BILL ANALYSIS
AB 1341
Page A
Date of Hearing: August 26, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 1341 (Lowenthal) - As Amended: August 2, 2010
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Property taxation: possessory interests: Long Beach
Courthouse
SUMMARY : Provides that there is no taxable possessory interest
if the possession is pursuant to a project agreement entered
into by the Judicial Council (JC) with a nongovernmental entity
for the purpose of replacing the Long Beach Courthouse, and if
other specified criteria are met. Specifically, this bill :
1)Includes the following legislative findings:
a) The existing courthouse located at 415 West Ocean
Boulevard in the City of Long Beach is in unsatisfactory
physical condition, is a potential public safety risk to
court staff and the public, and is in need of immediate
replacement;
b) This bill is designed to expedite the facility's
replacement by resolving a disputed property tax issue that
could potentially delay the replacement project and add an
element of unpredictable financial risk to the project's
public sponsor;
c) It is the Legislature's intent in enacting this bill to
provide legislative direction to county assessors, the
State Board of Equalization (BOE), the courts, and other
involved parties regarding the interpretation of the term
"independent" as it relates to the Long Beach Courthouse;
and,
d) A special law is necessary because of the need to
resolve the property tax issues potentially delaying the
Long Beach Courthouse replacement project and to mitigate
the attendant risks of that delay to the citizens of Los
Angeles County and the State of California.
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2)Provides that there is no "independent" possession or use of
land or improvements (and, therefore, no taxable possessory
interest) if the possession is pursuant to a project agreement
entered into by the JC with a nongovernmental entity in
accordance with Government Code (GC) Section 70391.5 for the
purpose of replacing the Long Beach Courthouse, and if all the
following conditions are met:
a) The nongovernmental entity is required to design, build,
finance, operate, and maintain the Long Beach Courthouse;
b) The JC establishes performance expectations and
benchmark criteria for the court facility proposal in
accordance with GC Section 70391.5 that serve as the basis
for selecting the nongovernmental entity;
c) The JC and other governmental entities have exclusive
use and control of the Long Beach Courthouse for court and
related activities for 35 years;
d) The JC holds title to the land and improvements of the
Long Beach Courthouse;
e) The nongovernmental entity is not treated as the owner
of the improvements for any purpose, including federal
income tax purposes, and does not deduct any depreciation
on the improvements; and,
f) Any lease-leaseback of land and improvements of the Long
Beach Courthouse with the nongovernmental entity is solely
for the purpose of providing security for the payment by
the JC of the service fee for services provided by the
nongovernmental entity in connection with a court facility.
3)Provides that this possessory interest safe harbor shall not
apply to any lease of, or improvements to, the Long Beach
Courthouse by the JC with a nongovernmental entity to the
extent the land or improvements are used by the
nongovernmental entity as commercial office space, retail
space, or paid parking spaces not designated for use for
governmental purposes or court facilities.
4)Provides that, notwithstanding existing law, the state shall
not reimburse any local agency for any property tax revenue
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lost as a result of this bill.
5)Takes immediate effect as a tax levy.
EXISTING LAW :
1) Provides that all property is taxable, unless otherwise
specified by the California Constitution or federal law.
2) Requires all property subject to tax to be assessed at
its full value. For property tax purposes, full value
generally 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."
3) 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.<1> 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 it is sufficiently autonomous to constitute
something more than a mere agency.
4)Provides that when the state or any local government enters
into a written contract with a private party whereby a
taxable possessory interest may be created, the private
party must be notified in the contract of the potential
property tax consequences. If this notification is not
provided, the private party can recover damages under
certain circumstances.
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<1> Property Tax Rule 20(a)(1) additionally requires that the
possessor derive a "private benefit" from the property's use. A
"private benefit" means "that the possessor has the opportunity
to make a profit, or to use or be provided an amenity, or to
pursue a private purpose in conjunction with its use of the
possessory interest."
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5) Specifies a procedure by which the JC may enter into
agreements for court facility development that include
alternate methods for project delivery, including
public-private partnerships.
FISCAL EFFECT : This bill could result in foregone possessory
interest taxes in Los Angeles County of between $4 million and
$5 million. However, the JC indicates that, in the absence of
this bill, the state would be required to pay any possessory
interest taxes related to the Long Beach Courthouse on behalf of
the nongovernmental entity, which could result in annual General
Fund payments of $4 million to $5 million.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
Long Beach is ready for its new courthouse. In fact, it is
long overdue. Experts say its existing 50-year-old
facility is perhaps the worst in the state when it comes to
security, safety and overcrowding.
The Administrative Office of the Courts has found a way to
deliver the project three years earlier than might
otherwise occur, by use of a public-private partnership.
Unfortunately, a dispute over property tax has arisen,
which, if left unresolved, could increase the cost of the
project to the point it would no longer be fiscally viable.
To resolve this problem without creating precedent or
altering existing code, AB 1341 declares that the unique
needs and nature of the Long Beach courthouse project
exempt its state functions from possessory interest
taxation.
If the courthouse were funded the traditional way,
possessory tax revenue would of course not exist.
Likewise, if the courthouse construction were postponed,
there would be no economic activity of any kind to tax.
Any revenue to be gained by applying possessory tax to this
project is an illusion.
2)The JC is sponsoring this bill to resolve property tax issues
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that could potentially delay construction of the Long Beach
Courthouse project. The JC notes:
In June the preferred proposer on the project was selected
and notified. Over the next several weeks the
Administrative Office of the Courts will be working with
the selected proposer to complete the project agreement in
order to secure final approval of the project from the
Department of Finance late this year after which project
construction can begin. AB 1341 will ensure that the Long
Beach Courthouse project can move ahead without any delay
that may be caused by unresolved property tax issues. The
bill has been crafted to be specific to the Long Beach
project and does not impact the possessory interest
analysis for any other project.
We have estimated that in the absence of AB 1341 an
assessed possessory interest tax could result in a $3 to $5
million cost to the State. If the possessory tax interest
is left unresolved this increased project cost could make
the project no longer fiscally viable. In that event, the
AOC would look to a traditional public construction of the
project which would delay the project (and the resulting
jobs that would be created) at least 2-3 years and, as a
publicly owned courthouse, there would be no possessory
interest. Thus, either way there is no actual loss of
possessory interest tax revenue.
3)Proponents state:
The Long Beach Courthouse ranks among the State's worst in
terms of security and overcrowding, and cannot meet the
current or future needs of the court. Over 4,800 people
visit the building each day in addition to the hundreds of
in-custody defendants. Currently those in-custody
defendants move within hallways that are also traveled by
judges, staff, and witnesses, creating a very real security
risk. Witnesses and victims often must wait in the same
hall as the accused defendant, and the holding cells were
not designed to accommodate the large number of in-custody
defendants. This facility must be replaced immediately,
and delay is not an option.
4)This bill is opposed by the California Assessors' Association,
which states:
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The AOC acknowledges the existence of possessory interest
taxes in Section 7.2(b) of the proposed ground lease, which
states:
'Tenant acknowledges that its possessory interest
hereunder may be subject to taxation and that Tenant
shall be responsible for payment of any such tax
except as otherwise provided for in the Project
Agreement.'
The AOC, however, in the RFP they issued to solicit
contractors, explicitly states that the AOC would be
responsible for any possessory interest taxes that would
apply to the newly constructed courthouse. This
self-inflicted harm should not be the basis for legislation
that is clearly unconstitutional.
5)Committee Staff Comments
a) Project Background : By all accounts, the Long Beach
Courthouse has seen better days. According to the
Administrative Office of the Courts (AOC), the current
courthouse suffers from fundamental flaws, is overcrowded,
and fails to meet accessibility requirements, making it
incapable of meeting the growing demand for court services
in the Long Beach area. Thus, the JC has developed plans
to replace the courthouse, using "Performance-Based
Infrastructure" or "PBI," which the AOC describes as an
innovative project delivery method that involves engaging a
private team to finance, design, build, operate, and
maintain the new facility.
To provide security for the JC's payment of applicable
service fees, the AOC will lease the Long Beach Courthouse
facilities to the private team under a long-term lease,
with the State maintaining ownership of the land and
improvements. The private team will then sub-lease back to
the AOC that portion of the Long Beach Courthouse to be
used for Superior Court purposes. This type of arrangement
is commonly referred to as a "lease-leaseback."
Once complete, the new facility will include 31 courtrooms,
administrative office space, and commercial office and
retail space compatible with court uses. The project will
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also include the renovation of a nearby parking structure
and improvements to surrounding street frontages. The new
facility is scheduled for occupancy in mid-2013.
b) Possessory Interests : In certain circumstances, a
property tax assessment may be levied when a person or
entity uses publicly-owned real property that, with respect
to its public owner, is either immune or exempt from
property taxation. These uses are commonly referred to as
"possessory interests" and are typically found in cases
where the entity leases, rents, or uses federal, state, or
local government property. Revenue and Taxation Code
Section 107 provides that, for a taxable possessory
interest to be found, the possession must be "independent,"
"durable," and "exclusive" of rights held by others in the
property. Generally, assessors and courts determine
whether a taxable possessory interest exists based on the
facts and circumstances of a particular case.
Given the "lease-leaseback" nature of the proposed Long
Beach Courthouse project, concerns have been raised that
the private party's leasehold interest may rise to the
level of a taxable possessory interest under existing law.
Thus, this bill proposes a narrow "safe harbor" under which
the private party's interest in the Long Beach Courthouse
would be considered non-independent and, therefore,
nontaxable as a possessory interest.
c) Constitutional Considerations : Article XIII, Section 1
of the California Constitution provides that all property
is taxable, unless otherwise specified by the California
Constitution or federal law. Some may argue that AB 1341
attempts to exempt a specific possessory interest
statutorily in violation of this constitutional provision.
Supporters of AB 1341, however, would likely counter that
this bill merely provides legislative guidance regarding
the independence prong of the existing three-factor
analysis. As BOE notes in its staff analysis of this bill,
in City of San Jose v. Carlson (1997) 57 Cal.App.4th 1348,
the court acknowledged the appropriateness of legislative
action to set parameters on the element of durability. A
similar argument could be made in this case with respect to
the element of independence.
d) Will AB 1341 Establish a Precedent? : It is very clear
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that the author of this measure does not intend for AB 1341
to establish a precedent for future legislation. This bill
is, by its very terms, limited to a single project.
Moreover, the bill's provisions are uncodified. Finally, in
the absence of this measure, the cost of any possessory
interest tax assessed on the private developer would likely
be passed on to the JC and, in turn, the state.<2>
Nevertheless, today's special circumstance often becomes
tomorrow's rule. While it may be appropriate to provide a
safe harbor in cases where state-owned property will be
leased to a private entity but used exclusively for a
public purpose, it is conceivable that, in the future, less
deserving public-private partnerships may seek similar
protections.
REGISTERED SUPPORT / OPPOSITION :
Support
Judicial Council of California (sponsor)
City of Long Beach
Presiding Judge Charles W. McCoy, Jr., Los Angeles County
Superior Court
Opposition
California Assessors' Association
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098
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<2> Ostensibly, this is because the original RFP specified that
the Judicial Council would bear the cost of any applicable tax.