BILL ANALYSIS                                                                                                                                                                                                    




                                                                  AB 1341
                                                                  Page A
          Date of Hearing:  August 26, 2010

                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
                            Anthony J. Portantino, Chair

                  AB 1341 (Lowenthal) - As Amended:  August 2, 2010

          Majority vote.  Tax levy.  Fiscal committee.
           
          SUBJECT  :  Property taxation:  possessory interests:  Long Beach  
          Courthouse

           SUMMARY  :  Provides that there is no taxable possessory interest  
          if the possession is pursuant to a project agreement entered  
          into by the Judicial Council (JC) with a nongovernmental entity  
          for the purpose of replacing the Long Beach Courthouse, and if  
          other specified criteria are met.  Specifically,  this bill  :  

          1)Includes the following legislative findings:

             a)   The existing courthouse located at 415 West Ocean  
               Boulevard in the City of Long Beach is in unsatisfactory  
               physical condition, is a potential public safety risk to  
               court staff and the public, and is in need of immediate  
               replacement;

             b)   This bill is designed to expedite the facility's  
               replacement by resolving a disputed property tax issue that  
               could potentially delay the replacement project and add an  
               element of unpredictable financial risk to the project's  
               public sponsor; 

             c)   It is the Legislature's intent in enacting this bill to  
               provide legislative direction to county assessors, the  
               State Board of Equalization (BOE), the courts, and other  
               involved parties regarding the interpretation of the term  
               "independent" as it relates to the Long Beach Courthouse;  
               and,

             d)   A special law is necessary because of the need to  
               resolve the property tax issues potentially delaying the  
               Long Beach Courthouse replacement project and to mitigate  
               the attendant risks of that delay to the citizens of Los  
               Angeles County and the State of California.  










                                                                  AB 1341
                                                                  Page B
          2)Provides that there is no "independent" possession or use of  
            land or improvements (and, therefore, no taxable possessory  
            interest) if the possession is pursuant to a project agreement  
            entered into by the JC with a nongovernmental entity in  
            accordance with Government Code (GC) Section 70391.5 for the  
            purpose of replacing the Long Beach Courthouse, and if all the  
            following conditions are met:

             a)   The nongovernmental entity is required to design, build,  
               finance, operate, and maintain the Long Beach Courthouse;

             b)   The JC establishes performance expectations and  
               benchmark criteria for the court facility proposal in  
               accordance with GC Section 70391.5 that serve as the basis  
               for selecting the nongovernmental entity;

             c)   The JC and other governmental entities have exclusive  
               use and control of the Long Beach Courthouse for court and  
               related activities for 35 years;

             d)   The JC holds title to the land and improvements of the  
               Long Beach Courthouse;

             e)   The nongovernmental entity is not treated as the owner  
               of the improvements for any purpose, including federal  
               income tax purposes, and does not deduct any depreciation  
               on the improvements; and, 

             f)   Any lease-leaseback of land and improvements of the Long  
               Beach Courthouse with the nongovernmental entity is solely  
               for the purpose of providing security for the payment by  
               the JC of the service fee for services provided by the  
               nongovernmental entity in connection with a court facility.  


          3)Provides that this possessory interest safe harbor shall not  
            apply to any lease of, or improvements to, the Long Beach  
            Courthouse by the JC with a nongovernmental entity to the  
            extent the land or improvements are used by the  
            nongovernmental entity as commercial office space, retail  
            space, or paid parking spaces not designated for use for  
            governmental purposes or court facilities. 

          4)Provides that, notwithstanding existing law, the state shall  
            not reimburse any local agency for any property tax revenue  









                                                                  AB 1341
                                                                  Page C
            lost as a result of this bill.  

          5)Takes immediate effect as a tax levy.

           EXISTING LAW  :

             1)   Provides that all property is taxable, unless otherwise  
               specified by the California Constitution or federal law.  

             2)   Requires all property subject to tax to be assessed at  
               its full value.  For property tax purposes, full value  
               generally equals the post-Proposition 13 acquisition price,  
               adjusted annually for inflation (not to exceed 2%).   
               Although public land is exempt from property tax, private  
               real property interests held in connection with public land  
               may be taxed as "possessory interests."  


             3)   Provides that, for a taxable possessory interest to be  
               found, the possession must generally be "independent,"  
               "durable," and "exclusive" of rights held by others in the  
               property.<1>  Possession is considered "independent" if the  
               holder has the ability to exert control over the property's  
               management, separate and apart from the public owner's  
               rules and policies.  In other words, a possession or use is  
               independent if it is sufficiently autonomous to constitute  
               something more than a mere agency.   


             4)Provides that when the state or any local government enters  
               into a written contract with a private party whereby a  
               taxable possessory interest may be created, the private  
               party must be notified in the contract of the potential  
               property tax consequences.  If this notification is not  
               provided, the private party can recover damages under  
               certain circumstances.  


             --------------------------
          <1> Property Tax Rule 20(a)(1) additionally requires that the  
          possessor derive a "private benefit" from the property's use.  A  
          "private benefit" means "that the possessor has the opportunity  
          to make a profit, or to use or be provided an amenity, or to  
          pursue a private purpose in conjunction with its use of the  
          possessory interest."  









                                                                  AB 1341
                                                                  Page D
             5)   Specifies a procedure by which the JC may enter into  
               agreements for court facility development that include  
               alternate methods for project delivery, including  
               public-private partnerships.  

           FISCAL EFFECT  :  This bill could result in foregone possessory  
          interest taxes in Los Angeles County of between $4 million and  
          $5 million.  However, the JC indicates that, in the absence of  
          this bill, the state would be required to pay any possessory  
          interest taxes related to the Long Beach Courthouse on behalf of  
          the nongovernmental entity, which could result in annual General  
          Fund payments of $4 million to $5 million.

           COMMENTS  :   

          1)The author has provided the following statement in support of  
            this bill:

               Long Beach is ready for its new courthouse.  In fact, it is  
               long overdue.  Experts say its existing 50-year-old  
               facility is perhaps the worst in the state when it comes to  
               security, safety and overcrowding.

               The Administrative Office of the Courts has found a way to  
               deliver the project three years earlier than might  
               otherwise occur, by use of a public-private partnership.  

               Unfortunately, a dispute over property tax has arisen,  
               which, if left unresolved, could increase the cost of the  
               project to the point it would no longer be fiscally viable.

               To resolve this problem without creating precedent or  
               altering existing code, AB 1341 declares that the unique  
               needs and nature of the Long Beach courthouse project  
               exempt its state functions from possessory interest  
               taxation.   

               If the courthouse were funded the traditional way,  
               possessory tax revenue would of course not exist.   
               Likewise, if the courthouse construction were postponed,  
               there would be no economic activity of any kind to tax.   
               Any revenue to be gained by applying possessory tax to this  
               project is an illusion. 

          2)The JC is sponsoring this bill to resolve property tax issues  









                                                                  AB 1341
                                                                  Page E
            that could potentially delay construction of the Long Beach  
            Courthouse project.  The JC notes:

               In June the preferred proposer on the project was selected  
               and notified.  Over the next several weeks the  
               Administrative Office of the Courts will be working with  
               the selected proposer to complete the project agreement in  
               order to secure final approval of the project from the  
               Department of Finance late this year after which project  
               construction can begin.  AB 1341 will ensure that the Long  
               Beach Courthouse project can move ahead without any delay  
               that may be caused by unresolved property tax issues.  The  
               bill has been crafted to be specific to the Long Beach  
               project and does not impact the possessory interest  
               analysis for any other project. 

               We have estimated that in the absence of AB 1341 an  
               assessed possessory interest tax could result in a $3 to $5  
               million cost to the State.  If the possessory tax interest  
               is left unresolved this increased project cost could make  
               the project no longer fiscally viable.  In that event, the  
               AOC would look to a traditional public construction of the  
               project which would delay the project (and the resulting  
               jobs that would be created) at least 2-3 years and, as a  
               publicly owned courthouse, there would be no possessory  
               interest.  Thus, either way there is no actual loss of  
               possessory interest tax revenue.  

          3)Proponents state:

               The Long Beach Courthouse ranks among the State's worst in  
               terms of security and overcrowding, and cannot meet the  
               current or future needs of the court.  Over 4,800 people  
               visit the building each day in addition to the hundreds of  
               in-custody defendants.  Currently those in-custody  
               defendants move within hallways that are also traveled by  
               judges, staff, and witnesses, creating a very real security  
               risk.  Witnesses and victims often must wait in the same  
               hall as the accused defendant, and the holding cells were  
               not designed to accommodate the large number of in-custody  
               defendants.  This facility must be replaced immediately,  
               and delay is not an option.  

          4)This bill is opposed by the California Assessors' Association,  
            which states:









                                                                  AB 1341
                                                                  Page F

               The AOC acknowledges the existence of possessory interest  
               taxes in Section 7.2(b) of the proposed ground lease, which  
               states:

                    'Tenant acknowledges that its possessory interest  
                    hereunder may be subject to taxation and that Tenant  
                    shall be responsible for payment of any such tax  
                    except as otherwise provided for in the Project  
                    Agreement.'

               The AOC, however, in the RFP they issued to solicit  
               contractors, explicitly states that the AOC would be  
               responsible for any possessory interest taxes that would  
               apply to the newly constructed courthouse.  This  
               self-inflicted harm should not be the basis for legislation  
               that is clearly unconstitutional. 

          5)Committee Staff Comments

              a)   Project Background  :  By all accounts, the Long Beach  
               Courthouse has seen better days.  According to the  
               Administrative Office of the Courts (AOC), the current  
               courthouse suffers from fundamental flaws, is overcrowded,  
               and fails to meet accessibility requirements, making it  
               incapable of meeting the growing demand for court services  
               in the Long Beach area.  Thus, the JC has developed plans  
               to replace the courthouse, using "Performance-Based  
               Infrastructure" or "PBI," which the AOC describes as an  
               innovative project delivery method that involves engaging a  
               private team to finance, design, build, operate, and  
               maintain the new facility.  

               To provide security for the JC's payment of applicable  
               service fees, the AOC will lease the Long Beach Courthouse  
               facilities to the private team under a long-term lease,  
               with the State maintaining ownership of the land and  
               improvements.  The private team will then sub-lease back to  
               the AOC that portion of the Long Beach Courthouse to be  
               used for Superior Court purposes.  This type of arrangement  
               is commonly referred to as a "lease-leaseback."     
                         
               Once complete, the new facility will include 31 courtrooms,  
               administrative office space, and commercial office and  
               retail space compatible with court uses.  The project will  









                                                                  AB 1341
                                                                  Page G
               also include the renovation of a nearby parking structure  
               and improvements to surrounding street frontages.  The new  
               facility is scheduled for occupancy in mid-2013.  

              b)   Possessory Interests  :  In certain circumstances, a  
               property tax assessment may be levied when a person or  
               entity uses publicly-owned real property that, with respect  
               to its public owner, is either immune or exempt from  
               property taxation.  These uses are commonly referred to as  
               "possessory interests" and are typically found in cases  
               where the entity leases, rents, or uses federal, state, or  
               local government property.  Revenue and Taxation Code  
               Section 107 provides that, for a taxable possessory  
               interest to be found, the possession must be "independent,"  
               "durable," and "exclusive" of rights held by others in the  
               property.  Generally, assessors and courts determine  
               whether a taxable possessory interest exists based on the  
               facts and circumstances of a particular case.      

               Given the "lease-leaseback" nature of the proposed Long  
               Beach Courthouse project, concerns have been raised that  
               the private party's leasehold interest may rise to the  
               level of a taxable possessory interest under existing law.   
               Thus, this bill proposes a narrow "safe harbor" under which  
               the private party's interest in the Long Beach Courthouse  
               would be considered non-independent and, therefore,  
               nontaxable as a possessory interest.  

              c)   Constitutional Considerations  :  Article XIII, Section 1  
               of the California Constitution provides that all property  
               is taxable, unless otherwise specified by the California  
               Constitution or federal law.  Some may argue that AB 1341  
               attempts to exempt a specific possessory interest  
               statutorily in violation of this constitutional provision.   
               Supporters of AB 1341, however, would likely counter that  
               this bill merely provides legislative guidance regarding  
               the independence prong of the existing three-factor  
               analysis.  As BOE notes in its staff analysis of this bill,  
               in City of San Jose v. Carlson (1997) 57 Cal.App.4th 1348,  
               the court acknowledged the appropriateness of legislative  
               action to set parameters on the element of durability.  A  
               similar argument could be made in this case with respect to  
               the element of independence.    
              
              d)   Will AB 1341 Establish a Precedent?  :  It is very clear  









                                                                  AB 1341
                                                                  Page H
               that the author of this measure does not intend for AB 1341  
               to establish a precedent for future legislation.  This bill  
               is, by its very terms, limited to a single project.   
               Moreover, the bill's provisions are uncodified. Finally, in  
               the absence of this measure, the cost of any possessory  
               interest tax assessed on the private developer would likely  
               be passed on to the JC and, in turn, the state.<2>     
               Nevertheless, today's special circumstance often becomes  
               tomorrow's rule.  While it may be appropriate to provide a  
               safe harbor in cases where state-owned property will be  
               leased to a private entity but used exclusively for a  
               public purpose, it is conceivable that, in the future, less  
               deserving public-private partnerships may seek similar  
               protections.    
               

           


          REGISTERED SUPPORT / OPPOSITION  :   

           Support
           
          Judicial Council of California (sponsor)
          City of Long Beach
          Presiding Judge Charles W. McCoy, Jr., Los Angeles County  
          Superior Court

           Opposition 
           
          California Assessors' Association
           
          Analysis Prepared by  :  M. David Ruff / REV. & TAX. / (916)  
          319-2098 











          ---------------------------
          <2> Ostensibly, this is because the original RFP specified that  
          the Judicial Council would bear the cost of any applicable tax.