BILL ANALYSIS Ó AB 2818 Page 1 Date of Hearing: May 9, 2016 ASSEMBLY COMMITTEE ON REVENUE AND TAXATION Sebastian Ridley-Thomas, Chair AB 2818 (Chiu) - As Amended May 2, 2016 Majority vote. Tax levy. Fiscal committee. SUBJECT: Property taxation: community land trust SUMMARY: Presumes that the assessed value of specified dwellings or units and the land on which they are situated is the purchase price of only the dwelling or unit, and that the property tax welfare exemption may apply to property on which specified residences will be constructed, but construction has not yet commenced. Specifically, this bill: 1)Presumes, for lien dates occurring on and after January 1, 2017, that the assessed value of an owner-occupied single-family dwelling or owner-occupied unit in a multifamily dwelling, and the land on which the dwelling or unit is situated for its convenient occupation and use by low or moderate income (LMI) households, is the purchase price of the dwelling or unit. AB 2818 Page 2 2)Presumes, for lien dates occurring on and after January 1, 2017, that the assessed value of a dwelling or unit owned by a limited equity housing cooperative (LEHC) or a member-occupant or resident shareholder of the LEHC, and the land on which the dwelling or unit is situated for its convenient occupation and use by LMI households, is the purchase price of the share conveying an exclusive right to occupancy and possession of the dwelling or unit. 3)Provides, for lien dates occurring on and after January 1, 2017, that a property is within the welfare exemption provided by Sections 4 and 5 of Article XIII of the California Constitution if the property is owned and operated by a nonprofit corporation otherwise qualifying for the exemption under Revenue and Taxation Code (R&TC) Section 214, that has as one of its primary purposes the creation and maintenance of permanently affordable single-family or multifamily residences to which both of the following conditions apply: a) All residences on the land are intended for ownership by a qualified owner to be occupied by LMI households as their primary residence, and the land on which the residence is situated is leased by the nonprofit corporation to the qualified owner for the convenient occupation and use of that residence for a renewable term of 99 years; and, b) The residence is subject to affordability restrictions. 4)Provides, in the case of property not previously designated as open space, that the exemption may not be denied to a property on the basis that the property does not currently include a permanently affordable single-family or multifamily residence in existence or in the course of construction. AB 2818 Page 3 5)Provides that the exemption is only applicable to a property for no more than five years from the date any affordability restriction is recorded against the property. 6)Provides that "affordability restrictions" include, but are not limited to, all of the following: a) A dwelling, unit, or residence that can only be rented, sold, or resold to LMI households for purposes of their principal place of residence; b) The sale or resale price of the dwelling, unit, or residence is determined by a formula that ensures it has a purchase price affordable to LMI households; c) The rent collected from the dwelling, unit, or residence does not exceed the maximum rent allowable to be collected from LMI households; d) There is a purchase option for the dwelling, unit, or residence in favor of the community land trust (CLT) intended to preserve the dwelling or unit as affordable to LMI households; e) Any restriction that ensures the dwelling, unit, or residence is to remain affordable to LMI households by recorded deed, deed restriction, ground lease, covenant, memorandum, or other recorded instrument; or, f) Any restriction in a recorded instrument from which a public agency or official has made a finding that the restriction serves the public interest to create and AB 2818 Page 4 preserve the affordability of residential housing for LMI households. The public agency or official must be one of the following: i) The director of the local housing authority or equivalent agency; ii) The county counsel; iii) The director of a county housing department; iv) The city attorney; or, v) The director of a city housing department. 7)Defines "community land trust" as a nonprofit corporation otherwise qualifying for an exemption under R&TC Section 214, that has as one of its primary purposes the creation and maintenance of permanently affordable single-family or multifamily residences to which both of the following conditions apply: a) All residences on the land are sold to a qualified owner to be occupied by LMI households as their primary residence, and the land on which the dwelling or unit is situated is leased by the nonprofit corporation to the qualified owner for the convenient occupation and use of that dwelling or unit for a renewable term of 99 years; and, b) The dwelling or unit is subject to affordability AB 2818 Page 5 restrictions. 8)Defines "limited equity housing cooperative" as having the same meaning as the term in Civil Code Section 817. 9)Defines "persons and families of low or moderate income" as having the same meaning as the term in Health and Safety Code (H&SC) Section 50093. 10)Defines "qualified owner" as either a LEHC or persons and families of LMI. 11)Defines "purchase price" as the price that does not exceed the sale or resale formula that ensures the dwelling or unit has a purchase price that is affordable to LMI households. 12)Imposes a state-mandated local program and provides that, if the Commission on State Mandates determines that the bill contains costs mandated by the state, reimbursement for those costs shall be made pursuant to these statutory provisions. 13)Provides that no appropriation is made and the state will not reimburse local agencies for property tax revenues lost by them pursuant to this bill. 14)Takes effect immediately as a tax levy. EXISTING LAW: 1)Limits the maximum amount of any ad valorem tax on real AB 2818 Page 6 property at 1% of full cash value. 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, including but not limited to: a) Zoning restrictions; b) Development controls in accordance with local coastal or protection programs; c) Statutory environmental constraints; d) Hazardous waste land-use restrictions; e) Recorded conservation, trail, or scenic easements; f) Solar-use easements; or, AB 2818 Page 7 g) Recorded contracts with a non-profit corporation granted a welfare exemption for properties intended to be sold to low-income families who participate in a special no-interest loan program. The contract must restrict use of the land for owner-occupied affordable housing for at 30 years, include a deed of trust in favor of the nonprofit corporation to ensure compliance, and be provided to the assessor. The local housing authority or equivalent agency must also make a finding that the long-term deed restrictions serve a public purpose. (R&TC Section 402.1) 5)Authorizes the Legislature to exempt from taxation property used exclusively for religious, hospital, or charitable purposes, as specified. (California Constitution Article XIII, Section 4(b).) The Legislature has implemented this "welfare exemption" in R&TC Section 214. 6)Grants the welfare exemption to property used exclusively for rental housing and related facilities for lower income households, as defined in H&SC Section 50053, operated by non-profit organizations, as specified. 7)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." 8)Authorizes nonprofit corporations organized and operated for the specific and primary purpose of building and rehabilitating single or multi-family residences to qualify for the welfare exemption when property is acquired rather than when construction commences. (R&TC Section 214.15.) AB 2818 Page 8 Generally, unimproved land is not exempt from when the property is initially acquired through when onsite activity commences, despite plans by the owning entity to build exempt property on vacant land in the future. FISCAL EFFECT: Unknown. The State Board of Equalization (BOE) analysis of this bill is pending. COMMENTS: 1)Author's Statement : The author has provided the following statement in support of this bill: Non-profits throughout the state have experienced an inconsistent methodology for assessing property taxes for CLT units. In some cases the units are assessed at the "fair market value" which does not take into consideration the underlying land lease and its restrictions on the resale price. In other cases homes are assessed somewhere in between market and the actual restricted value with varying explanations for the inconsistency. The ongoing affordability of CLT homes critically relies on the accurate and fair assessment of the home. In some cases, the property taxes are nearly double what they should be, particularly when assessed at the market value. Even 10 to 20 percent higher taxes can make these homes no longer affordable, putting the homeowner in jeopardy of foreclosure or unable to properly maintain the physical property. AB 2818 would create a uniform standard so that CLTs can receive a property tax exemption. Non-profits purchase existing multi-family structures and land to convert or develop into a CLT. During the time the non-profit is developing the CLT and obtaining financing, the property can be assessed at the market value. This can be prohibitive for a non-profit. AB 2818 would exempt CLTs AB 2818 Page 9 from assessment at the full market value during the development process. Under existing law, CLTs can obtain a welfare exemption after occupancy of a rental property but not before the property is developed. 2)Arguments in Support : Proponents of this bill state: California is deep within the throes of an affordability crisis with diminishing opportunities for families of modest means to purchase their own homes. AB 2818 affirmatively responds to our state's shortfall of affordable homeownership opportunities for low-income families, and affords community land trusts the same equitable treatment under California law already extended to more common forms of affordable housing provision. 3)Community Land Trusts : CLTs provide an affordable housing model to help LMI households that may not otherwise be able to purchase a home. The CLT acquires and develops properties for sale to LMI households, but retains ownership of the underlying land and leases the land to the homeowner for a nominal fee through a long-term ground lease (usually a 99-year term). The home is therefore more affordable because the homeowner is only buying the building and not the land underneath. If the homeowner decides to sell the property, the home must be resold to another LMI household, and the original owner will only be eligible for a smaller share of its appreciated value. Since the CLT is the owner of the land, it will be a party to all future sales and enforce resale restrictions. According to the California Community Land Trust Network, it appears that many CLTs in California also have robust rental portfolios restricted for LMI households. A CLT is generally formed as a membership-based, non-profit AB 2818 Page 10 organization with a professional staff, led by a member-elected board of directors and funded by land rent fees. Members include CLT homeowners, neighbors, and other local residents, providing community buy-in over local development. Many CLTs also provide homeowners with homebuyer education and financial literacy courses. While a subsidy is often needed to start a CLT, outside funding is no longer necessary once homes are occupied, which provides steady fee revenues, and are resold, which recycles the original subsidy thereby allowing homes to remain permanently affordable. According to the National Community Land Trust Network, virtually all CLT leases pass along the cost of property taxes to the homeowner. The homeowner is either directly assigned to pay property taxes associated with both the home and underlying land, or is directly assigned to pay property taxes associated with the home and then pays any property taxes associated with the underlying land via its lease fee to the CLT. 4)Limited-Equity Housing Cooperatives : Housing co-ops are democratically controlled corporations in which each household owns a share, entitling the member to occupy a unit of housing. The co-op is usually financed through one mortgage that covers the entire property, with members paying monthly carrying charges to cover mortgage payments and operating expenses, including property taxes. The co-op model can be used for virtually any type of housing construction covering high-end, mid-range, and affordable developments, but LEHCs are specifically developed to offer permanently affordable homeownership opportunities for LMI households. Share prices in these co-ops are usually low, member households are limited to owning only one share, and price restrictions are put on the sale of shares to prevent speculative resale and preserve affordability. AB 2818 Page 11 Given the similar participatory community-based models of CLTs and LEHCs to provide access to affordable housing for LMI households, it is not uncommon to have LEHC-owned homes situated on CLT-leased land. Although California law specifies that increases in LEHC share prices cannot exceed 10% annually and any profits from the sale of the co-op as a whole must be dedicated to public or charitable entities, existing law does not specify that ownership is limited to LMI individuals. If this broad scope is inconsistent with the author's intent, amendments should be considered to harmonize the definition of "qualified owner" utilized in this bill. 5)Assessment of Restricted Homes : Existing law requires every assessor to assess property subject to tax at its full value. In the assessment of land, the assessor must consider the effect of any enforceable restrictions to which the use of land may be subject, such as zoning, easements, environmental restrictions, and recorded contracts with governmental agencies including those outlining affordable housing restrictions. However, "[a]s a general rule, private parties cannot reduce the taxable value of their property by imposing private encumbrances upon it; only enforceable government restrictions under [R&TC] Section 402.1 are recognized as limiting the full fee simple interest." (Assessor's Handbook Section 502, ADVANCED APPRAISAL December 1998, Reprinted January 2015, pg. 6). The inability of private parties to reduce the taxable value of their property through self-imposed private encumbrances has long been recognized by the courts. (Carlson v. Assessment Appeals Board (1985) 167 Cal. App. 3d 1004). Last year, AB 668 (Gomez) Chapter 698, Statutes of 2015, provided that specified self-imposed private encumbrances could result in assessments of reduced property taxes if the applicable contract is recorded and provided to the assessor. Authorized contracts are limited to those by a non-profit corporation granted a welfare exemption to sell low-income AB 2818 Page 12 families participating in a special no-interest loan program affordable housing, similar to the model utilized by Habitat for Humanity. As a result, assessors must now consider the non-profit's organization-imposed restrictions when determining a property's assessed valuation. 6)How Are CLTs Assessed ? According to the author, CLTs in California experience an inconsistent methodology for assessing property taxes. In some cases, the units are assessed at "fair market value," which does not take into consideration the underlying land lease and restrictions on home resale price. In other cases, the units are assessed in between the market and restricted value with varying explanations for the inconsistency. For example, the Oakland CLT (OakCLT) states that while it technically owns the land, "there is no value to the land that it can realize apart from the nominal below-market monthly lease fee ($50/month) collected?the value of the land under an OakCLT home is fully included in the restricted sales price (i.e., $150,000)." As such, OakCLT believes that the total assessed value (improvements and land) of a CLT property should be based upon the restricted sales price of the home. 7)Purpose of This Bill - Consistent Assessments : This bill does not prescribe the assessment methodology that should be used in valuing a dwelling or unit and the CLT-leased land on which it is situated, but establishes a presumption that the value of the dwelling or unit and the land is the purchase price of the dwelling or unit only, and not the CLT-leased land on which it is situated (or in the case of a dwelling or unit owned by a LEHC, the purchase price of the share conveying exclusive right to occupancy). However, under existing law, there is already a rebuttable presumption that assessment of fair market value is the property's purchase price. The reason why the property may be assessed higher than the purchase price is that current law does not allow the assessor to consider the impact of private party enforceable AB 2818 Page 13 restrictions. As such, the Committee may wish to consider the extent to which the standard established by this bill contrasts with existing precedent that requires assessors to consider the effect of restrictions on a property's use, in lieu of specifying what purchase price should be used for assessment purposes, and may not achieve its desired intent. This bill suggests but does not explicitly provide that the specified purchase price presumption is limited to CLTs subject to affordability restrictions via ground leases. Additionally, this bill outlines a number of factors that may constitute applicable affordability restrictions, but does not distinguish between factors that influence purchase or rental price unique to CLTs and factors that establish restrictions with a governmental agency. For example, the affordability restrictions include either a rule providing that only LMI households can occupy the home or a recorded instrument ensuring LMI affordability, potentially allowing other non-profit housing models aside from CLTs to qualify for the assessment considerations proposed by this bill. If this is broad scope is inconsistent with the author's intent, amendments should be considered to better identify what non-profit housing models qualify for the welfare exemption proposed by this bill and require certain restrictions to be executed in combination with one another. 8)Property Tax Welfare Exemption : The California Constitution exempts from property taxes, in whole or in part, "property used exclusively for religious, hospital, or charitable purposes and owned or held in trust by corporations or other entities (1) that are organized and operating for those purposes, (2) that are nonprofit, and (3) no part of whose net earnings inures to the benefit of any private shareholder or individual." With regards to housing owned and used by these nonprofit entities, courts have ruled that this "welfare exemption" applies to uses that are either primary to or incidental to and reasonably necessary for the accomplishment AB 2818 Page 14 of the exempt purposes of the organization. For example, in Cedars of Lebanon Hospital v. County of Los Angeles (1950) 35 Cal. 2d 729, the court exempted any housing facility for interns, resident doctors, student nurses, and certain hospital employees deemed essential to the operation of a complete modern hospital on a 24-hour basis. The California Constitution also provides that the welfare exemption applies to "buildings under construction, land required for their convenient use, and equipment in them if the intended use would qualify the property for the exemption." Generally, a vacant property is not considered being used for a charitable purpose by the non-profit that otherwise qualifies for the welfare exemption, although the exemption would become effective as soon as construction or other activity begins onsite. However, existing law does provide that non-profits with an affordable housing model similar to that utilized by Habitat for Humanity may qualify for the welfare exemption as soon as the property is acquired and prior to commencement of construction. In providing special treatment for this affordable housing model, the Legislature issued findings proclaiming that its exempt activities are distinct from other affordable housing providers because its exempt purpose is not to own and operate a housing project on an ongoing basis, but to make housing and the land reasonably necessary for the use of that housing available for prompt sale to low-income residents. In other words, the Legislature found that the holding of real property for the future construction of housing on that property is central to the affordable housing model's exempt purposes and activities, and therefore constitutes "use." Existing law also provides that the welfare exemption also applies to property owned and operated exclusively for rental housing occupied by lower-income households, defined as 30-60% of area median income (AMI). A proportionate partial exemption is granted if lower-income households occupy only a AB 2818 Page 15 percentage of rental housing. The property must be financed with tax-exempt bonds or government grants with rents of the lower-income households below deed restrictions set by the terms of the financing, financed with low-income housing tax credits (LIHTC), or comprised of at least 90% lower-income households. Owners must also certify that property tax savings from the exemption are used to "maintain the affordability of, or reduce rents otherwise necessary for, the units occupied by lower income households." 9)Do CLTs Qualify for the Welfare Exemption ? This bill defines "community land trust" as a nonprofit corporation, otherwise qualifying for the welfare exemption, that has as one of its primary purposes creating and maintaining permanently affordable housing. However, it is not clear that CLTs always qualify for the welfare exemption. CLTs are a relatively new affordable housing model and exist in a variety of permutations. Although a CLT will always be the ground lessor of any housing development it manages, and it appears the primary goal is to promote affordable homeownership, many CLTs in California provide rental opportunities in addition to ownership opportunities. Homes owned by individuals or LEHCs on CLT land do not qualify for the welfare exemption. While LEHCs are nonprofit corporations, they exist solely as a means to hold property and do not serve a charitable purpose. Generally, facilitating housing for a finite number of people in their own private homes, albeit for LMI households, also does not constitute a charitable purpose. Rental housing is more complex. Some CLTs rent units they own directly to tenants while some lease their land to an affordable housing developer that then rents units it owns to tenants. Under either rental model, the welfare exemption would apply if the property was financed with deed-restricted tax-exempt bonds or government grants or the LIHTC, or served the requisite threshold of lower-income individuals. Since CLTs also serve AB 2818 Page 16 moderate-income households (income that does not exceed 120% AMI), not every CLT rental property qualifies for the exemption in whole or in part. Accordingly, it is unclear how many CLTs currently qualify for the welfare exemption and the manner in which they may qualify. 10)Purpose of This Bill - Special Exemption : This bill provides that non-profits with affordable housing models similar to CLTs qualify for the welfare exemption and prohibits the exemption from being denied on the basis that the property does not yet have a housing development in use onsite. The exemption would be effective for five years after affordability restrictions are recorded against the property. Although this bill is modeled on existing law that provided specified affordable housing developments a property tax exemption between the time vacant land is purchased and construction begins, operational differences between the CLT model and the Habitat for Humanity model result in a much broader exemption being granted to CLTs. In effect, this bill would grant all CLTs a welfare exemption for five years upon recordation of affordability restrictions, or until the unit is sold to a new owner, even if the CLT would not otherwise qualify for an exemption. Habitat for Humanity is generally a "short-term" holder of property - as soon as property ownership is transferred from the organization to a low-income household, the property is returned to the tax rolls. However, some CLTs maintain ownership of the development and rent units directly to tenants, which may include those of moderate-income who would not ordinarily qualify under the welfare exemption. Since this bill would grant the welfare exemption to nonprofits that have as one of their primary purposes the creation and maintenance of permanently affordable homes intended for ownership, rental housing traditionally excluded from the exemption would now qualify for it in limited instances. Even if the unit is immediately resold, the exemption would still have been granted to AB 2818 Page 17 construct a unit restricted for purchase by a moderate-income household, representing an expansion of the current exemption. The Committee may wish to consider the precedent set by extending the welfare exemption to more unimproved properties and more households, and whether it may incentivize other taxpayers to seek a similar exemption. The Committee may also wish to consider whether a five-year exemption is too long of a "grace period" to begin construction, or whether CLTs that do not begin construction after five years must owe deferred property taxes to the county, since initial plans should at least be underway if affordability restrictions must be in place, prior to receiving the exemption. Finally, as referenced earlier, this bill suggests but does not explicitly provide that the specified welfare exemption is limited to CLTs subject to affordability restrictions via ground leases. This bill also outlines a number of factors that may constitute applicable affordability restrictions, but does not distinguish between factors that influence purchase or rental price unique to CLTs and factors that establish restrictions with a governmental agency. If this broad scope is inconsistent with the author's intent, amendments should be considered to require certain restrictions to be executed in combination with one another to better identify what non-profit housing models qualify for the welfare exemption proposed by this bill. 11)Technical Amendments : Committee staff suggests adoption of the following amendments: a) On Page 4, Line 29, strike "preserves" and insert "preserve"; b) On Page 5, Line 1 and Page 5, Line 37, strike "creating AB 2818 Page 18 and maintaining" and insert "creation and maintenance"; and, c) On Page 6, Line 20, strike "required" and insert "authorized". 12)Related Legislation : AB 668 (Gomez) Chapter 698, Statutes of 2015, requires assessors to consider self-imposed private encumbrances on the value of a property if the contract is executed by a non-profit corporation granted a welfare exemption to sell affordable housing to low-income families participating in a special no-interest loan program and the contract is recorded and provided to the assessor. 13)Prior Legislation : AB 1559 (Wiggins) Chapter 927, Statutes of 1999 provides an extension of the welfare exemption to vacant land in the case of a nonprofit corporation with a charitable purpose to acquire and hold real property for the future construction or rehabilitation of affordable housing for sale at cost to low-income families. REGISTERED SUPPORT / OPPOSITION: Support AMCAL Multi-Housing, Inc. Bolinas Community Land Trust AB 2818 Page 19 California Association of Local Housing Finance Agencies California Housing Consortium Enterprise Community Partners Greenlining Institute Grounded Solutions Network Habitat for Humanity of Orange County Housing Land Trust of Sonoma County Irvine Community Land Trust Oakland Community Land Trust Policy Innovation + Justice Project, Dellums Institute for Social Justice PolicyLink San Diego Community Land Trust San Diego Housing Federation AB 2818 Page 20 San Francisco Community Land Trust Urban Strategies Council Opposition None on file Analysis Prepared by:Irene Ho / REV. & TAX. / (916) 319-2098