BILL ANALYSIS
AB 2362
Page 1
Date of Hearing: May 10, 2010
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Anthony J. Portantino, Chair
AB 2362 (Skinner) - As Amended: April 20, 2010
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Property tax: "new construction" exclusion:
soft-story buildings.
SUMMARY : Creates a 10-year new construction exclusion from
property tax for improvements made to pre-1978 wood frame
multi-unit residential buildings, so-called "soft-story
buildings," as specified. Specifically, this bill :
1)Excludes from the definitions of "newly constructed" and "new
construction" the portion of reconstruction or improvement to
a soft-story building.
2)Specifies that the exclusion remains in effect only during the
first 10 years following the reconstruction or improvement,
but is terminated if the property is purchased or the
ownership is changed during that period.
3)Defines a "soft-story building" as a wood frame, multi-unit
residential building constructed before January 1, 1978, where
the ground floor portion of the structure contains parking or
other similar open floor space that causes soft, weak, or
open-front wall lines.
4)Does not provide for reimbursement to local agencies for any
property tax revenues lost by those agencies pursuant to this
bill.
5)Takes effect immediately as a tax levy, but will become
inoperative if SCA 4 (Ashburn), Resolution Chapter 115,
Statutes of 2008 (SCA 4) is approved by the voters at the June
8, 2010, statewide general election.
EXISTING LAW :
1)Provides that all property is taxable unless explicitly
exempted by the California Constitution or federal law. The
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maximum amount of any ad valorem tax on real property is
limited to 1% of its full cash value.
2)Requires local county assessors to reassess property when it
is purchased, newly constructed, or upon a change in
ownership. "Newly constructed" or "new construction" includes
additions to the real property, or the alteration of the real
property that amounts to a rehabilitation or conversion of the
property to a different use since the preceding lien date.
The assessor is required to determine the added value of the
new construction when completed and add that amount to the
assessed value of the property. In general, if the new
construction replaces existing improvements, the value
attributable to the existing improvements is deducted from the
base year value of the property.
3)Allows the Legislature, pursuant to Article XIII A of the
California Constitution, to enact legislation to exclude from
the definition of "newly constructed" certain improvements
made to buildings for seismic safety purposes. Specifically,
"new construction" does not include:
a) Improvements to buildings with unreinforced masonry
bearing walls (those without steel reinforcing bars) made
to comply with a local ordinance on seismic safety and
completed on or after January 1, 1984 [Proposition 23
(1984)]; and,
b) Any qualified construction (seismic retrofitting
improvements and improvements utilizing earthquake hazard
mitigation technologies) other than work for unreinforced
masonry bearing walls. There is no requirement that
qualified construction be required by local ordinance or
mandate. This exclusion applies to construction completed
on or after January 1, 1991. [Proposition 127 (1990)].
4)Allows the existing exclusion for improvements to unreinforced
masonry buildings for 15 years. There is no term for
exclusion of other qualified construction improvements for
seismic safety. Both exclusions terminate with the change in
ownership of the property.
FISCAL EFFECT : Unknown.
COMMENTS :
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1)Author's Statement . The author states that, "The United
States Geological Society, California has said that there is a
99.7% chance that it will be hit by an earthquake of 6.7
magnitude or higher in the next thirty years. Wood-frame,
multi-unit residential buildings with soft, weak or open-front
first stories, commonly known as soft-story buildings, have a
great likelihood of collapse if an earthquake of 6.7 magnitude
or higher occurs. Of the 16,000 housing units that were
rendered uninhabitable by the Loma Prieta earthquake, 7,700
housing units were in soft-story buildings. [Thirty four
thousands] housing units that were rendered uninhabitable in
the Northridge earthquake were in soft-story buildings.
Soft-story buildings have made up a large majority of the
buildings that are destroyed by a major earthquake. Moreover,
major earthquakes often make these buildings uninhabitable for
residents and therefore displace hundreds of thousands of
residents.
"According to the State of California, Multi-Hazard Mitigation
Plan of 2007, there are 46,000 soft-story buildings in
seismically unstable areas of the state. Those buildings have
over 730,000 residential units and over a million residents.
AB 2362 will incentivize owners of these unsafe buildings to
seismically retrofit their buildings to protect their
residents, as has happened with Unreinforced Masonry Buildings
(URMs). AB 2362 will allow owners to retrofit their buildings
to protect their residents while not being required to pay the
increased property tax assessment for 10 years. After a
10-year period, the property would be assessed according to
the current full cash value of the portion of reconstruction
or improvement to the structure that was excluded. The
substantial risk that these buildings pose to their residents
demonstrates the necessity of AB 2362."
2)The Purpose of this Bill . According to the author, this bill
is intended to provide an incentive to owners of wood-frame,
multi-unit residential buildings with a soft, weak, or
open-front first story, known as a "soft-story building", to
retrofit his/her building.
3)Background . Under existing law, certain seismic safety
improvements made to buildings with "unreinforced masonry
bearing walls" are excluded from property tax assessment for
the first 15 years after the work is completed [Revenue and
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Taxation Code (R&TC) Section 70). The exclusion applies only
if the improvements are made to comply with a local ordinance,
such as a county or city mandatory strengthening program. In
contrast, any seismic retrofitting improvements or
improvements utilizing earthquake hazard mitigation
technologies made to an existing building or structure, other
than unreinforced masonry buildings, are permanently excluded
from the definition of "newly constructed" and "new
construction" (R&TC Section 74.5). Furthermore, there is no
requirement for these improvements to be mandated by a local
government.
In 2008, the Legislature approved SCA 4 and its companion bill
SB 111[(Ashburn), Chapter 336, Statutes of 2008], which makes
the statutory changes necessary to implement SCA 4. On June
8, 2010, voters will decide whether or not to approve SCA 4,
Proposition 13 (2010), which would create a permanent
exclusion from the definitions of "newly constructed" and "new
construction" for construction or reconstruction of seismic
retrofitting components of an existing structure. If SCA 4 is
approved by the voters, then SB 111 would become operative.
SB 111 amends R&TC Sections 70 and 74.5 to eliminate the
15-year limitation on the exclusion from "new construction"
for seismic improvements made to unreinforced masonry
buildings. Both SCA 4 and SB 111 would, primarily, benefit
the owners of existing structures who are facing the
expiration of the 15-year exclusion period under Proposition
23 and would ensure equal treatment of property owners who
incorporate seismic safety improvements into existing
buildings, regardless of the type of the buildings. In
addition, if Proposition 13 (2010) is approved and SB 111
becomes operative, then R&TC Section 74.5 would provide a more
precise definition of qualifying improvements. Property
owners would simply use the broader exclusion provided for by
Proposition 127, instead of the more limited exclusion
provided under Proposition 23 for any new improvements.
4)What Exactly Does this Bill Do ? This bill proposes an
exclusion from property tax assessment for the portion of
reconstruction or improvement made to a soft-story building.
A soft-story building is a wood frame, multi-unit residential
building constructed before January 1, 1978, where the ground
floor portion of the structure contains parking or other
similar open floor space. Typically, soft-story buildings
"have outside walls with large openings due to garage doors
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and display windows, as well as few internal walls, making
this story "weak" or "soft" and likely to lean or fall over in
earthquakes" (A report issued by the Association of Bay Area
Government, May 2009). According to the report, many
"apartments and condos can collapse in earthquakes because
they have parking on all or part of the first floor, or open
commercial space on that first floor." As noted by the Board
of Equalization (BOE) staff in its analysis of this bill, in
the 1989 Loma Prieta earthquake and the 1994 Northridge
earthquake, the collapse of soft-story buildings killed people
and left thousands of housing units uninhabitable.
Apparently, a number of California cities have implemented, or
will soon implement, soft-story related ordinances to
encourage homeowners to complete seismic retrofits of those
buildings. The exclusion proposed by this bill is limited to
the first 10 years following the reconstruction or improvement
and will terminate if the property is sold or its ownership is
changed during that period. In the 11th year, the assessor is
required to enroll the current full cash value of the
previously excluded portion of reconstruction or improvement
to the structure.
5)The Types of Eligible Improvements to Soft-Story Buildings .
AB 2362 is intended to provide a tax incentive to owners to
seismically retrofit their soft-story buildings. The language
of this bill, however, appears to be too broad because it does
not limit the types of eligible improvements only to seismic
safety related improvements. Thus, any improvement or
reconstruction made to a soft-story building, whether related
or unrelated to seismic safety, will be eligible for the
proposed exclusion. The Committee may wish to consider
amending this bill to limit its application only to the
portion of reconstruction or new improvements to a soft-story
building that are seismic safety related. The limited
exclusion will further the state's interest by providing the
fiscal incentive of not increasing an owner's property tax
when the owner installs seismic retrofits, and by reducing the
tax burden imposed on individuals seeking to increase
earthquake safety voluntarily, and not simply due to a legal
requirement.
6)So, What Would this Bill Accomplish ? Assuming that the author
intends to limit the new construction exclusion to those
improvements that are made for seismic safety related
purposes, it seems that the existing R&TC Section 74.5 would
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already provide the necessary protection from the property tax
assessment. Specifically, R&TC Section 74.5 broadly defines
"seismic retrofitting improvements" to mean, among other
things, "structural strengthening or providing the means
necessary to resist seismic force levels that would otherwise
be experienced by an existing building or structure during an
earthquake, so as to significantly reduce hazards to life and
safety while also providing for the substantially safe ingress
and egress of building occupants during and immediately after
an earthquake." It is unclear to the Committee staff why this
definition would not already apply to the seismic safety
improvements made to a soft-story building. As noted by BOE
staff, if there are cases in which the current definition of
"seismic retrofitting improvements" is deficient, then a
simple amendment to that definition would resolve the problem,
although it should be noted that R&TC Section 74.5 does not
currently impose a proposed 10-year limitation. On the other
hand, if the existing definition in R&TC Section 74.5 is too
narrow and does not encompass the improvements contemplated by
the author, then a new constitutional amendment will be needed
to implement the provisions of this bill, unless Proposition
13 is approved by the voters.
Proposition 13 (2010), which is already on the ballot, would
apply to soft-story buildings because it would extend the
permanent new construction exclusion from reassessment to
seismic safety improvements made to all buildings, regardless
of whether or not the building is a masonry structure. Thus,
this bill will become unnecessary if Proposition 13 is
approved. And if Proposition 13 is voted down, then this bill
will require, as noted earlier, a separate companion
constitutional amendment to become operative.
7)BOE Implementation Concerns .
a) BOE staff notes that limited "new construction"
exclusions have proved to be administratively problematic,
and, unless there is a policy reason for imposing the
10-year limit, it should be removed.
b) BOE staff also states that it is unclear as to whether a
building with a ground floor retail business or restaurant
with residential apartments above would qualify for the
proposed exclusion.
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c) BOE staff notes that seismic safety improvements to
soft-story buildings fall under the existing "new
construction" exclusion of R&TC Section 74.5. It is
unclear if this bill is intended to exclude from assessment
"improvements" above and beyond seismic safety
retrofitting, such as a complete remodel of the building
that includes as one component seismic safety retrofitting.
The expansive definition of "improvements" may result in a
greater revenue impact but it would require an additional
constitutional amendment to exclude this additional value
from assessment.
1)Related Legislation .
SCA 4 (Ashburn) removes the 15-year property tax exclusion for
seismic safety improvements made to unreinforced masonry
buildings. SB 111, a counterpart measure to SCA 4, makes the
statutory changes necessary to implement SCA 4.
SCA 28 (Ashburn) and SB 1633 (Ashburn), introduced and
considered late in the 2005-06 legislative session,
are identical to SCA 4 and SB 111, respectively. SCA 28 and
SB 1633 were passed by the Senate on August 31, 2006, but were
held at the Assembly Desk due to time constraints.
REGISTERED SUPPORT / OPPOSITION :
Support
None on file
Opposition
None on file
Analysis Prepared by : Oksana G. Jaffe / REV. & TAX. / (916)
319-2098