BILL ANALYSIS Ó SB 996 Page 1 SENATE THIRD READING SB 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 Page 2 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; SB 996 Page 3 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 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 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 SB 996 Page 4 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 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 SB 996 Page 5 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 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 SB 996 Page 6 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 guarantee. COMMENTS: 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. SB 996 Page 7 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 SB 996 Page 8 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 SB 996 Page 9 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 SB 996 Page 10 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 year. 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: 0004269 SB 996 Page 11