BILL ANALYSIS
AB 1332
Page 1
Date of Hearing: May 11, 2009
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Charles M. Calderon, Chair
AB 1332 (Salas) - As Introduced: February 27, 2009
Majority vote.
SUBJECT : Taxation: military housing
SUMMARY : Modifies the criteria that must be met for a private
contractor's long-term lease of military housing to be excluded
from classification as a possessory interest subject to property
tax. Specifically, this bill :
1) Deletes the requirement that the housing be for
"military personnel and their dependents" and instead
specifies that the housing be for military personnel, their
dependents, or both, thereby allowing the exclusion to
apply to long-term leases of nonfamily housing.
2) Modifies the current requirement that all property tax
savings resulting from the exclusion be used solely to
benefit the military housing residents through improvements
like the provision of a child care center. Provides
instead that the savings shall be used solely to benefit
the residents through the private contractor's provision or
renovation of any of the following improvements:
a) Community improvements, including child care centers and
recreation centers; and,
b) Housing improvements, including the construction of
additional housing units.
3) Requires the private contractor, as a general rule, to
expend its estimated property tax savings for an assessment
year, for the purposes specified above, each year or within
the time period the county assessor may make an escape
assessment.
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4) Provides that any expenditure of property tax savings
shall be in addition to any contractual obligation that the
private contractor assumed for the construction,
renovation, rehabilitation, replacement, management, or
maintenance of the military housing.
5) Permits the private contractor to use the reasonable
estimate of property tax savings that will be realized over
the term of the lease to construct, or to secure financing
for the construction of, community and housing improvements
as part of the initial construction of the project.
6) Provides that if, before the expiration of the time
period for the "initial construction of the project", the
private contractor and the county assessor agree in writing
to extend the time period, the initial construction time
period shall be extended to the time period agreed upon.
The time period may also be extended by subsequent written
agreements made before the expiration of the time period
previously agreed upon. In such cases, the time period the
county assessor has to make an escape assessment shall be
extended by a time period equal to the extension of the
initial construction period agreed upon by the county
assessor and the private contractor.
7) Provides that the estimate of assessed value that will
determine the property tax savings to be realized over the
term of the lease shall be calculated by using an income
approach to value.
8) Defines the term "initial construction of the project"
as "construction completed within the first four years of
the term of the lease of the housing project".
9) Requires the private contractor, at the county
assessor's request, to provide all of the following:
a) The request for proposals or equivalent document,
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including any subsequent modifications or amendments;
b) The response submitted by the private contractor and
accepted by the military for the housing project; and,
c) The lease and any other binding project documents that
identify the initial project scope.
10) Provides that, for housing projects where the lease was
entered into on or after January 1, 2008, and the private
contractor would like to expend the reasonable estimate of
property tax savings as authorized, the private
contractor's response that was accepted by the military and
the binding project documents, shall include all of the
following:
a) The contractor's reasonable estimate of property tax
savings over the term of the lease;
b) A detailed calculation of the private contractor's
estimate of property tax savings;
c) The community and housing improvements to be constructed
with the property tax savings; and,
d) The projected scope of the housing project if the
estimated property tax savings were not available to be
used to construct or secure financing for the community or
housing improvements.
11) Applies, by its own terms, to any housing project where
the contract or lease was entered into on or after January
1, 2006.
12) Contains uncodified language providing that:
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a) Revenue and Taxation Code (R&TC) Section 107.4(m), which
this bill recasts as Section 107.4(13) shall be interpreted
to prevent the possession of property from escaping
assessment. Specifically, if the tax savings for a given
assessment year are not expended through constructed
improvements within the time period that the county
assessor may make an escape assessment for that assessment
year, the requirements for property tax exclusion are not
met.
b) In any hearing involving the appeal of an escape
assessment made by the county assessor for a failure to
satisfy this section's requirements for exclusion, the
county assessor may rebut the presumption affecting the
burden of proof in favor of the taxpayer by submitting a
statement that, to the best of his/her knowledge, the
requirements for exclusion have not been satisfied.
EXISTING LAW :
1) Requires all property subject to tax to be assessed at
full value. For purposes of property taxation, full value
equals the post-Proposition 13 acquisition price, adjusted
annually for inflation (not to exceed 2%). Although public
land is exempt from property tax, private real property
interests held in connection with public land may be taxed
as "possessory interests".
2) Provides that, for a taxable possessory interest to be
found, the possession must generally be "independent",
"durable", and "exclusive" of rights held by others in the
property. Possession is considered "independent" if the
holder has the ability to exert control over the property's
management, separate and apart from the public owner's
rules and policies. In other words, a possession or use is
independent if sufficiently autonomous to constitute
something more than a mere agency.
3) Provides that, if specified conditions are met, there is
no "independent" possession of land or improvements if the
possession is pursuant to a contract that includes a
long-term lease for the private construction, renovation,
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or maintenance of housing for active duty military
personnel and their dependents. Among other things, the
military family housing so constructed and managed must be
situated on a military facility under military control. In
addition, existing law provides that any reduction in
property taxes on the leased property shall insure solely
to the benefit of the military housing residents through
improvements, such as a child care center provided by the
private contractor.
FISCAL EFFECT : The Board of Equalization (BOE) notes that, in
2003, Congress authorized the Navy to undertake up to three
pilot privatization projects for nonfamily housing. The first
pilot project, Pacific Beacon, privatized 258 units of
Navy-owned nonfamily housing units and provided for the
construction of 941 apartments at Naval Station San Diego. The
project was completed in March of 2009, with a projected
assessment value of $100 million. Thus, if the property were
subject to tax, it would yield roughly $1 million per year ($100
million x 1% = $1 million). The project has not actually been
assessed however. As a result, BOE notes that the actual
revenue impact has not been determined. Nevertheless, BOE
states, "Depending on the success of the pilot unaccompanied
housing privatization projects, Congress may decide to authorize
the privatization of other unaccompanied housing quarters as
well. The revenue impact of this bill would increase
significantly if all such housing quarters were privatized."
COMMENTS :
1) The author states, "This bill is intended to facilitate
the development of military housing in a manner that
ensures that such development benefits military personnel."
2) The County of San Diego (County) is sponsoring this
bill. The County states, "As currently drafted, AB 1332
provides maximum flexibility to a developer of military
housing by allowing for the use of both family and bachelor
housing. In addition, the bill enables property tax funds
to be used for additional housing as well as improvements
to existing housing units. Also, the bill allows a
developer to accrue the property tax savings over a period
of several years, provided that the County is able to
ensure that the total amount of the property tax funds are
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ultimately spent in a manner that benefits military
personnel." Finally, the County states, "Unfortunately,
another measure, AB 1344 (Fletcher) does not provide these
same safeguards. Instead this bill could create a
situation where a developer wins and military personnel
lose. Consequently, the County opposes AB 1344."
3) Critics of the approach taken by this measure state,
"Upon passage of SB 451 (Rev and Tax Code Section 107.4),
the question of whether these developments were considered
independent was answered in 57 of the 58 counties. But the
County of San Diego continues to insist that they are
independent and has attempted to impose a legal
interpretation of one of the criteria that is at odds with
the rest of the State. The criterion under contention
requires that the 'tax savings' insure to the benefit of
the residents through the construction of improvements, a
condition entirely consistent with the contracts between
the military and the private contractors. While the
contractors could go to court to overturn the County's
position, the issue needs to be put to rest without the
need to resort to litigation if future contracts can
proceed unimpeded as the Legislature clearly desired when
it passed SB 451."
4) BOE notes the following by way of background:
a) "In 2004, Senate Bill 451 (Ch. 853, Ducheny) added
Section 107.4 to the Revenue and Taxation Code to provide
that a possession or use of land or improvements is not
independent if that possession or use is pursuant to a
contract, including, but not limited to, a long-term lease,
for the private construction, renovation, rehabilitation,
replacement, management, or maintenance of housing for
active duty military personnel and their dependents, if
specific criteria are met. An interest that is not
independent fails to meet one of the three necessary
elements for the interest to be subject to property tax.
Thus, a private contractor's interest in military housing
meeting the eligibility criteria of Section 107.4 would be
exempt from property tax."
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b) "This bill is sponsored by San Diego County. Its
purpose is to ensure that the private contractor's interest
in bachelor housing is also eligible for exemption from
property tax under Section 107.4. In addition, to
administer the provision of the exemption which requires
that the property tax savings conferred by the state of
California be passed through to the residents of the
military housing project, this bill expands and details the
administration of those provisions. The county notes that
this bill is codifying written agreements the county has
made with some private contractors currently operating
military housing projects in San Diego that have been
granted the possessory interest exemption."
5) BOE provides the following comments in its staff
analysis of this bill:
a) California provides a property tax exemption - provided
the residents are the ultimate beneficiaries of the
exemption rather than the private contractor . "In 2004,
Senate Bill 451 (Ch. 853, Ducheny) . . . provided a
property tax exemption to the developers and operators of
the housing projects, but only if the private contractor
passes through the property tax savings to the residents.
Private contractors who bid for projects are informed that
the projects could be subject to property taxes by the
various local governments where the properties are located.
According to the Department of Defense [DoD], the property
tax implications of these projects are not guaranteed. The
website to potential bidders notes: 'Are property taxes
considered in these deals? Although DoD will not negotiate
with the local jurisdiction on any tax abatements, the
developer is free to negotiate to achieve any tax
abatements.'"
b) Property tax savings are to inure to the benefit of the
military families and service personnel rather than to the
private contractor . "Current law requires that any
reduction in property taxes on leased property used for
military housing . . . will inure solely to the benefit
of the residents of the military housing through
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improvements, such as a child care center provided by the
contractor. Other sections of law extending a property tax
exemption to an otherwise non-tax exempt entity similarly
require that property tax savings inure to the worthy
organization in question, via rent reductions. (See [R&TC]
Section 202.2 related to property leased to a public
school, university or college or leased to a library or
museum that is free to the public . . . .). In this case,
rather than reducing the rents charged to service
personnel, the contractor is to insure that the property
tax savings are used to provide additional improvements."
c) This bill expands upon the types of improvements upon
which the property tax savings can be used . "The property
tax savings can be spent on either community improvements
(like a recreation center or a child care center) or
housing improvements including building more rental units
for military personnel (but must be more than the minimum
number required by the military). The savings can also be
spent on renovating and refurbishing the community
improvements or the housing improvements. The bill also
specifies that the property tax savings from any one year
[are] to be spent within 4 years. In addition, the
property tax savings that will be realized over the term of
the lease (typically 50 years) can be used to construct (or
secure financing for) community or housing improvements as
part of the 'initial construction of the project.' For
example, if the contract only required that 500 homes be
built, but because of the projected property tax savings
the contractor was able to build 550 homes, that could be
an allowable use of the property tax savings that benefits
the residents, since 50 more families can rent homes on the
military base."
6) Committee Staff Notes:
a) How did we get here? : In 1996, Congress established the
Military Housing Privatization Initiative (MHPI) to give
the military a tool to improve the quality of military
housing. The MHPI was designed to attract private sector
financing and expertise to provide much-needed housing more
efficiently than traditional military construction
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practices would allow. Under the MHPI, the military is
authorized to enter into agreements with private developers
selected in a competitive process to maintain and operate
family housing during a 50-year lease. In this manner, the
MHPI was aimed at addressing the generally poor condition
of military-owned housing, and the shortage of quality,
affordable private housing.
b) Military personnel and their dependents :
i) R&TC Section 107.4 provides specific rules for a
private contractor's interest in military housing to be
exempt from taxation as a possessory interest.
Currently, one of these rules requires the housing to be
for "military personnel and their dependents". Under a
technical reading of the statute, this means that single,
nonfamily housing projects are not eligible for the
beneficial property tax treatment Section 107.4 affords.
This bill would amend Section 107.4 to cover housing for
active duty military personnel or their dependents, or
both. As such, single, nonfamily housing would be
eligible for the exclusion.
ii) Given the fact that existing law provides an
exemption for family housing, Committee staff sees no
reason why the exemption should not also be extended to
nonfamily housing projects.
c) What happens to the property tax money saved? :
i) Current law requires that any reduction in property
taxes resulting from the exclusion be used solely to
benefit the military housing residents through
improvements like the provision of a child care center.
(If the reduction amount is unknown, the contractor's
reasonable estimate of savings is used.) BOE notes, "The
purpose of this provision is to ensure that the property
tax exemption extended to the private contractor of the
military housing project is not merely a windfall savings
to the private contractor, but rather that the property
tax savings are ultimately passed through to benefit the
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residents of the military housing project."
ii) This bill would expand the list of eligible
improvements to include "community improvements" (e.g.,
child care centers and recreation centers) and "housing
improvements" (i.e., the construction of additional
housing units). This bill would also permit the property
tax savings to be used on renovation and refurbishment of
community and housing improvements.
d) How much time does the contractor have to provide these
improvements? : Existing law does not contain an explicit
timeframe for contractors to make improvements. As a
general rule, this bill would require contractors to expend
the estimated property tax savings for a given assessment
year each year, or within the time period the county
assessor may make an escape assessment.
e) Related legislation : AB 1344 (Fletcher), introduced in
the current Legislative Session, also proposes amendments
to R&TC Section 107.4 sponsored by industry. AB 1344 is
set to be heard by this Committee along with this bill.
f) Technical amendment : Committee staff suggests deleting
the word "and" on page 4, line 4.
REGISTERED SUPPORT / OPPOSITION :
Support
County of San Diego (sponsor)
Opposition
None on file
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098