BILL ANALYSIS Ó AB 2046 Page A Date of Hearing: May 7, 2012 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Henry T. Perea, Chair AB 2046 (Allen and Huffman) - As Introduced: February 23, 2012 Majority vote. Tax levy. Fiscal committee. SUBJECT : Property tax: change in ownership: exclusion: floating homes. SUMMARY : Revises the definition of a "change in ownership" to create an exclusion from property reassessment for specified transfers of a floating home marina. Specifically, this bill : 1)Provides that a purchase of a floating home marina, as defined, by an eligible entity formed by the marina's tenants, does not trigger a reassessment of the marina's real property to current fair market value for property tax purposes. 2)Provides that both of the following requirements must be met in order for the transfer to qualify for the exclusion from reassessment: a) A transfer of a floating home marina is made to a non-profit corporation, stock cooperative corporation, limited equity stock cooperative, or other entity formed by the tenants of a floating home marina for the purpose of purchasing the marina. b) The individual tenants who were renting at least 51% of the berths in the floating home marina prior to the transfer participate in the transaction through the ownership of at least 51% of the voting stock of, or other ownership or membership interest in, the entity that acquires the floating home marina. 3)Defines "floating home marina," by reference to Civil Code Section 800.4, as an area where five or more floating home berths are rented, or held out for rent, to accommodate floating homes. Excludes from this definition: a) A marina where 10% or fewer of the berths are leased or held out to lease to floating homes; AB 2046 Page B b) A marina or harbor (i) which is managed by a nonprofit organization; (ii) the rules and regulations of which are set by majority vote of the berth holders thereof; and, (iii) which contains berths for fewer than 25 floating homes. 4)Specifies that the state will not reimburse any local agency for any property tax revenues lost by it pursuant to this bill. 5)Provides that reimbursement to local agencies and school districts shall be made for the costs, if the Commission on Mandates determines that this bill contains costs mandated by the state. 6)Takes effect immediately as a tax levy. EXISTING LAW : 1)Provides that all property is taxable, unless explicitly exempted by the California Constitution or federal law, and limits the maximum amount of any ad valorem tax on real property at 1% of full cash value, subject to an annual increase of the lesser of 2% or the inflation rate. "Full cash value" is defined as the assessor's valuation of real property as shown on the 1975-76 tax bill or, thereafter, the appraised value of that real property when purchased, newly constructed, or a change in ownership has occurred. 2)Requires a reassessment of real property to current fair market value upon a "change of ownership of that property," which means that the value of the property, for property tax purposes, is re-determined based on current market value. The value of the property established for property tax purposes initially, or re-determined where appropriate, is referred to as "base year value." 3)Defines the phrase "a change in ownership" as a transfer of a present interest in real property, including the beneficial use thereof, the value of which is substantially equal to the value of the fee interest. ÝRevenue & Taxation Code (R&TC) Section 60]. 4)A transfer of a mobilehome park, on or after January 1, 1985, is excluded from a "change in ownership" reassessment, AB 2046 Page C provided that it is purchased by an entity formed by the tenants renting at least 51% of the spaces prior to the transfer. A property transferred under these circumstances would retain its low Proposition 13 base year value. The Legislature's authority to create statutory exemptions from property tax reassessment was affirmed by the courts ÝSee, e.g., Strong v. Board of Equalization (2007) 155 Cal. App.4th 1182]. 5)Provides that any transfer in the shares of stock or ownership interests in the entity that acquired a mobilehome park would result in a pro-rata reassessment of the park's real property equal to the portion of ownership interests that have been transferred. Excludes from pro-rata reassessment transfers that are undertaken for the purpose of converting the park to condominium or cooperative ownership. 6)Excludes from reassessment transfers of rental spaces in a mobilehome part to individual tenants if (a) at least 51% of the spaces are purchased by individual tenants renting their spaces prior to purchase, and (b) the individual tenants form, within one year after the first purchase of a rental space by a tenant, a resident organization, as defined in Health and Safety Code Section 50781. 7)Provides that a floating home is not a vessel but is real property for property tax assessment purposes. (R&TC Section 229). FISCAL EFFECT : The Board of Equalization (BOE) staff estimates that this bill would result in an annual loss of $212,000. COMMENTS : 1)The Purpose of this Bill. According to the author, "the reassessment of floating home properties upon transfer is much more similar to that of mobile homes than it is to fixed structures and should be reflected this way in the law. The ultimate goal Ýof this bill] is to give floating homes marinas the ability to be purchased by a neighborhood association," by excluding the transfer of a floating home marina from the definition of a "change of ownership." 2)Property Taxes: Background. The property tax is one of the major general revenue sources for local governments in AB 2046 Page D California. It applies to all classes of property, is imposed on property owners and is based on the value of the property. Much of the law pertaining to property taxation is prescribed by Articles XIII and XIII A (commonly known as Proposition 13) of the California Constitution. Proposition 13 was added to the California Constitution in June 1978 and was most recently amended by Proposition 26 in 2010. It was designed to provide real property tax relief by imposing a set of interlocking limitations upon the assessment and taxing powers of state and local governments.<1> Section 1 of Article XIII A of the California Constitute states that, as a general rule, the maximum amount of any ad valorem tax on real property may not exceed 1% of the property's full cash value, as adjusted for the lesser of inflation or 2% per year. The term "full cash value" means the "county assessor's valuation of real property as shown on the 1975-1976 tax bill" or, thereafter, "the appraised value of real property when purchased, newly constructed, or a change in ownership has occurred after the 1975 assessment" (emphasis added) ÝCalifornia Constitution, Article XIII A, Sections 1 and 2]. In other words, the California Constitution requires that real property be reassessed to its current fair market value whenever a "change in ownership" has occurred. 3)What is a "Change in Ownership"? The definition of a "change in ownership" was not included in Proposition 13, but rather, was left to implementing legislation. Shortly after the passage of Proposition 13, the Assembly Committee on Revenue and Taxation appointed a special Task Force - a broad-based 35-member panel that included legislative and State BOE staff, county assessors, attorneys in the public and private sectors, and trade associations - to suggest a statutory scheme for implementing Proposition 13, including applicable "change in ownership" provisions. Following the Task Force's recommendations, the Legislature defined the term as a transfer of a present interest in real property, including the --------------------------- <1> Since any tax savings resulting from the real property tax limitations provided in Sections 1 and 2 of Article XIII A could be effectively eliminated through the imposition of additional state and local taxes, Sections 3 and 4 place additional restrictions upon the imposition of any such taxes. See Amador Valley Joint Union High Sch. Dist. v. State Bd. of Equalization , (1978) 22 Cal.3d 208. AB 2046 Page E beneficial use thereof, the value of which is substantially equal to the value of the fee interest. (R&TC Section 60). For policy reasons, the Legislature has, over the years, exempted various transfers from the "change in ownership" definition. The exempted transfers, such as, for example, a transfer of real property between spouses or a purchase of a mobilehome park by its residents, among others, do not trigger a reassessment of property to current fair market value. Instead, the property retains its prior base year value. 4)The Mobilehome Park Resident Occupancy Program (MPROP). In 1984, the Legislature enacted MPROP in order "to facilitate conversions of mobilehome parks to tenant ownership, thereby maintaining affordable housing for the tenants." ÝStrong v. Board of Equalization (2007) 155 Cal. App.4th 1194]. The program allows mobilehome park residents to apply for low-interest loans to finance the conversion of mobilehome parks to resident ownership. It is funded through a $5 fee that certain mobilehome owners pay along with their annual registration fee, as well as through loan repayment. The Department of Housing and Community Development (HCD) states on its website that, currently, approximately $8 million is available under MPROP. As part of the MPROP, the Legislature excluded a direct or indirect transfer of a mobilehome park to an entity formed by the tenants from the definition of a "change of ownership," provided that 51% of the entity is owned by the tenants renting at least 51% of the spaces in the park prior to the transfer. As a result, the tenants retain the prior base-year value in the mobilehome park, since the transfer does not trigger a reassessment of the property. Once the park has been purchased by the residents and the purchase was not subject to reassessment, any subsequent pro-rata change of ownership in resident-owned mobilehome parks issubject to reassessment. In other words, when a resident who participated in the original purchase of the park sells or otherwise transfers his/her ownership interest in the park, a pro-rata share of the park's real property would be reassessed to its current fair market value. According to the Senate Select Committee on Mobile and Manufactured Homes (Select Committee), there are approximately 4,822 mobilehome parks and manufactured communities in the California, with an estimated 700,000 residents living in AB 2046 Page F them. In the vast majority of parks, mobilehome residents own their homes but rent the spaces on which their homes are installed from the park on a month-to-month or long-term lease agreement. According to the Select Committee, of the 4,822 parks, most are privately owned by investor groups or owner/operators and an estimated 150 are owned by resident organizations or non-profit organizations. Contrary to their name, mobilehomes generally are not mobile. Once installed in a park, they are rarely ever moved. Between 1985 and 2001, MPROP provided loans to assist with conversion in 66 mobilehome parks around the state. Since 2002, new loan activity under the program has slowed and activity continues to decline. The program had no successful applications in 2010 and only two in 2011. The HCD indicates that the increasing cost and complexity of park conversions are two of the primary reasons for the reduction in the number of loan applications. 5)What Does This Bill Do? AB 2046 allows tenants of a floating home marina to purchase the marina without triggering a potential reassessment of the marina for property tax purposes. Similarly to the exclusion for purchases of mobilehome parks, the marina's tenants must form a non-profit corporation, stock cooperative corporation, limited equity stock cooperative, or other entity to purchase the marina. This bill further limits the availability of the proposed exclusion by requiring individual tenants who were renting at least 51% of the berths in the floating home marina prior to the transfer to participate in the transaction and own at least 51% of the voting stock or membership interests of the entity that acquires the floating home marina. 6)Should a Transfer of a Floating Home Marina Be Treated the Same as a Transfer of a MobileHome Park for Property Tax Purposes ? Generally, the residents of a mobilehome park, like the tenants of a floating home marina, do not own the land underneath their homes where they reside. Instead, they rent a space in a mobilehome park from the owner or operator of the park, or, in the case of a floating home, a berth from the marina's owner or operator. Functionally, the ownership structure of a mobile home is comparable to that of a floating home. But the tax benefit - an exclusion from reassessment for property tax purposes - is only available for purchases of mobilehome parks, and not floating home marinas, by the tenants. Should this benefit be extended to the tenants of a floating home marina? AB 2046 Page G A floating home is considered to be real property, not a vessel. It stays in a permanent location, just like a regular home, except the location is on the water. A floating home is subject to property tax and usually is connected to utilities and other services, such as cable or satellite TV, and Internet. Many people use floating homes as their principal residences, just like owners of mobile homes. Proposition 13 provides protection from a reassessment of property until a "change in ownership" has occurred. Arguably, it is unfair, or excessively burdensome, to treat a purchase of a floating home marina by the tenants as a "change in ownership," since the tenants presently use and occupy the marina as renters. Furthermore, the "underlying purpose and chief aim of Proposition 13 was real property tax relief" ÝBoard of Supervisors v. Lonergan (1980) 27 Cal.3d 855, 863], ensuring that people are protected from being "taxed" out of their homes because of increasing property taxes. Finally, owners of mobile homes - who are similarly situated - are allowed to purchase the mobilehome park in which they reside without triggering an increase in the amount of property tax associated with the park. It is important, however, to look at the legislative intent underlying the creation of the exclusion for conversions of a mobilehome park into resident-owned, in order to determine if the same rationale would apply in the case of floating home marina conversions. In the mid-1980s, as a result of increasing park rents for low- and moderate-income residents and the closure of some parks and displacement of residents, the concept of resident-owned parks, where residents form a homeowners association to purchase a park and convert it to a mobilehome subdivision, condominium, stock co-operative, or non-profit ownership, gained popularity. In response, the Legislature enacted a number of laws, including the MPROP, to assist mobilehome residents with the conversion costs in order to provide the residents with an opportunity to obtain management and financial control over the park. A price of a mobilehome park is not cheap, and, for the most part, residents of those parks tend to be low- or moderate-income people. The low-interest loan program and the exemption from reassessment for property tax purposes were envisioned as a subsidy, part of financing for conversions of mobilehome parks into resident-owned parks. In fact, most of those conversions would not have taken place in the absence of these subsidies, AB 2046 Page H including the tax benefit, provided by the state. On average, a price of a manufactured home tends to be lower than that of a floating home. An average price of a mobilehome park is also lower than the price of a floating home marina. It may be argued that an average owner of a floating home is better off financially than an average owner of a mobile home. The Committee may wish to consider whether the rationale for creating a tax benefit for mobilehome park purchases by its residents, i.e. a need to provide financial assistance to residents in order to effectuate those conversions, would apply in the case of floating home marinas. 7)Subsequent Reassessment of Pro Rata Transfers . The exclusion for qualifying mobilehome park transfers does not apply to subsequent sales or transfers of pro-rata share in resident-owned mobilehome parks. AB 2046 does not contain a similar provision with respect to the treatment of a pro rata change in ownership after the conversion of a floating home marina into tenant-owned, thus potentially creating a permanent exclusion from reassessment for any subsequent transfers of ownership in the marina. The Committee may wish to consider including a similar provision to require a reassessment of subsequent pro rata changes in ownership of the floating home marina. REGISTERED SUPPORT / OPPOSITION : Support None on file Opposition None on file Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916) 319-2098