BILL ANALYSIS                                                                                                                                                                                                    

                                                                     SB 996

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          996 (Hill)

          As Amended  August 15, 2016

          Majority vote

          SENATE VOTE:  39-0

          |Committee       |Votes|Ayes                  |Noes                |
          |                |     |                      |                    |
          |                |     |                      |                    |
          |                |     |                      |                    |
          |Revenue &       |9-0  |Ridley-Thomas,        |                    |
          |Taxation        |     |Brough, Dababneh,     |                    |
          |                |     |Gipson, Mullin,       |                    |
          |                |     |O'Donnell, Patterson, |                    |
          |                |     |Quirk, Wagner         |                    |
          |                |     |                      |                    |
          |Appropriations  |15-0 |Gonzalez, Bigelow,    |                    |
          |                |     |Bloom, Bonilla,       |                    |
          |                |     |Bonta, Chang, Eggman, |                    |
          |                |     |Eduardo Garcia,       |                    |
          |                |     |Jones, Obernolte,     |                    |
          |                |     |Quirk, Santiago,      |                    |
          |                |     |Weber, Wood, McCarty  |                    |
          |                |     |                      |                    |
          |                |     |                      |                    |


                                                                     SB 996

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          SUMMARY:  Increases the total property tax welfare exemption  
          amount allowed to a qualified taxpayer from $20,000 to $100,000,  
          and allows a cancellation of property tax outstanding in excess  
          of $20,000 to the extent that the amount canceled 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.

          2)Requires any outstanding 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 if a qualified claim was filed, to the extent the  
            amount canceled 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.

          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;


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             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  
            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 of any  
            outstanding 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  


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            confidential affidavit from public disclosure limits the  
            public's right of access to the writings of public officials  
            and agencies within the meaning of the California Constitution  
            Article I Section 3, 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  
            the California Constitution Article I Section 3(b)(7).   
            However, if the Commission on State Mandates determines that  
            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  


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            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  
            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  


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               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 Assembly Appropriations  
          Committee, annual ongoing property tax revenue losses of  
          approximately $240,000, resulting in General Fund (GF) costs of  
          approximately $120,000 as a result of the Proposition 98  


          1)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.  

            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.   


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            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  
            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.

          2)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  


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            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  
            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.

          3)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  


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            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  
            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.

          4)Cancellation of Property Taxes:  This bill would also provide  
            a cancellation of property taxes owed 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.  As  
            amended, this bill would not provide a refund of property  
            taxes previously paid.  

            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  


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            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,  
            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  

          5)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.

          Analysis Prepared by:                                             
                          irene ho / REV. & TAX. / (916) 319-2098  FN:  


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