Department of Housing and Community Development: HCD acquires an administrative tool to prevent acute fiscal failures in projects it regulates, potentially reducing the need for emergency conservatorships, enforcement proceedings, or expensive loans.
- Public funders and local governments focused on preservation: Where transfers or waivers prevent loss of affordable units, local preservation goals and program outcomes may be supported without new appropriations.
Who Bears the Cost
- Lenders and bondholders: Transfers of reserves or waived payments can reduce the cash available to service secured debt and may conflict with existing loan covenants or trust indentures, increasing credit risk for investors.
- Donor projects and their current tenants: Projects that supply excess reserves or operating income lose financial cushions intended for maintenance, capital repairs, or emergency needs, which can accelerate deterioration or future service shortfalls.
- Taxpayers and program administrators: If transfers or waivers postpone rather than resolve fiscal problems, HCD or the state could face greater future costs to cure defaults or to replace lost capital, particularly where department receivables are reduced without repayment plans.
- Regulatory compliance teams and servicers: Monitoring cross-portfolio transfers and ensuring accurate accounting will increase administrative burdens and require new policies, audits, and possibly contested interpretations of ‘‘sufficient net operating income.’
Key Issues
The Core Tension
The core tension is between giving HCD flexible, portfolio-level tools to keep affordable housing operating now and protecting the contractual priorities, reserve strength, and investor confidence that sustain long-term asset health—an administrative discretion that can save a building today may erode financial safeguards that prevent future failures.
AB 913 creates a trade-off between flexibility to stabilize at-risk properties and the protections that creditors and reserve policies are designed to deliver. The bill sets bright-line terms for what counts as ‘‘excess’’ in two senses, but it leaves crucial operational questions unresolved: how HCD will evaluate a sponsor’s 15‑year income demonstration, whether transfers require trustee or lender consent, and how HCD will calculate and document reserve excess.
Those gaps will determine whether the authority is a surgical tool or a blunt instrument.
Another practical tension is timing and transparency. The statute vests ‘‘sole discretion’’ in HCD but does not require notice to lenders, tenants, or investors, nor does it set a formal appeal, reporting, or repayment regime.
That absence increases the risk of legal conflict with existing financing documents and creates policy risks: donors’ reserves may be drawn down to sustain financially weak projects, reducing long‑term asset health in exchange for short‑term stability. Finally, the definitions (1.15x coverage metric and 15‑year demonstration) invite complexity: determining allowable adjustments to NOI, the treatment of one-time items, and interperiod smoothing will all be contested in practice.
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