BILL ANALYSIS Ó AB 668 Page 1 ASSEMBLY THIRD READING AB 668 (Gomez) As Amended May 5, 2015 Majority vote ------------------------------------------------------------------- |Committee |Votes |Ayes |Noes | | | | | | | | | | | |----------------+------+---------------------+---------------------| |Housing |6-0 |Chau, Steinorth, | | | | |Burke, Chiu, Lopez, | | | | |Mullin | | | | | | | |----------------+------+---------------------+---------------------| |Revenue & |9-0 |Ting, Brough, | | |Taxation | |Dababneh, Gipson, | | | | |Roger Hernández, | | | | |Mullin, Patterson, | | | | |Quirk, Wagner | | | | | | | |----------------+------+---------------------+---------------------| |Appropriations |15-0 |Gomez, Bigelow, | | | | |Bloom, Bonta, | | | | |Calderon, Chang, | | | | |Eggman, Gallagher, | | | | | | | | | | | | | | |Eduardo Garcia, | | | | |Holden, Quirk, | | | | |Rendon, Wagner, | | AB 668 Page 2 | | |Weber, Wood | | | | | | | | | | | | ------------------------------------------------------------------- SUMMARY: This bill requires county assessors to consider a recorded contract with a tax-exempt non-profit corporation when valuing property for property tax assessment purposes. Specifically, this bill: 1)Requires county assessors to consider contracts that meet the following requirements: a) The contract is with a non-profit corporation organized as a 501(c)(3) that has received a welfare exemption under Revenue and Taxation Code Section 214.15 for properties intended to be sold to low-income families who participate in a special no-interest loan program; b) The contract restricts the use of the land for 30 years to owner-occupied housing available at an affordable cost; c) The contract includes a deed of trust on the property in favor of the nonprofit corporation to ensure compliance with the terms of the program, which has no value unless the owner fails to comply with the covenants and restrictions of the terms of the home sale; d) The local housing authority or an equivalent agency, or, if none exists, the city attorney or county counsel, has made a finding that the long-term deed restrictions in the contract serve a public purpose; and e) The contract is recorded. 1)Requires the state to reimburse local agencies and school districts if the Commission on State Mandates determines that AB 668 Page 3 this bill contains costs mandated by the state. FISCAL EFFECT: According to the Assembly Appropriations Committee, unknown reduction in property tax receipts, resulting in General Fund costs to reimburse counties under the Proposition 98 (1988) funding guarantee. For example, assuming the average Habitat for Humanity homebuyer earns $33,600 (55% of the 2014 median household income in California, the mid-point of Habitat's eligibility scale), and pays one-third of that income towards a mortgage, that buyer could probably afford a mortgage of approximately $190,000. Further assuming the median home price in California for a three bedroom home is approximately $420,000, the difference in assessed value would be $230,000 if the county assessor assessed the value at what the Habitat for Humanity homeowner effectively paid. Habitat for Humanity estimates there are approximately 25 homes built per year that would be affected by this bill. Assuming the difference in assessed value in the above example, this bill would result in a reduction in property tax receipts statewide of approximately $60,000 in the first year, approximately half of which would be reimbursed from the General Fund. Over time, the number of homes that enjoy the reduced tax assessment value under this bill, and the amount therefore reimbursed from the General Fund, will increase. 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 1% of full cash 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 AB 668 Page 4 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 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, AB 668 Page 5 Homeowners Association 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. This bill would create uniformity in what county assessor can consider when determining the assessed value of a property, upon which a nonprofit organization has a recorded contract that limits the use of the land for 30 years to owner-occupied housing at an affordable cost. Analysis Prepared by: Lisa Engel / H. & C.D. / (916) 319-2085 FN: 0000526 AB 668 Page 6