BILL ANALYSIS
AB 1945
Page 1
Date of Hearing: May 3, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 1945 (Fletcher) - As Amended: April 5, 2010
Majority vote.
SUBJECT : Taxation: military housing
SUMMARY : Modifies the statute that provides a possessory
interest tax exemption to private contractors that construct and
maintain military housing, provided the tax savings inure solely
to the benefit of the military housing residents. Specifically,
this bill :
1)Provides that if the military, in writing or by contract,
requires the property tax savings to be held in a reserve
account for use in future project construction, the county
assessor may levy an escape assessment within four years after
July 1 of the assessment year in which the savings are
withdrawn from the reserve account.
2)Allows, by implication, the tax savings to be held in a
reserve account for use in future project construction if the
military so requires.
EXISTING LAW :
1) 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."
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
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independent if it is 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,
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.
4) Provides, as a general rule, that property tax escape
assessments must be made within four years after July 1 of
the assessment year in which the property escaped taxation
or was under-assessed.
FISCAL EFFECT : The Board of Equalization (BOE) notes that,
according to the County of San Diego (County), various military
housing properties located in the County would be impacted by
this bill, resulting in a revenue loss of roughly $2 million.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
In 2004, the [L]egislature passed SB 451 (Ducheny). This
legislation created a "safe harbor" from being taxed as a
possessory interest for on-base housing developments
through the creation of a presumptive threshold of fifteen
criteria. If all fifteen criteria were met, the housing
project would be classified as not "independent", and
therefore can not be taxed as a possessory interest. But
as a condition of this safe harbor, the [L]egislature
mandated that any property tax savings resulting from the
safe harbor classification "inure solely to the benefit of
the residents of the military housing through
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improvements".
The problem is that as a stipulation in some contracts with
housing developers, the military requires revenues not used
for debt service or immediate maintenance (including this
specified tax savings) be placed in a lockbox account and
cannot be released without the written direction of the
military. Because a county assessor cannot impose an
escape assessment beyond four years, the assessor cannot
guarantee that the developer/military will spend the tax
savings in a way that adheres to the safe harbor
requirements. There is no way for the assessor to "hold
the developer's feet to the fire" so that the money is only
spent on additional improvements for the benefit of
residents per current statute.
AB 1945 is designed to correct this problem. For funds in
this particular kind of account, the bill begins the four
year escape assessment period granted to the county
assessor in law on the date the funds are released from the
lockbox account per the direction of the military. This
change means the county assessor will be able to "hold the
developer's feet to the fire" to ensure that the tax
savings are properly spent on project improvements per SB
451.
2)This bill is sponsored by De Luz Family Housing (De Luz), a
private military housing development in Camp Pendleton,
California. De Luz states that applicable contract provisions
generally require all revenues not used for debt service or
maintenance to be placed in a secure reserve account until the
military approves additional construction. This results in
funds being encumbered beyond the four-year period for
imposing escape assessments. De Luz states, "This could
prevent an assessor from 'holding a developer's feet to the
fire' to insure the funds are properly spent on project
improvements." The sponsor states that AB 1945 is designed to
correct this problem by delaying the four-year period for
escape assessments until the funds are withdrawn from the
reserve account.
3)This bill is opposed by the County. The County states:
AB 1945 would allow tax savings held in a "reserve account"
to be spent for "future project construction" with no
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defined time limit requiring the developer to build
improvements for military residents. The bill would make
it difficult to track compliance over the life of the
project (50 years or more) and to ensure improvements are
actually built for the military residents. AB 1945 does
not define "reserve account" nor does it call for reporting
requirements that ensure the tax savings deposited into the
"reserve account" go towards the benefit of the military.
If a developer pulls out of a project after only a few
years and has not built any improvements nor withdrawn the
tax savings, it could be argued the assessor is prevented
from making an escape assessment for any prior years and
none of the "reserve account" tax savings have gone towards
benefiting the military. AB 1945 would also allow the
contractor to keep the decades of accrued interest on the
unexpended tax savings.
4)BOE has provided the following comments in its staff analysis
of this bill:
a) Why is the Possessory Interest Tax Exemption
Conditional? : "The purpose of this provision is to ensure
that the property tax exemption extended to the private
contractor of the federal 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 California residents of the military
housing project. 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."
b) Expenditure of Tax Savings : The County, which has many
military housing projects within its borders, has
previously expressed concern that the mandatory expenditure
language may not ultimately require the private contractor
to provide benefits to the military housing residents above
and beyond what is required in the applicable contract.
c) Reserve Accounts : "This bill appears to allow, by
inference, the use of tax savings deposited in a reserve
account for 'future project construction' as a use that
benefits the residents. If this is the intent, [it] may be
preferable to make an express statement to that effect.
The sponsor states that contracts with the military
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generally require all revenues not used for debt service,
maintenance, etc. to be placed in a secure reserve account
until the military approves the additional construction."
d) Unlimited Escape Assessments for Prior Years? : "It
appears that by waiving the statute of limitations in this
case, the technical effect of proposed Section 107.4(m)(2)
is [to] allow back taxes to be levied for an unlimited
number of prior tax years (i.e., more than the maximum of
four years the law currently provides) and to give
assessors up to four years after July 1 of the calendar
year in which the property tax savings were withdrawn from
the reserve account to issue those escape assessments.
Thus, if the property tax savings were withdrawn anytime
during the year 2015, and those funds were ultimately not
used to benefit the residents, then the assessor would have
until July 1, 2019, to make retroactive assessments for
back taxes for as many number of years as appropriate
(i.e., which could be for more than the current limit of
four years)."
5)Committee Staff Comments:
a) Background : 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
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.
In response to the MHPI, SB 451 (Ducheny), Chapter 853,
Statutes of 2004, added Revenue and Taxation Code (R&TC)
Section 107.4, which provides specific rules for a private
contractor's interest in military housing to be exempt from
taxation as a possessory interest. Among other things,
R&TC Section 107.4(m) provides that any reduction in
property taxes resulting from the exclusion must be used
solely to benefit the military housing residents through
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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 make certain that the tax
savings bestowed by California on the project ultimately
benefit the residents of the military housing project,
rather than provide windfall additional profit to the
private contractor operating the project."
b) Escape Assessments : R&TC Section 532 sets forth the
statute of limitations for making escape assessments. As
BOE notes, an "escape assessment" is a retroactive
assessment intended to rectify an omission or error that
resulted in taxable property being under-assessed or not
assessed at all. Generally, the statute of limitations on
escape assessments allows back taxes on the property to be
collected for the last four tax years.
c) What Would this Bill Do? : This bill provides a specific
exception to the general statute of limitations for escape
assessments. Specifically, this bill provides that if the
military requires a private contractor's property tax
savings to be held in a reserve account for use in future
project construction, the county assessor may levy an
escape assessment within four years after July 1 of the
assessment year in which the savings are withdrawn from the
reserve account. BOE notes that, in practical effect, this
bill would give the county assessor four years to process
escape assessments for as many years as needed if the tax
savings are not used to benefit the residents of the
military housing.
d) What Exactly is "Future Project Construction"? : This
bill does not define the phrase "future project
construction." Would the use of tax savings to build
additional housing units (which would serve to increase the
project's rental income) qualify? Moreover, it is unclear
whether "future project construction" would require the
private contractor to do anything above and beyond what it
is already required to do under its contract with the
military. Finally, neither this bill nor the existing
statute appear to provide any clear guidance on when tax
savings must be spent for the benefit of housing residents.
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Committee staff understands that this issue has been a
source of contention, with the County arguing that moneys
should be spent in the same year the possessory interest
exclusion applies, while developers have argued that they
should be given more flexibility in spending these funds.
e) Why is This Bill So Familiar? : Last year, the author
introduced AB 1344 (Fletcher), which was held in this
Committee. AB 1344 would have modified the possessory
interest exception for military contractors in numerous
respects. Among other things, AB 1344 would have allowed
property tax savings to be used for the benefit of current
or future residents through a wide range of current or
future improvements provided by the contractor under the
terms of its contract with the military (or with the
military's prior written approval). AB 1344 would have
also allowed property tax savings to be used to fund the
construction of improvements or to service debt incurred to
fund the construction. Finally, AB 1344 would have allowed
private contractors to spend the property tax savings for
an assessment year within the period of time the county
assessor may make an escape assessment.
The County opposed AB 1344, stating "AB 1344 lacks mechanisms
that would prevent a military housing developer from using
the property tax funds for purposes other than the direct
benefit of the residents of the military housing project."
f) Related Legislation : SB 1250 (Ducheny), of the current
Legislative Session, proposes amendments to R&TC Section
107.4 and is sponsored by the County to extend the
possessory interest exemption to projects for unaccompanied
service personnel (i.e., bachelor housing). SB 1250 is set
to be heard in Senate Appropriations on May 3, 2010.
REGISTERED SUPPORT / OPPOSITION:
Support
De Luz Family Housing
AB 1945
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Opposition
County of San Diego
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098