BILL ANALYSIS Ó
SB 996
Page 1
Date of Hearing: June 20, 2016
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Sebastian Ridley-Thomas, Chair
SB
996 (Hill) - As Amended May 2, 2016
Majority vote. Fiscal committee.
SENATE VOTE: 39-0
SUBJECT: Property taxation: welfare exemption
SUMMARY: Increases the total property tax welfare exemption
amount allowed to a qualified taxpayer from $20,000 to $100,000,
and allows a cancellation or refund of property tax outstanding
or paid in excess of $20,000 to the extent that the amount
canceled or refunded does not exceed $100,000. Specifically,
this bill:
1)Increases the welfare exemption cap imposed on a qualified
taxpayer from $2 million of assessed value ($20,000) to $10
million of assessed value ($100,000), with respect to lien
dates occurring on and after January 1, 2017.
SB 996
Page 2
2)Requires any outstanding or paid ad valorem tax in excess of
the $20,000 cap, and related interest or penalty, imposed on
and after January 1, 2013, and before January 1, 2017, to be
canceled or refunded if a qualified claim was filed, to the
extent the amount canceled or refunded does not result in a
total exemption amount in excess of $100,000 allowed to a
qualified taxpayer.
3)Prohibits, on and after January 1, 2017, an escape assessment
from being levied on qualified property if that amount would
be subject to cancellation or refund.
4)Requires a claim for the welfare exemption on qualified
property to be accompanied by a confidential affidavit, not
subject to public disclosure, including a list of units
occupied by lower income households for which the exemption is
claimed, and the following non-personally identifiable
information about the occupants:
a) The actual household income of the occupant;
b) The maximum rent that may be charged to the occupant;
and,
c) The actual rent charged to the occupant.
5)Defines a "qualified taxpayer" as a taxpayer subject to the
total exemption amount limitation with respect to a single
property or multiple properties that is specified in Revenue
and Taxation Code (R&TC) Section 214(g)(1)(C).
6)Defines a "qualified claim" as a claim for exemption that was
SB 996
Page 3
filed for a qualified property with the assessor on and after
January 1, 2013, and before January 1, 2017, for which the
assessor granted a partial exemption.
7)Defines a "qualified property" as property used exclusively
for rental housing and related facilities where 90% or more of
the occupants of the property are lower income households as
prescribed by Health and Safety Code (H&SC) Section 50053, and
that qualifies for exemption under R&TC Section 214(g)(1)(C),
except for property owned by a limited partnership in which
the managing general partner is an eligible nonprofit
organization.
8)Makes findings and declarations that the cancelation or refund
of any outstanding or paid ad valorem tax fulfills a statewide
public purpose because it addresses California's serious
shortage of affordable, decent, safe, and sanitary housing for
low or moderate income households, including the elderly and
handicapped, by providing necessary property tax relief for
certain tax-exempt organizations providing affordable housing.
9)Makes findings and declarations that the protection of the
confidential affidavit from public disclosure limits the
public's right of access to the writings of public officials
and agencies within the meaning of Section 3 of Article I of
the California Constitution, but is necessary in the state's
interest to protect the privacy of an individual's personal
and financial information.
10)Imposes a state-mandated local program, for which no
reimbursement is required because the only costs that may be
incurred by a local agency or school district under this act
would result from a legislative mandated within the scope of
Article I of the California Constitution Section 3(b)(7).
However, if the Commission on State Mandates determines that
SB 996
Page 4
this bill contains other costs mandated by the state,
reimbursement for those costs will be made as required by
statute.
11)Provides that no appropriation is made by this act and that
no reimbursement is required of any local agency for any
property tax revenues lost.
EXISTING LAW:
1)Limits the maximum amount of any ad valorem tax on real
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)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.
5)Grants a partial welfare exemption, equal to the percentage of
units serving lower income households as defined in H&SC
Section 50053, to property used exclusively for rental housing
and operated by non-profit organizations, as specified, under
SB 996
Page 5
either of the following conditions:
a) The project is publicly financed with tax-exempt
mortgage revenue bonds, general obligation bonds, grants,
or low-income housing tax credits (LIHTCs); or,
b) In the case of non-publicly financed affordable housing,
90% of units are affordable for lower income households,
and the property is managed solely by a non-profit
organization, with the taxpayer only exempt from the first
$20,000 in tax for all properties the taxpayer owns in the
state.
6)Requires rental property owners seeking the welfare exemption
to do the following:
a) File an enforceable and verifiable agreement with a
public agency or other restriction, as specified, that
provides that the units designated for use by lower income
households are continuously available to or occupied by
lower income households; and,
b) Certify that the funds that would have been used to pay
property taxes are used to maintain the affordability of,
or reduce rents otherwise necessary for, the units occupied
by lower income households.
FISCAL EFFECT: According to the State Board of Equalization
(BOE), annual property tax revenue losses of $240,000 and
one-time property tax refund or cancellations of about $400,000.
COMMENTS:
SB 996
Page 6
1)Author's Statement : The author has provided the following
statement in support of this bill:
California has a serious shortage of affordable housing.
SB 996 provides the necessary property tax relief to
certain nonprofit organizations so that these tax-exempt
organizations can continue to provide more affordable
housing for low income people and families.
There are only 76 different properties in California owned
by 26 nonprofits that are currently being reported to the
Board of Equalization by the County assessors that are
subject to this cap. Only eight of these are close to or
over the cap. The three charities in my district are the
only ones in the entire state currently over the cap.
2)Arguments in Support : Proponents of this bill state the
following:
Given the severe nature of [San Mateo] County's affordable
housing challenge, it is critically important to preserve
and assist the efforts of non-profits like the Ministry
Services of the Daughters of Charity of St. Vincent de Paul
in Los Altos and the Saint Francis Center in Redwood City,
which collectively provide approximately 86 units of
affordable housing to extremely low-income residents in
East Palo Alto and North Fair Oaks. In addition to owning
and operating housing that is 100 percent dedicated to
low-income families, these nonprofit organizations provide
much needed nutrition, clothing and educational assistance
to the residents of these low-income communities.
Moreover, the organizations have committed to reinvesting
any property tax savings back into their mission of
providing more affordable housing and other supportive
SB 996
Page 7
services.
3)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 regard 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
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.
Existing law provides that a partial welfare exemption also
applies to property owned by a non-profit organization and
operated exclusively for rental housing occupied by lower
income households, defined as 30% to 60% of area median income
AMI. The partial exemption is granted in proportion to the
percentage of rental units serving lower income households.
For example, if lower income households occupy 95% of a rental
property, the welfare exemption is granted in an amount equal
to 95% of the value of the property.
To qualify for the welfare exemption, the rental property must
be financed with tax-exempt mortgage revenue bonds or general
obligation bonds; local, state, or federal loans or grants; or
LIHTCs with rents of the lower-income households below deed
restrictions set by the terms of the financing. There is no
cap on the amount of exemption from which the non-profit
SB 996
Page 8
organization may benefit if the rental property receives
government financing. Alternatively, rental properties
without government financing may also qualify for the rental
exemption, but under more restrictive conditions. The rental
property must be solely managed by a non-profit organization
(limited partnerships with a non-profit organization serving
as the managing general partner are not eligible) and lower
income households must comprise 90% or more of its occupants.
Additionally, there is a statewide cap on the total amount of
exempt property from which a non-profit organization may
benefit, limited to the first $20,000 of property tax ($2
million of assessed value), with respect to a single property
or multiple properties for any fiscal year.
4)History of the Welfare Exemption Cap : Prior to 2000,
non-profit rental housing owners could generally claim the
welfare exemption if 20% of the property's occupants were low
income. After the Los Angeles Housing Project investigated
some of the city's worst housing projects, they discovered
abuse of the welfare exemption that enabled owners of
substandard housing properties to benefit from relief. It was
alleged that substandard housing owners were partnering with
nonprofit organizations in a limited partnership as a ruse to
obtain the welfare exemption, or were creating their own
non-profit organizations for the sole purpose of holding their
properties. In response, AB 1559 (Wiggins), Chapter 927,
Statutes of 1999, repealed the occupancy test and instead
required owners to receive government financing to qualify for
the welfare exemption, as such properties would at least be
subject to some level of government oversight, presumably
resulting in less fraud and higher quality housing for
tenants. AB 1559 also imposed higher documentation standards
to substantiate that a rental property is dedicated to
low-income housing.
However, reforms set forth by AB 1559 inadvertently resulted
in revocation of the welfare exemption from otherwise
SB 996
Page 9
deserving non-profit organizations that provided affordable
rental housing without any government financing. In response,
AB 659 (Wiggins), Chapter 601, Statutes of 2000, reinstated
the welfare exemption for non-publicly financed rental housing
with the restrictions provided for in existing law today: (a)
ineligibility of owners organized as a limited partnership,
(b) 90% lower-income households occupancy threshold, and (c)
$20,000 statewide welfare exemption cap.
5)Purpose of this Bill - Increase the Cap : The cap was intended
to preclude "bad actors" from exploiting the welfare exemption
by creating shell non-profit organizations. According to data
compiled by the BOE, which monitors the welfare exemption and
the statewide cap, there are 26 non-profit organizations in
California that provide affordable rental housing subject to
the cap. These 26 organizations own 76 properties of various
types (single-family residences, multifamily residences, and
apartment complexes) located across 11 counties. Currently,
three of these 26 organizations own an amount rental property
which puts them over the cap, and must therefore pay property
taxes in excess of the first $20,000 otherwise due.
According to the author, the three organizations over the cap
are located in the district he represents. For example, the
Ministry Services of the Daughters of Charity of St. Vincent
de Paul owns and operates housing in Los Altos Hills that
exclusively serves low-income families and has been billed for
over $68,000 in property taxes (the amount in excess of the
current $20,000 cap) that could otherwise be put toward
providing more affordable housing for those in need. This
bill would increase the welfare exemption cap from $20,000 to
be expressed as $10 million in assessed value ($100,000).
Since the creation of the welfare exemption cap over 15 years
ago, few non-profit organizations that own rental housing have
exceeded the cap as the majority of affordable housing
SB 996
Page 10
projects receive government financing and are thus not subject
to the cap. However, as property values continue to rise
across California, it is possible that more and more
properties may become limited by the cap, especially in areas
with high costs of living such as the San Francisco Bay Area.
Increasing the cap to $10 million in assessed value would put
all non-publicly financed rental housing properties partially
exempt from property tax back under the cap and potentially
allow non-profit organizations to acquire and operate more
affordable housing units without fear of breaching the cap.
6)Refund of Property Taxes Previously Paid : This bill would
also provide a cancellation or refund of property taxes owed
or paid between $20,000 and $100,000 by the qualified
non-profit organization if the organization filed a welfare
exemption claim within the last four years but was required to
pay tax because of the cap. Existing law allows property tax
refunds in very limited instances. Generally, refunds may be
granted if the taxes were overpaid, paid more than once,
erroneously collected or levied, illegally assessed or levied,
an assessor's clerical error, or an error based on erroneous
information supplied by the assesse.
Prior legislation that altered when property tax was due has
provided for cancellations of tax, but not refunds of tax.
For example, SB 1284 (Lowenthal), Chapter 524, Statutes of
2008, provided that specified affordable housing properties
acquired by a non-profit organization in Long Beach, as a
result of mitigation efforts from the construction of the
Century Freeway (I-105) in Los Angeles County, were excluded
from the welfare exemption cap that would have otherwise
applied, and canceled all outstanding taxes back to the date
of acquisition. Subsequent legislation, SB 996 (Lowenthal),
of the 2009-10 Legislative Session, would have allowed refunds
of property taxes paid on the properties exempt from the
welfare exemption cap by SB 1284, but was not enacted.
Similarly, SB 559 (Kehoe), Chapter 555, Statutes of 2007,
SB 996
Page 11
which reversed past assessments for changes in ownership
triggered by transfers of property between registered domestic
partners, provided for cancellations of tax in the assessment
year in which the claim for reassessment was filed, but
explicitly prohibited refunds of tax for any prior assessment
year.
While properties currently affected by the $20,000 cap may no
longer owe property tax in subsequent years if the cap is
increased to $10 million in assessed value, providing a refund
of property tax properly paid pursuant to existing law at the
time of assessment and collection diverges from precedent that
generally only allows for refunds necessitated by
unintentional mistakes. The Committee may wish to consider the
precedent set by allowing a property tax refund as set forth
in this bill, and whether it may incentivize other taxpayers
to seek a similar refund.
7)Additional Reporting Requirements : This bill also requires
all non-publicly financed, non-profit organizations, not just
those that would benefit from increasing the cap, to report
additional information to county assessors when they claim the
welfare exemption. The required information will include a
list of units occupied by lower income households, actual
household income of the occupant, maximum rent that may be
charged to the occupant, and actual rent charged to the
occupant. According to the California Assessors Association,
additional reporting is needed because unlike rental housing
properties eligible for the welfare exemption because of
government financing, the county assessor's office is the only
government entity charged with exemption compliance for
non-publicly financed rental housing properties. To the
extent that additional properties become exempt from tax as a
result of increasing the cap, additional information may
facilitate efforts to verify eligibility.
SB 996
Page 12
8)Technical Amendment : Committee staff suggests adoption of the
following amendment:
On Page 12, Line 33, replace "qualified ad valorem tax, and
related interest, or penalty" with "qualified ad valorem tax
in excess of the total exemption amount limitation, and
related interest or penalty".
9)Related Legislation : SB 678 (Hill) was substantially similar
to this bill. SB 678 was held on the Senate Committee on
Appropriations' Suspense File.
10)Prior Legislation : SB 996 (Lowenthal), of the 2009-2010
Legislative Session, would have allowed refund of property
taxes previously paid in excess of $20,000 welfare exemption
cap for specified affordable housing properties excluded from
the cap. SB 999 was held on the Senate Committee on
Appropriations' Suspense File.
SB 1284 (Lowenthal), Chapter 524, Statutes of 2008, provided
that specified affordable housing properties acquired by a
non-profit organization in Long Beach, as a result of
mitigation efforts from the construction of the Century
Freeway (I-105) in Los Angeles County, were excluded from the
welfare exemption cap that would have otherwise applied.
REGISTERED SUPPORT / OPPOSITION:
Support
SB 996
Page 13
San Mateo County Board of Supervisors
St. Francis Center
The Arc and United Cerebral Palsy California Collaboration
Opposition
None on file
Analysis Prepared by:Irene Ho / REV. & TAX. / (916)
319-2098