BILL ANALYSIS Ó AB 668 Page 1 Date of Hearing: April 15, 2015 ASSEMBLY COMMITTEE ON HOUSING AND COMMUNITY DEVELOPMENT Ed Chau, Chair AB 668 (Gomez) - As Amended March 26, 2015 SUBJECT: Property taxation: assessment: affordable housing SUMMARY: This bill requires county assessors to consider a recorded contract with a tax-exempt affordable housing nonprofit corporation when valuing property for property tax assessment purposes. Specifically, this bill: 1)Requires the nonprofit corporation to be organized as a 501 (c) (3) that has as its primary purpose the advancement of affordable housing. 2)Requires the recorded contract to restrict the use of the land for at least 30 years at an affordable housing cost or affordable rent at specified income limits. 3)Requires the state to reimburse local agencies and school districts if the Commission on State Mandates determines that this Act contains costs mandated by the state. EXISTING LAW: AB 668 Page 2 1)Limits the maximum amount of any ad valorem tax on real property at 1% of full cash value (California Constitution Section One of Article XIII). 2)Requires property to be reassessed to current fair market value whenever it is purchased, newly constructed, or when ownership changes, with specified exceptions, and provides a rebuttable presumption that the fair market value is the purchase price. 3)Defines "purchase price" as the total consideration provided by the purchaser or on the purchaser's behalf, valued in money, whether paid in money or otherwise. 4)Requires county assessors, when determining assessed valuation, to consider the effect on property of the value of any enforceable restrictions against the use of the land, such as zoning, easements, environmental restrictions, and recorded contracts with government agencies (Revenue and Taxation Code Section 402.1). FISCAL EFFECT: Unknown. COMMENTS: Background : The California Constitution provides that all property is taxable unless explicitly exempted by the Constitution or federal law. The Constitution limits the maximum amount of any ad valorem tax on real property at one percent of full cash AB 668 Page 3 value and growth in the value of the property to two percent per year. Assessors reappraise property whenever it is newly constructed, or when ownership changes. To determine value, the law effectively presumes that a property's purchase price in the transaction is its full cash or fair-market value. The law further defines the purchase price to include the total consideration provided by the purchaser, or on the purchaser's behalf, valued in money, paid in money or otherwise. Assessors must consider enforceable restrictions, such as zoning and environmental restrictions, when valuing property. Assessors subsequently estimate the value of the property based on its legal uses allowed by the enforceable restriction. An assessor must consider the value of an enforceable restriction recorded by a governmental agency when valuing a property as well as other types of restrictions. Nonprofit organizations record enforceable affordability contracts and deeds restrictions. However, the law does not explicitly require assessors to consider these recorded contracts when determining the property's assessed value. The law allows the assessor to consider enforceable restrictions in addition to those specified in existing law (Revenue and Taxation Code Section 4021.1). Some county assessors deduct the value of the restriction from the fair market value of the home, and the Board of Equalization (BOE) recommends that assessors estimate the present economic value of the covenant, and then sum it with the down payment and value of the mortgage. The value determines the property tax the new owners must pay, so the tax effect of the difference between "fair market value" rather than the "purchase price" can be significant. Habitat for Humanity model : The sponsor of this bill, Habitat for Humanity works with families who contribute sweat equity to the construction of the home. Habitat for Humanity attaches a covenant or restrictions AB 668 Page 4 sometimes known as a "silent second mortgage", secured by a deed of trust that limits any family purchasing the home from reselling it so that the home remains affordable should the initially selected family choose to move out. Households that assume a mortgage from Habitat for Humanity are restricted from spending more than 30% of their income on their monthly mortgage, which includes property taxes, insurance, HOA dues, and deferred maintenance. The family must agree to the covenant in order to buy the subsidized home. Because of the restriction on resale, the value of the property to the owner is less than its value on the open market. Assessment of the property at fair market value, without consideration of the affordability covenant which limits the resale price, increases the amount of the property taxes the homeowner must pay making the home less affordable for lower-income families. Inconsistency in application of law : Assessors throughout the state vary the methods of determining the assessed value of homes with recorded contracts limiting the resale. Some consider the "fair market price" of the home while others take into consideration the restrictions on resale and reduce the assessed value. In February of this year, the sponsor conducted a survey of 22 counties in California to determine how they assessed homes built and financed by Habitat for Humanity. The results indicated an inconsistency in how different jurisdictions assess the home value. For example, in some areas, the assessed value was based on whether or not city or county funds were involved in the construction and in others was based on a verbal agreement with the local assessor. Purpose of the bill : According to the author, "this bill creates consistency throughout the state by authorizing the county assessors, when AB 668 Page 5 determining the value of a property for tax purposes for affordable housing sold to low-income families, to consider the effect of the recorded contracts and deed restrictions on affordability between the buyer and a nonprofit organization in assessment of that land." Arguments in opposition : The California Assessors' Association is opposed to AB 668 and has raised several issues of concern with the bill. "Section 402.5 of the Revenue and Taxation Code requires the assessor to take into consideration the effect of enforceable governmental restrictions' on a property's full cash value to substantially reduce the assessed value of the property. This bill would require a county assessor to consider a recorded contract with a non-profit entity that restricts the use of the land for at least 30 years for affordable housing or affordable rent, when valuing the real property for property tax purposes. Currently the meaning of 'enforceable restrictions' is limited to government entities - and for good reason. Government entities are in the best position to evaluate the overall benefit to the entire community relative to the loss in property tax revenue. Moreover, governmental restrictions are generally recorded, discoverable, and provided to the assessor. Private restrictions, for which there are many variations, are not readily discoverable." Staff Comments: Under the existing provisions of the bill, any nonprofit could record a contract against a property and the assessor would need to consider it when determining the value of a property. The committee may wish to consider narrowing the bill in the following ways to limit the application to legitimate nonprofits providing affordable housing. AB 668 Page 6 1)Limit the application of the bill to recorded contracts that apply to owner-occupied, affordable homes; 2)Limit the application of the bill to 501 (c) 3 non-profit organizations that have been approved by the BOE for a "welfare exemption" for properties intended to be sold to low-income families who participate in a special no-interest loan program; and 3)Require a non-profit organization to have a silent deed of trust on the property. Related legislation: SB 499 (Wyland, 2013) which was identical to this bill was held in the Senate Appropriations Committee. AB 793 (Strickland, 2007) would have excluded from the calculation of purchase price the amount of any "silent second mortgage" if payment is not required for at least 30 years. It expressly provided that resale restrictions on homes purchased through a program operated by a governmental agency must be considered when determining property value. The bill would have allowed resale price restrictions on homes purchased through a program operated by a nonprofit organization to be treated as an enforceable restriction that must be considered when determining the property value. This bill was held in Senate Appropriations Committee. AB 668 Page 7 REGISTERED SUPPORT / OPPOSITION: Support Habitat for Humanity (sponsor) California Housing Consortium (CHC) Opposition California Assessors' Association Analysis Prepared by:Lisa Engel/ H. & C.D. / (916) 319-2085 AB 668 Page 8