BILL ANALYSIS Ó SENATE GOVERNANCE & FINANCE COMMITTEE Senator Lois Wolk, Chair BILL NO: AB 551 HEARING: 7/3/13 AUTHOR: Ting FISCAL: Yes VERSION: 6/25/13 TAX LEVY: No CONSULTANT: Lui URBAN AGRICULTURE INCENTIVE ZONES Authorizes a county to establish, by ordinance, an "Urban Agriculture Incentive Zone." Background and Existing Law In efforts to conserve agriculture and open space and discourage premature conversion of agriculture land to urban uses, the Legislature enacted the California Land Conservation Act of 1965, known as the "Williamson Act" (AB 2117, Williamson, 1965). The Williamson Act, which allows landowners to contract with counties to conserve their properties as farmland and open space, is comprised of three key parts: First, landowners and counties voluntarily sign and enter into contracts for a period of ten years. Landowners give up the right to develop their farms, ranches, and open space lands. In return, counties must assess the contract lands to reflect these enforceable restrictions. Second, county assessors rely on constitutional authority and statutory formulas to determine "use value" preferential tax assessments for contracted lands (AB 1177, Knox, 1969; California Constitution Article XIII, §8). Lastly, the state General Fund provides counties with subventions to replace property tax revenues that local governments forgo because of the preferential tax assessments. The state General Fund also pays indirect subventions to school districts to replace property tax revenues that are lost due to lower property tax assessments on Williamson Act contracted lands. In efforts to address the state's budget deficit, Governor Brown's 2011-12 Budget eliminated Williamson Act subventions. AB 551 -- 6/25/13 -- Page 2 The Mills Act (1972) authorizes cities and counties to enter into contracts with an owner of a qualified historic property. The owner pledges to restore, maintain, and protect the historical and architectural character of the property in exchange for property tax relief. Mills Act contracts are ten years with automatic yearly extensions and stay with the property when transferred. Property tax revenue remains in the county in which it was collected and is used exclusively by local governments. In 1978, voters approved Proposition 13, which capped the rate of ad valorem taxes on real property on to a constitutional maximum of 1%. The Legislature was responsible for allocating the remaining property tax revenues. When assessing the value of land, an assessor must consider the effect of any enforceable restriction on the use of the land, including zoning, contracts with governmental agencies, and solar-use easements. In recent years, public interest in urban agriculture, "farm-to-fork" practice, and access to healthy foods has increased. Community-based organizations, nonprofits, and for profit organizations engage in urban agricultural production within cities, and some small-scale producers sell their products in local farmers' markets or on-site produce stands. Some nonprofits would like cities and counties to facilitate urban farming by providing reduced property tax rates on vacant property. Proposed Law Assembly Bill 551 establishes the "Urban Agriculture Incentive Zones Act." AB 551 authorizes a county or a city and county to, after a public hering, establish, by ordinance, an Urban Agriculture Incentive Zone (Zone) within its boundaries for the purpose of entering into voluntary enforceable contracts with landowners, for the use of vacant, unimproved, or blighted lands for small-scale production of agriculture crops. A county that has established an Urban Agriculture Incentive Zone within its boundaries can adopt rules and AB 551 -- 6/25/13 -- Page 3 regulations to implement and administer the Zone and contracts related to the Zone. The bill authorizes the county to impose a fee on contracting landowners for the reasonable costs of implementing and administering contracts and the incentive zone. After a county adopts the ordinance, it can enter into a contract with a landowner to enforceably restrict the use of land, subject to the contract, to uses consistent with urban agriculture. The bill requires the contract to include all of the following provisions: An initial term of not less than five years. A requirement that the entire property subject to the contract must be dedicated to agricultural use. A prohibition against commercial uses, except as those uses comply with the terms of the contract on property subject to the contract, and Either of the two following provisions: o A restriction on property that is at least 0.10 acres and no more than three acres in size, or o A restriction on property that is larger than three acres in size, if before entering the contract, the board of supervisors makes a determination that the agricultural development of the property would result in a net increase in revenue to the county, or city and county, resulting from an increase in property value of one or more adjacent properties. AB 551 prohibits a contract from prohibiting the use of structures that support agricultural activity, including toolsheds, greenhouses, produce stands, and instructional space. The bill provides that a contract that prohibits the use of pesticide or fertilizers on properties under contract must permit pesticides or fertilizers allowed by the U.S. Department of Agriculture's National Organic Program. Property subject to a contract must be assessed pursuant to state law that requires how an assessor must consider the AB 551 -- 6/25/13 -- Page 4 effect on value of any enforceable restriction when assessing land. The bill prohibits a county from establishing a Zone within any portion of a city or the city's sphere of influence, unless that city has adopted an ordinance that authorizes an Urban Agriculture Incentive Zone within the city's boundaries or spherefs of influence. The bill also requires an assessor, when assessing land, to consider the effect on the value of any enforceable restriction to which the use of the land may be subjected, including a contract entered to the Urban Agriculture Incentive Zones Act. AB 551 defines the following terms: "Urban" means an area within the boundaries of an urbanized area, as that term is used by the U.S. Census Bureau, which includes at least 50,000 people. "Urban Agriculture Incentive Zone" is an area within a county or a city and county comprised of individual properties designated as urban agriculture preserves by the county or the city and county for farming purposes. The bill makes findings and declarations to support its purpose. State Revenue Impact No estimate. Comments 1. Purpose of the bill . According to the author, "Urban agriculture provides many benefits to city residents including education about fresh, healthy food and the effort it takes to produce it; environmental benefits for the city including modeling grounds for new, energy saving and environmentally sustainable technologies; community-building; vibrant green spaces and recreation; and a source of economic development including increased neighboring home values. One of the biggest obstacles to expanding the number of Californians who enjoy these AB 551 -- 6/25/13 -- Page 5 benefits of urban agriculture is access to land -- both its supply and cost in urban jurisdictions. This legislation provides an incentive to private landowners to make more land available for urban agriculture, while at the same time enabling them to do so at a lowered cost. AB 551 will incentivize the use of private land for urban agricultural. In exchange for signing a contract with a county to place privately held land into urban agricultural use, private landowners will have their property assessed at a lower property tax rate based on its agricultural use rather than its market value." AB 551 retains local governments' decision-making ability -- determining funding priorities with local property taxes. 2. Incentive vs. reward . Proponents state that this bill would encourage local governments to look favorably on urban agriculture by providing landowners incentives of reduced property tax liability. Incentives, like tax credits, seek to promote or encourage specific behavior. However, AB 551 would provide an incentive that may not be necessary. For example, Contra Costa County already has plans to establish an Agriculture Zone in the North Richmond area. Given the recent movement calling for more locally sourced food and increased access to address food security, urban agriculture enjoys growing support at the local level. Rather than creating a new incentive, AB 551 may only be a reward for landowners, who would already be inclined to use their property for urban agriculture. 3. Passed costs . AB 551 allows a county to impose a fee on contracting landowners for the costs of implementing and administering the contracts. But, it also allows a county to charge landowners for the cost of the incentive zone. If a county sees declines in property tax revenues, a county could assess contracting landowners the cost in reduced property taxes. It is unclear whether it was the author's intent to pass along the uncertainty of the costs of the incentive zone to contracting landowners. The Committee may wish to consider amending the bill to eliminate language that authorizes a county to impose a fee on landowners for the cost of the incentive zone. 4. Valuation . Unlike the Williamson Act, the bill does not specify or prescribe valuation procedures, other than requiring the assessor to consider the impact of the enforceable restriction annually on the lien date. And, if AB 551 -- 6/25/13 -- Page 6 the value determined is lower than the Proposition 13 protected value, to reduce the value for that year. Because AB 551 appears to targets "vacant, unimproved, or blighted lands" for small-scale production of crops, the base year value of the land may likely be low. There won't be any comparable sales of similar restricted properties at the outset of the program to determine the current market value of urban land used to grow crops. As a result, the assessor would likely have to apply an income approach on the highest and best agricultural use to value the property. Further, because the bill allows parcels to have retail sales, like produce stands, on site, the assessor may start with the retail price and deduct sales, marketing, and cultivation costs. The Committee may wish to consider amending the bill to include a valuation process. Because the bill omits valuation procedures, an alternative approach would be to authorize a city or county to rebate its share of the property tax from the property. This approach eliminates the need for the assessor to create a complicate appraisal process and potentially limits revenue loss from property tax proceeds. Alternatively, the Committee may wish to amend AB 551 to pursue this alternative approach. 5. Workability . AB 551's current language raises the following implementation and consistency issues: Proposition 13 . The bill authorizes contracts for property larger than three acres, if a board of supervisors determines that agricultural development results in a net increase in revenue from an increase in adjacent property value. This language appears inconsistent with Proposition 13 (1978), which limits rate of ad valorem taxes on real property to 1%. A county would not realize a net increase in revenue unless there is a change of ownership in the surrounding property. Unless the county assumes a rapid market sale of nearby properties, the county may never be able to make a finding of net increase in revenue, making a contract for property over three acres unlikely. Early cancellation . If a landowner decides to cancel a Williamson Act or Mills Act contract before the full-term, the landowner is required to pay a cancellation fee equal to 12.5% of the unrestricted current fair market value of land. The Committee may wish to consider amending the bill to include a AB 551 -- 6/25/13 -- Page 7 similar provision. Commercial uses . AB 551 allows any commercial uses that are consistent with the terms of a contract, but the bill fails to provide any specificity on the types of permitted commercial development. Would this mean farmer's markets or a small restaurant that serves produce grown from the contracted land? The Committee may wish to amend AB 551 to clarify what commercial uses are authorized by the bill. Structures . AB 551 permits structures that support agricultural activity, like toolsheds, to be built on contracted lands. Because the list is noninclusive, other agricultural-related structures could be built. Would this authorize homestead structures, like in the Williamson Act? What about food processing facilities? The Committee may wish to amend AB 551 to clarify what structure are permitted by the bill. Rolling contracts . The bill is silent whether the contracts are limited five-year terms or are rolling terms, meaning that contract is automatically renewed for an additional year. The author's office has indicated that the contracts are to be limited for five years. The Committee may wish to amend the bill to reflect the intent. 6. A new model . The Williamson Act and Mills Act recognize different types of properties that the government deems valuable. In the case of Williamson Act, the state recognized its role in protecting open-space and preventing premature conversion of prime agriculture land, and the Mills Act offers local governments a tool to maintain historical properties that are important to a community's identity. AB 551 blends parts of each program -- recognizing the value of agriculture from the Williamson Act, and authorizing the rehabilitation or maintenance of specified property like the Mills Act. Assembly Actions Assembly Agriculture: 7-0 Assembly Local Government: 7-0 Assembly Appropriations: 17-0 Assembly Floor: 75-0 AB 551 -- 6/25/13 -- Page 8 Support and Opposition (6/27/13) Support : San Francisco Urban Agriculture Alliance; Alchemist Community Development Corporation; American Planning Association - California Chapter; The California School Employees Association (CSEA), AFL-CIO; City and County of San Francisco; City Slicker Farms; Greenhouse Project; Hunger Action LA; Little City Gardens; Mission Pie; Oakland Food Policy Council; Oakland Roots -- The School of Urban Sustainability; Open Beach People's Organic Food Market; President Craig McNamara, California State Board of Food and Agriculture; Sacramento Natural Foods Co-Op; San Francisco Supervisor David Chiu; Santa Clara Open Space Authority; The Social Justice Learning Institute; Soil Born Farms; SPUR; Sustainable Economies Law Center; Ubuntu Green; Victory Garden San Diego; Women Organizing Resources Knowledge and Services; three individuals. Opposition : Unknown.