BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 1250 - Ducheny
Introduced: February 19, 2010
Hearing: March 24, 2010 Fiscal: Yes
SUMMARY: Retroactively Removes Distinction Between Family
and Non-Family Military Housing When Determining
Application of Possessory Interest Tax.
EXISTING LAW (Constitution) provides that all property
is taxable unless explicitly exempted by the Constitution
or federal law. The possessory interest tax is imposed on
real property interests located on public land. A taxable
possessory interest must be independent, durable, and
exclusive, all terms of which are defined by statute and
case law. Private interests on federal land (e.g., a
vacation cabin on Forest Service land) are subject to the
possessory interest tax.
EXISTING LAW defines "independent" for purposes of
applying the possessory interest tax generally (Revenue and
Taxation Code 107). In 2004, the Legislature enacted
specific conditions for a military housing project to meet
to ensure than assessor does not determine that the project
is "independent," and therefore possibly taxable as a
possessory interest because it is not independent (Revenue
and Taxation Code 107.4, as added by SB 451, Ducheny,
2004). To maintain its exemption from possessory interest
tax the housing must be situated at a military facility,
under military control, managed by private contractor, and
constructed according to military guideline. A project may
SB 1250 - Ducheny
Page 4
still be considered "independent" under R&T 107 even if it
does not meet the terms of R&T 107.4, which primarily
serves as a safe harbor.
THIS BILL strikes the word "family" from the safe
harbor provisions of R&T 107.4, thereby ensuring that
qualifying non-family military housing projects are not
considered independent for purposes of assessing a
possessory interest tax, and makes conforming changes. The
measure also provides that it applies retroactively to any
housing project where the contract for possession of use of
land or improvements was entered into on or after January
1, 2005.
FISCAL EFFECT:
According to the Board of Equalization (BOE), SB 1250
results in property tax revenue losses of $2.1 million
annually.
COMMENTS:
A. Author's Statement
According to the Author, "Senate Bill 1250 would, for
a contract entered into on or after January 1, 2005, delete
the requirement that the housing be for military personnel
and their dependents, and instead specify that the housing
be for military personnel or their dependents, or both. In
2004 SB 451 was passed and signed into law and added
section 107.4 to the Revenue and Taxation code. This new
provision clarified that "military family housing" meeting
certain specified criteria did not rise to an "independent"
possession of federal land. Section 107.4 does not apply to
housing designed for bachelor, or non-family military
personnel. The need for military housing exists for both
married and unmarried military personnel, and it is
important to ensure that all military personal has access
to adequate housing."
SB 1250 - Ducheny
Page 4
B. Military History
While SB 1250 is not a controversial measure,
conflicts over whether possessory interest tax applies to
private military housing in California are as old as
private military housing in California. In 1955, Congress
authorized the Wherry Housing Program that used private
builders to construct the original De Luz homes, which were
subject to possessory interest taxes, although a famous
possessory interest tax lawsuit arose out of the amount of
tax due (De Luz Homes, Inc. v. County of San Diego, (1955)
45 Cal.2d 546). Congress subsequently repurchased these
homes beginning in 1957 until conveying them to De Luz in
2000 under the Military Housing Privatization Initiative
(MHPI), enacted in 1996 in an effort to build military
housing by using private sector know-how to build better
housing more expeditiously at less cost. In practice, the
military enters into a contract with a developer to build,
own, maintain, and operate housing under a fifty-year
lease. In 2000, the military selected Hunt Building
Corporation to restore the De Luz project at Camp Pendleton
for the first of these projects. Over the next few years,
Clark Pinnacle, a partnership of Maryland-based Clark
Realty Capital and Pinnacle from Seattle, entered into a
private-public partnership to operate and construct
military family housing communities in several other sites
in California, including Alameda, Monterey, and San
Bernardino Counties.
The initial project resulted in a dispute: San Diego
County later assessed a possessory interest tax on the
homes, which De Luz contested. The San Diego Assessment
Appeals Board subsequently sided with the Assessor,
determining a possessory interest existed, so De Luz paid
possessory interest taxes for the 2000 through 2004 tax
years. After the Legislature enacted SB 451, the San
Diego County Assessor and De Luz disputed whether the
project meets the requirement that foregone possessory
interest tax revenues are accruing solely to the benefit of
the residents through improvements. Clark Pinnacle
SB 1250 - Ducheny
Page 4
sponsored AB 530 (Salas, 2007), which expanded the
safe-harbor provision from the possessory interest tax by
removing the restriction on foregone possessory interest
tax revenues inuring to the benefit of residents, instead
allowing these revenues to be used to construct additional
units. The Committee defeated AB 530 in 2007 and 2008.
Clark Pinnacle is also a partner in Pacific Beacon,
LLC, which entered an agreement with the military to
privatize 258 units of Navy-owned, non-family "bachelor"
housing, known as Palmer Hall, and 941 apartments as the
"Pacific Beacon" project. Because SB 451's safe harbor
applied only to "military family housing" because no
non-family housing yet existed, San Diego County wants the
distinction between family and non-family housing removed
to ensure clarity in the law between projects that are
identical in every other aspect relevant to analyzing
whether a possessory interest exists.
C. A Tale of Two Sections
Revenue and Taxation Code 107 guides whether private
leases of public land constitute possessory interests, and
are therefore subject to the possessory interest tax, which
is the same as the property tax. The section states that a
possession of land is a possessory interest when it is
independent, durable, and exclusive of rights held by
others, and defines those terms. Assessors rely on this
are of law when determining whether private leaseholders of
public spaces, such as hamburger stand at a convention
center, is subject to tax. SB 451 added Revenue and
Taxation Code 107.4, which set forth several requirements
for a private military housing contractor to meet that
ensured they would not be considered independent, including
requiring foregone tax revenues be spent on amenities that
inure to the benefit of current residents. If the
contractor meets the terms of 107.4, the assessor cannot
assert independence under 107, essentially providing a
safe harbor.
SB 1250 - Ducheny
Page 4
San Diego County has asked the State Board of
Equalization to opine whether the Pacific Beacon project
giving rise to SB 1250 constitutes a possessory interest
under 107. If BOE determines that the project does not
constitute a possessory interest, the project would not be
taxable; however, the blessing is only for that project,
similar to previous rulings regarding projects for projects
on Fort Ord Army Base and Vandenberg Air Force Base. As
such, SB 1250 would not be entirely moot because the
measure would provide additional certainty for future
non-family military housing projects in the state.
D. Going Retro
SB 1250 explicitly applies to any housing project
where the contract for the possession or use of land or
improvements was entered into on or after January 1, 2005,
essentially relieving the Pacific Beacon project from any
previously assessed possessory interest taxes. The San
Diego County Assessor has valued the project at $194
million, but the taxpayer never paid tax on the project
back to when construction began in 2007. If San Diego
County is successful in either enacting this bill, or BOE
opines that the project does not constitute a taxable
possessory interest, then those taxes would be cancelled,
and San Diego County would not receive these previously
assessed taxes. Had the taxes been paid, San Diego County
would have to refund if either effort is successful. San
Diego County argues that because the projects that give
rise to this bill meet all of the requirements of R&T
107.4, the artificial distinction between family and
single housing in that section should not on its own change
the taxable status of the project.
Support and Opposition
SB 1250 - Ducheny
Page 4
Support:County of San Diego (sponsor)
Oppose:None Received
---------------------------------
Consultant: Colin Grinnell