BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 1760
                                                                  Page  1

          CONCURRENCE IN SENATE AMENDMENTS
          AB 1760 (Chau and Bocanegra)
          As Amended  August 22, 2014
          Majority vote
           
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          |ASSEMBLY:  |55-20|(May 29, 2014)  |SENATE: |24-8 |(August 26,    |
          |           |     |                |        |     |2014)          |
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           Original Committee Reference:    REV. & TAX.  
           
          SUMMARY  :  Provides that, on or after January 1, 2015, a "local  
          government" shall not enter into a "payment in lieu of taxes  
          agreement" (PILOT agreement) with a "low-income housing project"  
          owner.  

           The Senate amendments  :

          1)Add a principal coauthor.

          2)Add legislative findings and declarations.  

          3)Restructure this bill to add new sections to the Revenue and  
            Taxation Code (RTC) that contain the provisions previously  
            included as amendments to RTC Section 214, which implements  
            the welfare exemption.

          4)Delete the tax cancellation and refund provisions, which are  
            now included in SB 1203 (Jackson) of the current legislative  
            session.

          5)Modify the definition of a "PILOT agreement," which is now  
            defined as any agreement between a local government and a  
            low-income housing project owner that requires the owner to  
            pay the local government a charge to compensate the local  
            government for lost property tax revenues resulting from the  
            project receiving a welfare exemption.    

          6)Establish a conclusive presumption that any payments made  
            under any PILOT agreement entered into before January 1, 2015,  
            comply with the certification requirements of RTC Section  
            214(g)(2)(B) and were or are used to maintain the  
            affordability of, or reduce rents otherwise necessary for, the  
            units occupied by lower income households.  








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          7)Provide that no inference shall be drawn from this bill's  
            enactment with regard to whether the law, as it read prior to  
            January 1, 2015, authorized a local government to enter into a  
            PILOT agreement.

          8)Provide that this bill shall become operative only if SB 1203  
            is also enacted and takes effect on or before January 1, 2015.  
                  

           EXISTING LAW  :

          1)Authorizes the Legislature to exempt from taxation property  
            used exclusively for religious, hospital, or charitable  
            purposes, as specified.  The Legislature has implemented this  
            "welfare exemption" in RTC Section 214.  

          2)Exempts low-income housing developments operated by non-profit  
            organizations, as specified. 

          3)Imposes a "certification requirement" for low-income housing  
            owners seeking the welfare exemption.  Specifically, the law  
            requires a project's owner to "[c]ertify that the funds that  
            would have been necessary to pay property taxes are used to  
            maintain the affordability of, or reduce rents otherwise  
            necessary for, the units occupied by lower income households."

           AS PASSED BY THE ASSEMLBY  , this bill:

          1)Provided that, on or after January 1, 2015, a local government  
            shall not enter into a PILOT agreement with a low-income  
            housing project owner.

          2)Provided that any PILOT agreement entered into in violation of  
            this prohibition shall be void and unenforceable.    

          3)Established a presumption that any payments made under a PILOT  
            agreement entered into before January 1, 2015, are used to  
            maintain the affordability of, or reduce rents otherwise  
            necessary for, the units occupied by low-income households.

          4)Provided that any outstanding ad valorem tax, interest, or  
            penalty that was levied between January 1, 2012, and January  
            1, 2015, as a result of a PILOT agreement shall be canceled;  
            and any tax, interest, or penalty, as so levied, that was paid  








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            before January 1, 2015, shall be refunded.  

          5)Defined a "local government" as any city, county, city and  
            county, housing authority, housing successor to a  
            redevelopment agency, or a joint powers agency that has  
            approved land use entitlements or building permits, provided  
            land or financing, or approved the issuance of tax-exempt  
            bonds pursuant to the federal Tax Equity and Fiscal  
            Responsibility Act for the low-income housing project.  

          6)Defined a "PILOT agreement" as any agreement entered into  
            between a local government and a "low-income housing project"  
            owner that requires the owner to pay the local government a  
            "charge," including any charge designed to compensate the  
            local government for lost property tax revenues resulting from  
            the low-income housing project receiving a welfare exemption.

          7)Specified that the term "charge" shall not include a fee that  
            is permitted by the Mitigation Fee Act pursuant to Government  
            Code Section 65008(d).   

          8)Defined a "low-income housing project" as a low-income housing  
            project that is eligible for the welfare exemption.        

           FISCAL EFFECT  :  Unknown.  The State Board of Equalization (BOE)  
          notes that information on the number of PILOT agreements in  
          place has been difficult to obtain, making it impossible to  
          assess the full fiscal impact of this bill.  To date, the BOE  
          has identified four low-income housing projects that have  
          received escape assessments for prior years' taxes as a result  
          of PILOT payments.  Two of these projects have entered into  
          five-year payment plans and have paid a total of $450,000 toward  
          outstanding liabilities of over $6.1 million.  In other projects  
          where PILOT agreements became an issue, the local government  
          dropped the PILOT payment requirement to ensure the project  
          would remain eligible for the welfare exemption.  

           COMMENTS  :

          1)The author has provided the following statement in support of  
            this bill:

               Beginning in 1987, low-income housing developers were  
               authorized to claim a property tax welfare exemption.   
               Low-income housing developers have come to rely upon  








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               the welfare exemption as a way to build housing that  
               is affordable to low-income tenants.  At the same  
               time, some low-income housing developers have entered  
               into PILOTs, to pay cities and counties all or a  
               portion of the property taxes they would have  
               received, but for the exemption.  These agreements are  
               now jeopardizing the developers' welfare exemption and  
               threatening the future of the projects.  More  
               importantly, they are threatening the tenants that  
               live in the developments and rely upon the housing.   
               AB 1760 protects those tenants by preserving the  
               welfare exemption of low-income housing developments  
               with PILOTs and outlaws PILOTs going forward.

          2)Assembly Revenue and Taxation Committee comments:

             a)   The welfare exemption for low-income housing  
               developments:  California Constitution Article XIII,  
               Section 4(b) authorizes the Legislature to exempt from  
               taxation property used exclusively for religious, hospital,  
               or charitable purposes, as specified.  The Legislature has  
               implemented this "welfare exemption" in RTC Section 214.  

               AB 2144 (Filante), Chapter 1469, Statutes of 1987, amended  
               RTC Section 214 specifically to exempt low-income housing  
               developments operated by non-profit organizations.  As  
               noted in the Senate Revenue and Taxation Committee  
               analysis, AB 2144's proponents argued that the property tax  
               funds then being paid "could better be used in furtherance  
               of the goals of providing low income housing."
                 
               To this end, RTC Section 214(g) currently includes a  
               "certification requirement" for low-income housing owners  
               seeking the welfare exemption.  Specifically, the law  
               requires a project's owner to "[c]certify that the funds  
               that would have been necessary to pay property taxes are  
               used to maintain the affordability of, or reduce rents  
               otherwise necessary for, the units occupied by lower income  
               households."  (RTC Section 214(g)(2)(B).)  

             b)   PILOT agreements:  Since local governments do not  
               receive their share of property taxes from exempt  
               properties, certain local governments have entered into  
               agreements with low-income housing developers to compensate  
               them for their lost revenues.  These agreements, known as  








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               PILOT agreements, often provide for payments that closely  
               resemble property tax payments.  

               A recent informal survey of low-income housing developers  
               provides some insight into the nature and structure of  
               PILOT agreements currently in place in California.   
               According to the survey, payment amounts are determined in  
               various ways, including as:  a portion or all of the  
               property taxes the local government would have received  
               without the exemption, a percentage of the project's  
               assessed value, a flat fee, and an amount to compensate for  
               police and fire service needs generated by the project's  
               residents.  A few PILOT agreements provided to committee  
               staff were also structured to increase the payment amount  
               over time.

               While there is no express authority for low-income housing  
               developers to pay PILOTs, PILOTs are authorized in state  
               statute in two cases:  for low-income housing owned by  
               either public housing authorities or federally recognized  
               Indian tribes.

             c)   The potential impact of a PILOT agreement on a project's  
               welfare exemption:  Recently, a question has arisen  
               regarding whether the existence of a PILOT agreement  
               jeopardizes a low-income development's welfare exemption.   
               Specifically, some have argued that the existence of a  
               PILOT agreement negates a developer's ability to certify,  
               as required by RTC Section 214(g)(2)(B), that property tax  
               savings are being used to reduce rents or maintain unit  
               affordability.  As a result, at least one county assessor  
               has begun to pursue escape assessments for prior years,  
               claiming that back property taxes are owed for prior years  
               in which PILOT agreement payments were made.  Affordable  
               housing advocates and low-income developers alike note that  
               the economic burden of these escape assessments jeopardizes  
               the very feasibility of these projects.

             d)   How this bill addresses the problem:  This bill  
               addresses the prevailing state of confusion by making clear  
               that low-income housing developments should not face the  
               retroactive revocation of their welfare exemption simply by  
               virtue of having made payments under a PILOT agreement.   
               Specifically, this bill establishes a conclusive  
               presumption that payments made under a PILOT agreement  








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               entered into before January 1, 2015, were and are used to  
               maintain the affordability of the low-income units.  This  
               provision is intended to preserve the welfare exemption for  
               low-income projects subject to a PILOT agreement entered  
               into before January 1, 2015.

               This bill also reasserts the underlying purpose of the  
               welfare exemption by prohibiting local governments and  
               low-income housing owners from entering into any PILOT  
               agreement on or after January 1, 2015.  A PILOT agreement  
               entered into in violation of this prohibition would be void  
               and enforceable.  
           

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


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