BILL ANALYSIS                                                                                                                                                                                                    

                                                                     SB 996

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          Date of Hearing:  June 20, 2016


                           Sebastian Ridley-Thomas, Chair

          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.


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          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;  

             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  


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            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  

          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  


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            this bill contains other costs mandated by the state,  
            reimbursement for those costs will be made as required by  

          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  


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            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  

          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.



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           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  

               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  


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           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  


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            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  


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            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  


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            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,  


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            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  

            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.


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           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.




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          San Mateo County Board of Supervisors

          St. Francis Center

          The Arc and United Cerebral Palsy California Collaboration 


          None on file

          Analysis Prepared by:Irene Ho / REV. & TAX. / (916)