BILL ANALYSIS
SB 1284
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Date of Hearing: July 16, 2008
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Mark Leno, Chair
SB 1284 (Lowenthal) - As Amended: July 1, 2008
Policy Committee: Revenue and
Taxation Vote: 9-0
Urgency: No State Mandated Local Program:
Yes Reimbursable: No
SUMMARY
This bill restores a full property tax exemption and cancels
outstanding property taxes for an affordable project that was
originally created as part of the "Century Freeway Housing"
program. Specifically, this bill:
1)Enables a low income housing development to qualify for the
property tax "welfare exemption" if it was previously
purchased and owned by the Department of Transportation
pursuant to a consent decree requiring housing mitigation
measures related to freeway construction.
2)Provides that any outstanding tax levied on low income housing
between January 1, 2002 and January 1, 2009 be canceled if the
property (a) was previously purchased and owned by the
Department of Transportation pursuant to a consent decree
related to the construction of a freeway and (b) the owner is
a non-profit organization and had been operating the property
continuously for low-income housing.
FISCAL EFFECT
Board of Equalization (BOE) staff estimate that the bill will
result in (a) the cancellation of past due property taxes
totaling $932,000, and (b) ongoing property tax reductions of
$167,000 annually. Under Proposition 98, the roughly 40% share
of local property tax reductions allocated to schools would be
backfilled by the General Fund, resulting in an ongoing increase
in GF costs of around $70,000 annually.
Ongoing losses only occur, however, if it is assumed that,
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without the bill, the existing owner will continue to operate
the affordable housing project without refinancing its privately
secured loan with public financing sources (which, as discussed
below, would restore the exemption.)
COMMENTS
1)Background - welfare exemption for affordable housing
projects . Under existing law, property owned and operated by a
nonprofit corporation or partnership and used exclusively for
low income rental housing is eligible for a "welfare
exemption" from California's property tax, provided that it
meets one of several criteria. These are (a) the acquisition
of the property was publicly financed with tax exempt bonds,
or federal or state loans or grants; (b) the owner of the
property receives federal low-income housing tax credits; or
(c) 90% of the occupants of the property are low income
households whose rent does not exceed an amount specified by
California's Health and Safety Code. A project qualifying
under the last of the three criteria is eligible for an
exemption capped at $20,000 annually.
2)Background - Century Freeway Housing Program. This bill is
narrowly crafted so that it would likely apply only to 222
units of rental housing in 12 separate developments owned by
the Long Beach Affordable Housing Coalition (LBAHC). These
properties were originally developed by Caltrans pursuant to a
court challenge to the Century Freeway (I-105) in Los Angeles
County. In 1979, the case was settled and the district court
issued a consent decree requiring Caltrans to replenish the
affordable housing that was demolished to build the freeway.
The consent decree created the "Century Freeway Housing
Program" and designated the California Department of Housing
and Community as the lead agency to coordinate and implement
the housing program.
Caltrans developed 222 units of rental housing in 12
developments to be maintained as affordable housing for
low-income households, and later transferred those properties
to the Century Freeway Housing program. In 1995, the program
was privatized, and the developments were transferred several
times between non-profit organizations. In 2004, the
developments were sold to LBAHC at a reduced price. Because of
the reduced price, LBAHC was able to finance the acquisition
private mortgage secured by rental income. The properties are
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in the cities of Compton, Cudahy, Inglewood, Los Angeles,
Lynwood, and Paramount. The transfer of the properties to
LBAHC reset a low income housing affordability deed
restriction on these properties to a new 50-year period.
Up until the time the properties were sold to LBAHC, they were
eligible for the full welfare exemption from property taxes
because they were secured through tax-exempt financing, were
owned by non-profit organizations, and were maintained as
affordable housing projects.
However, when the properties were sold to LBAHC they lost the
eligibility for the full exemption, even though the
developments continue to be operated as affordable housing and
LBAHC is a non-profit organization. This is because
legislation enacted in 1999 (AB 1559 (Wiggins, Chapter 927,
Statutes of 1999) added a requirement that, in order to
qualify for the full exemption, a development must have been
acquired using public financing. Because LBAHC was able to
purchase the project at a reduced price using private funding,
the project no longer meets that criteria. Since it meets
other criteria, the project continues to be eligible for the
capped exemption (i.e. exemption for the first $20,000 of
property taxes). However because the assessed value of the
project is over $16 million, the owners remain liable for
$167,000 in annual property taxes. With penalties and
interest, the accumulated property tax bill since 2004 is now
$932,000.
LBAHC could regain the full exemption by refinancing its
private loan with tax exempt bonds. However, this option would
result in considerable time and expense and, ironically, could
result in a loss of state revenues to the extent that interest
LBAHC paid on tax-exempt bonds would not be subject to state
income taxes.
3)Purpose . The author states that this bill is needed to ensure
the continued affordability of a portion of the Century
Freeway affordable housing portfolio without the need for
additional public subsidies. Supporters assert that if LBAHC
is required to pay property taxes on these developments, the
properties will operate in the red, and LBAHC's only option
will be to sell the properties or refinance with new public
subsidy funds, in which case, the properties will qualify for
a tax exemption again.
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4)Narrow exemption or reasonable accommodation ? The purpose
behind the public financing requirement added by SB 1559 was
to prevent owners of blighted and deteriorated housing
projects from receiving the welfare exemption by using a
nonprofit organization as a front for the property owners in a
limited partnership or by creating a non-profit organization.
Thus, even though LBAHC is a highly respected nonprofit
organization, it is reasonable to ask whether the bill will
erode safeguards put in place by earlier legislation.
It can be also be argued, however, that earlier legislation
did not envision the unique circumstances surrounding the
Century Freeway properties, and this bill proposes a
reasonable accommodation that recognizes these unique
circumstances. Virtually all low income projects need public
subsidies to be viable, and this normally takes the form of
tax exempt financing, government subsidized loans, and/or low
income housing tax credits. The Century Freeway units,
however, were developed by a public agency using public
funding. They were then privatized with the intent that they
continue to be operated as affordable housing units. The
"public-subsidy" in this case took the form of a below-market
sale of the properties to these entities. Because of this
below-market purchase, the current operator did not require
the use of other public subsidies that that would have
qualified them for the exemption.
Analysis Prepared by : Brad Williams / APPR. / (916) 319-2081