BILL ANALYSIS SB 1250 Page A Date of Hearing: June 28, 2010 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Anthony J. Portantino, Chair SB 1250 (Ducheny) - As Amended: June 2, 2010 Majority vote. SENATE VOTE : 33-0 SUBJECT : Taxation: military housing SUMMARY : Modifies the statute that provides a possessory interest tax exemption to private contractors that construct and maintain military housing, provided certain conditions are met. Specifically, this bill : 1)Eliminates the requirement that the housing be for "military personnel and their dependents" and instead specifies that the housing be for military personnel or their dependents, or both, thereby allowing the exclusion to apply to long-term leases of nonfamily or "bachelor" housing. 2)Specifies that the exclusion applies to housing used solely for active duty military personnel. EXISTING LAW : 1) 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." 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 SB 1250 Page B 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. 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 : Unknown. The Board of Equalization's staff analysis notes: This bill does not have a revenue impact since the Pacific Beacon project is not subject to the property tax under existing law. To date, the Pacific Beacon [project] is the only privatized housing for unaccompanied service members located in California. 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. We are not aware of any other projects on the horizon - but should there be such a project in the future (that is not structured like the fact pattern in this particular project) then this bill might have some future, unknown revenue impact. COMMENTS : --------------------------- <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." SB 1250 Page C 1)The author states: In 2004 SB 451 was passed and signed into law and added [S]ection 107.4 to the Revenue and Taxation [C]ode. 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 [personnel] have access to adequate housing. 2)The County of San Diego (County) is sponsoring this bill. The County notes: The County is sponsoring SB 1250 to address an inadvertent omission in SB 451 (Ducheny), Ch. 853 of the Statutes of 2004, which exempted military "family" housing projects from the possessory interest classification. The intent of SB 451 was to also include unaccompanied or single housing which is in short supply as well. SB 1250 will further promote the development of on-base military housing, thereby increasing the supply of available affordable housing for all military personnel. 3)Opponents state that, "by inserting the word "solely" into the legislation, it effectively nullifies Rev. and Tax Section 107.4 for all privatized on-base military housing projects for several reasons." Specifically, opponents state: To satisfy lender requirements, every Military Housing Privatization Initiative (MHPI) housing project contains provisions in their lease that if there are not enough active duty military personnel to occupy the units, a hierarchy of other tenants may occupy the units with the approval of the base commander. This hierarchy includes Department of Defense personnel, retired military, and finally, the general public. While no projects in the State of California are currently utilizing this provision, the fact that these provisions exist mean that the project cannot meet the amended language " a long-term lease, for the private construction, renovation, rehabilitation, SB 1250 Page D replacement, management, or maintenance of housing solely for active duty military personnel or their dependents." 4)Committee Staff Comments: a) Background : 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. In response to the MHPI, SB 451 (Ducheny), Chapter 853, Statutes of 2004, added Revenue and Taxation Code (R&TC) Section 107.4, which provides specific rules for a private contractor's interest in military housing to be exempt from taxation as a possessory interest.<2> As noted above, however, R&TC Section 107.4 only applies to housing for "military personnel and their dependents." In 2003, however, Congress authorized the Department of the Navy to undertake up to three pilot projects for the privatization of unaccompanied housing. On March 26, 2009, the Department of the Navy and Clark Realty Capital celebrated the opening of Pacific Beacon at Naval Base San Diego - the nation's first large-scale privatized housing community for unaccompanied military personnel. This bill would simply extend the possessory interest exemption to projects for unaccompanied service personnel (i.e., bachelor housing). b) Related Legislation : The following related bills were introduced in the current legislative session: -------------------------- <2> Among other things, R&TC Section 107.4(m) provides that any reduction in property taxes resulting from the exclusion must be used solely to benefit the military housing residents through improvements like the provision of a child care center. SB 1250 Page E i) AB 1332 (Salas) : AB 1332 would have extended the possessory interest tax exemption to long-term leases of nonfamily housing. In addition, AB 1332 would have modified the requirement that all property tax savings resulting from the exclusion be used solely to benefit the military housing residents. Finally, AB 1332 would have required the private contractor, at the county assessor's request, to provide certain substantiating documentation. AB 1332 was held in the Assembly Appropriations Committee. ii) AB 1344 (Fletcher) : AB 1344 would have modified the conditions 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. AB 1344 died in this Committee. iii) AB 1945 (Fletcher) : AB 1945 would have allowed, by implication, the tax savings to be held in a reserve account for use in future project construction if the military so required. The bill's hearing in this Committee was cancelled at the request of the author. REGISTERED SUPPORT / OPPOSITION : Support County of San Diego (Sponsor) Clark Realty Capital County of San Diego Assessor/Recorder/County Clerk David L. Butler San Diego Regional Chamber of Commerce Opposition De Luz Family Housing Analysis Prepared by : M. David Ruff / REV. & TAX. / (916) 319-2098