BILL ANALYSIS SB 1250 Page A SENATE THIRD READING SB 1250 (Ducheny) As Amended August 9, 2010 Majority vote SENATE VOTE : 33-0 REVENUE & TAXATION 9-0 ----------------------------------------------------------------- |Ayes:|Portantino, DeVore, | | | | |Beall, Charles Calderon, | | | | |Coto, Fuentes, Gatto, | | | | |Harkey, Nestande | | | |-----+--------------------------+-----+--------------------------| | | | | | ----------------------------------------------------------------- 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 Page B 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." SB 1250 Page C 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 SB 1250 Page D 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 --------------------------- --------------------------- <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