BILL ANALYSIS Ó
AB 2818
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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.
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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.
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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
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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
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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
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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,
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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.)
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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
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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
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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.
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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
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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
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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
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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
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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
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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
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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
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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
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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
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San Francisco Community Land Trust
Urban Strategies Council
Opposition
None on file
Analysis Prepared by:Irene Ho / REV. & TAX. / (916) 319-2098