BILL ANALYSIS                                                                                                                                                                                                    




                                                                  SB 1250
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          SENATE THIRD READING
          SB 1250 (Ducheny)
          As Amended  August 9, 2010
          Majority vote

           SENATE VOTE  :   33-0
           
           REVENUE & TAXATION  9-0                                         
           
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          |Ayes:|Portantino, DeVore,       |     |                          |
          |     |Beall, Charles Calderon,  |     |                          |
          |     |Coto, Fuentes, Gatto,     |     |                          |
          |     |Harkey, Nestande          |     |                          |
          |-----+--------------------------+-----+--------------------------|
          |     |                          |     |                          |
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           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 safe harbor provisions shall not apply to a  
            military housing unit managed by a private contractor that is  
            rented to a tenant who is an "unaffiliated member of the  
            general public."

          3)Defines an "unaffiliated member of the general public" as a  
            person who is not a current member of the military.  

          4)Provides that a housing unit rented to or occupied by a person  
            employed as management or maintenance personnel for the  
            military housing property shall not be considered to be a unit  
            rented to an "unaffiliated member of the general public."  

          5)Requires the private contractor to notify annually the  
            assessor by February 15 of any housing units rented to  
            unaffiliated members of the general public as of the  









                                                                  SB 1250
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            immediately preceding lien date.  The private contractor shall  
            be responsible for any property taxes on housing units rented  
            to unaffiliated members of the general public. 

           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  
               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.
             --------------------------
          <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."  









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           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  :

          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."

          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."  

          Committee Staff Comments.  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  









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          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 extend the possessory interest exemption to  
          projects for unaccompanied service personnel (i.e., bachelor  
          housing).  This bill would also make clear that the safe harbor  
          provisions of R&TC Section 107.4 do not apply to a military  
          housing unit managed by a private contractor that is rented to a  
          tenant who is an unaffiliated member of the general public.  


           Analysis Prepared by  :    M. David Ruff / REV. & TAX. / (916)  
          319-2098 


                                                               FN: 0005743 




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          <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.








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