BILL ANALYSIS
AB 1344
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Date of Hearing: May 11, 2009
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
AB 1344 (Fletcher) - As Amended: May 5, 2009
Majority vote.
SUBJECT : Taxation: military housing
SUMMARY : Modifies the criteria that must be met for a private
contractor's long-term lease of military housing to be excluded
from classification as a possessory interest subject to property
taxation. Specifically, this bill :
1)Replaces references to "military family housing" with
references to "military housing", to allow the exclusion to
apply to long-term leases of nonfamily housing.
2)Modifies the current exclusion criterion providing that the
military must control the distribution of revenues from the
project to the private contractor. Provides that the military
control of revenue distribution may be accomplished "by
contract or other means, including control of reserve account
distributions or withdrawals".
3)Modifies the current requirement that all property tax savings
resulting from the exclusion be used solely to benefit the
military housing residents. Provides instead that property
tax savings, and any interest earned on the unexpended
property tax savings, may benefit current or future residents
through any of the following current or future improvements
provided by the contractor "under the terms of a contract
between the private contractor and the military or with the
prior written approval or direction of the military":
a) Project serving facilities, including day care centers,
recreation or community centers, fitness centers, parks or
playgrounds, parking, and outdoor lighting, and any
furnishings, fixtures, and equipment for those facilities;
and,
b) Housing improvements, including the construction of
additional housing units, the renovation of housing units,
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and the upgrade of housing units.
4)Provides that the property tax savings, and any interest
earned on the unexpended property tax savings, may be used to
fund the construction of improvements or to service debt
incurred to fund the construction of improvements.
5)Provides that the private contractor shall expend the property
tax savings for an assessment year through the construction of
improvements or to service debt incurred to fund the
construction of improvements within the period of time the
county assessor may make an escape assessment.
6)Provides that the period of time to expend the property tax
savings shall be extended if any of the following conditions
occur:
a) The private contractor is required, under the terms of
its contract, to retain the property tax savings for a
specified period of time and for a specified purpose,
including future housing renovations and rehabilitations;
or,
b) The military has directed the private contractor, in
writing, to retain the property tax savings in a reserve
account for a specified period of time and for a specified
purpose.
7)Provides that any unexpended property tax savings shall be
deposited in secure accounts and invested in interest bearing
instruments until withdrawn for authorized expenditures.
EXISTING LAW :
1) Requires all property subject to tax to be assessed at
full value. For purposes of property taxation, full value
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".
2) 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
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property. 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 sufficiently autonomous to constitute
something more than a mere agency.
3) Provides that, if specified conditions are met, there is
no "independent" possession of land or improvements if the
possession is pursuant to a contract that includes a
long-term lease for the private construction, renovation,
or maintenance of housing for active duty military
personnel and their dependents. Among other things, the
military family housing so constructed and managed must be
situated on a military facility under military control. In
addition, existing law provides that any reduction in
property taxes on the leased property shall insure solely
to the benefit of the military housing residents through
improvements, such as a child care center provided by the
private contractor.
FISCAL EFFECT : The Board of Equalization (BOE) notes that, in
2003, Congress authorized the Navy to undertake up to three
pilot privatization projects for nonfamily housing. The first
pilot project, Pacific Beacon, privatized 258 units of
Navy-owned nonfamily housing units and provided for the
construction of 941 apartments at Naval Station San Diego. The
project was completed in March of 2009, with a projected
assessment value of $100 million. Thus, if the property were
subject to tax, it would yield roughly $1 million per year ($100
million x 1% = $1 million). The project has not actually been
assessed, however. As a result, BOE notes that the actual
revenue impact has not been determined. Nevertheless, BOE
states, "Depending on the success of the pilot unaccompanied
housing privatization projects, Congress may decide to authorize
the privatization of other unaccompanied housing quarters as
well. The revenue impact of this bill would increase
significantly if all such housing quarters were privatized."
COMMENTS :
1)The author states:
AB 1344 is intended to finally clarify the tax treatment of
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military housing in California and particularly, in San
Diego County. The US Constitution precludes one government
from taxing another. As such, military property has not
been taxed.
In 1996, the military privatized the construction of
housing in response to the dramatic need for housing and a
severe lack of funding. By privatizing, the military could
maintain control over the property, its rents, tenants,
etc, but it would be financed through private contractors.
This was a win-win situation for the military and most
importantly, for the men and women in uniform.
After housing construction began on Camp Pendleton, the San
Diego County Assessor determined that the contractor (De
Luz Family Housing) had a taxable interest in the property.
In response to this, Senator Ducheny authored legislation
(SB 451, 2003) to ensure that these projects remain untaxed
. . . .
At the time, this seemed to clarify the existing law and
most importantly, clarify the intention of the legislature
that these properties not be taxed. Legislative Counsel
opinions, BOE opinions and assessors throughout the state
agreed that this was an appropriate clarification,
unfortunately, San Diego County and their Assessor
continued to disagree and continued to assess taxes on
various military housing projects.
2)The County of San Diego (County) is opposed to this bill and
is, instead, sponsoring AB 1332 (Salas) to ensure that
property tax savings are used to benefit military housing
residents and not the contractors. The County states:
As you know, San Diego County is supportive of efforts to
increase and improve military housing options for our
military personnel. Indeed, the County is sponsoring a
bill, AB 1332, which allows developers to use property tax
funds for the construction of additional housing units or
improvements to existing units provided that those
additions and improvements exceed the developer's
obligations under contract with the military. In addition,
AB 1332 provides needed safeguards to ensure that the
property tax funds are actually used for this purpose.
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. . . AB 1344, while well intended, does not provide these
same safeguards. Rather, AB 1344 lacks mechanisms that
would prevent a military housing developer from using the
property tax funds for purposes other than the direct
benefit of the residents of the military housing project.
3)BOE notes that, under existing law, property tax savings must
inure to the benefit of military housing residents and not the
private contractor. Specifically, BOE notes, "The County of
San Diego, which has many military housing projects and
administers this provision of law, is concerned that the
particular provisions of this bill related to the expenditure
of the tax savings may not ultimately require the private
contractor to provide benefits to the residents over and
beyond the contractual obligation already incurred. The
purpose of this provision is to ensure that the property tax
exemption extended to the private contractor of the military
housing project is not merely a windfall savings to the
private contractor, but rather that the property tax savings
are ultimately passed through to benefit the residents of the
military housing project. Other sections of law extending a
property tax exemption to an otherwise non-tax exempt entity
similarly require that property tax savings inure to the
worthy organization in question, via rent reductions."
4) Committee Staff Notes
a) How did we get here? : In 1996, Congress established the
Military Housing Privatization Initiative (MHPI) to give
the military a tool to improve the quality of military
housing. The MHPI was designed to attract private sector
financing and expertise to provide much-needed housing more
efficiently than traditional military construction
practices would allow. Under the MHPI, the military is
authorized to enter into agreements with private developers
selected in a competitive process to maintain and operate
family housing during a 50-year lease. In this manner, the
MHPI was aimed at addressing the generally poor condition
of military-owned housing, and the shortage of quality,
affordable private housing.
b) Military personnel and their dependents :
i) Revenue and Taxation Code (R&TC) Section 107.4
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provides specific rules for a private contractor's
interest in military housing to be exempt from taxation
as a possessory interest. Currently, one of these rules
requires the housing to be for "military personnel and
their dependents". Under a technical reading of the
statute, this means that single, nonfamily housing
projects are not eligible for the beneficial property tax
treatment Section 107.4 affords. This bill would amend
Section 107.4 to cover nonfamily housing for active duty
military personnel.
ii) Given the fact that existing law provides an
exclusion for family housing, Committee staff sees no
reason why the exclusion should not also be extended to
nonfamily housing projects.
c) What happens to the property tax money saved? :
i) Current law requires that any reduction in property
taxes resulting from the exclusion be used solely to
benefit the military housing residents through
improvements like the provision of a child care center.
(If the reduction amount is unknown, the contractor's
reasonable estimate of savings is used.) BOE notes, "The
purpose of this provision is to ensure that the property
tax exemption extended to the private contractor of the
military housing project is not merely a windfall savings
to the private contractor, but rather that the property
tax savings are ultimately passed through to benefit the
residents of the military housing project."
ii) This bill would instead provide that property tax
savings, and any interest earned on the unexpended
property tax savings, may benefit current or future
residents through any of the following current or future
improvements provided by the contractor:
(1) Project serving facilities, including day care
centers, recreation or community centers, fitness
centers, parks or playgrounds, parking, and outdoor
lighting, and any furnishings, fixtures, and equipment
for those facilities; or,
(2) Housing improvements, including the
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construction of additional housing units, the
renovation of housing units, and the upgrade of
housing units.
iii) Committee staff would note that the inclusion of
undefined items like "fixtures" could lead to disputes.
d) How much time does the contractor have to provide these
improvements? : Existing law does not contain an explicit
timeframe for contractors to make improvements. Critics of
the approach advanced by this bill state that it also fails
to provide a workable timeline for the expenditure of tax
savings. Thus, they have raised concerns that contractors
could hold onto the savings for an unreasonable period of
time, giving rise to serious disputes over weather the
money was used properly.
e) Would the improvements be "above and beyond" those
required under the contract ?: Critics argue that this bill
does not clearly require the contractor to provide
improvements above and beyond those already called for in
the underlying contract.
f) Documents, please : Critics note that this bill does not
require the contractor to provide any documentation
substantiating its estimated tax saving. This is essential
to ensuring that the contractor's underlying obligations
are met.
g) Related legislation : AB 1332 (Salas), introduced in the
current Legislative Session, also proposes amendments to
R&TC Section 107.4 sponsored by the County of San Diego.
AB 1332 is set to be heard by this Committee along with
this bill.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
AB 1344
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County of San Diego
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098