BILL ANALYSIS �
AB 1788
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Date of Hearing: May 14, 2012
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 1788 (Morrell) - As Introduced: February 12, 2012
VOTE ONLY
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Property taxation: welfare exemption: course of
construction.
SUMMARY : Revises various definitions for purposes of the
property tax welfare exemption and allows the welfare exemption
to be granted on a retroactive basis, as provided.
Specifically, this bill :
1)Amends the definition of "property used exclusively for
religion, hospital, or charitable purposes" to include
equipment in the facilities in the course of construction.
Specifically:
a) Requires the intended use of the facilities, land and
equipment exclusively for religious, hospital or charitable
purposes.
b) Provides that this expanded definition is enacted under
the authority of the California Constitution, Article XIII,
Sections 4(b) and 5.
2)Expands the definition of the phrase "facilities in the course
of construction" to include prospective construction and
rehabilitation of a new or existing building or improvement,
provided that the building or improvement will be used
exclusively for religious, hospital, or charitable purposes.
Specifically:
a) Requires an application for a building permit to be
filed with the local planning or building departments.
b) Grants exempt status and provides for cancellation or
refund of tax, penalty, or interest levied on the exempt
portion of the assessment upon confirmation that actual
construction commenced, as shown by actual physical
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activity.
c) Provides that any exemption allowed for the course of
construction is applied retroactively to the date of permit
application and continues for three years after the year
during which the application was filed.
3)Provides for no reimbursement to any local agency for property
tax revenues lost by this bill.
4)Takes effect immediately as a tax levy, but provides that the
changes proposed by this bill are operative commencing with
the lien date for the 2013-14 fiscal year (FY).
EXISTING LAW :
1)Provides that all property is taxable unless explicitly
exempted by the California Constitution or federal law and
limits the maximum amount of any ad valorem tax on real
property at 1% of full cash value.
2)Provides an exemption from taxation for property that is
irrevocably dedicated to religious, hospital, scientific, or
charitable purposes, if the property is used for the actual
operation of the exempt activity and is owned by a nonprofit
entity qualified as an exempt organization by the Internal
Revenue Service, the Franchise Tax Board, or both (the
so-called 'welfare exemption') �Article XIII, Section 4, of
the California Constitution; Revenue and Taxation Code (RT&C)
Section 214]. The entity that owns the property is prohibited
from having any earnings that contribute to the benefit of any
private shareholder or individual. This welfare exemption has
been expanded over the years to add certain specific types of
property that do not otherwise qualify under the general
exemption.
3)Denies the welfare exemption for vacant or unused property,
even if the intended use will be for exempt purposes and
activities.
4)Allows the welfare exemption to be claimed for facilities in
"the course of construction," together with the land required
for their convenient use, provided that the intended use of
the building would qualify for the exemption. Specifically,
exempts from property tax:
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a) Buildings, land, equipment, and securities used
exclusively for educational purposes by a nonprofit
institution of higher education. �California Constitution,
Article XIII, Section 3(e)].
b) Buildings, land on which they are situated, and
equipment used exclusively for religious worship.
�California Constitution, Article XIII, Section 3(f)].
c) Property used exclusively for religious, hospital, or
charitable purposes and owned or held in trust by
corporations or other entities that are non-profit,
organized and operating for those purposes, provided that
no part of the entity's net earnings inures to the benefit
of any private shareholder or individual. �California
Constitution, Article XIII, Section 4(b)].
5)States that exemptions granted or authorized by Sections 3(e),
3(f), and 4(b) of the California Constitutions apply to
buildings under construction, land required for their
convenient use, and equipment in them if the intended use
would qualify the property for exemption.
6)Specifies that "course of construction" requires commencement
of physical activity connected with construction that results
in physical changes visible to a person inspecting the site.
�Revenue and Taxation Code (R&TC) Sections 214.1 and 214.2].
7)Includes the demolition of an existing building with the
intent to build a facility to replace the one razed in the
"course of construction".
8)Terminates the welfare exemption for construction that is
abandoned. Construction delayed due to reasonable causes and
circumstances beyond the control of the property owner
exercising ordinary care is not considered "abandoned".
9)Provides, with respect to newly acquired property, that a
nonprofit organization has 90 days after the date of change in
ownership to qualify for an exemption, which effectively
allows a 90-day grace period before construction must
commence.
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FISCAL EFFECT : The Board of Equalization (BOE) staff estimates
that the revenue loss to local governments will be $3.51 million
for each FY.
COMMENTS :
1)Author's Statement . The author states that, "Current law
provides the welfare exemption for property used exclusively
for religious, hospital, scientific or charitable purposes.
This exemption was created by the passage of Proposition 4 in
1944 in order to encourage the proliferation of private,
nonprofit entities that operate for the public good. The
health, citizenship, and welfare services provided by these
groups are of great benefit to their communities, and this
property tax exemption has helped to encourage these efforts
for nearly 70 years.
"The welfare exemption is granted during the course of
construction. However, a property is not eligible for the
exemption until construction has resulted in "changes visible
to any person inspecting the site." In the years since
Proposition 4's passage, the permitting process for
construction projects has grown dramatically, increasing costs
and delaying construction projects. As a result, the entities
that California voters intended to insulate from taxation in
order to foster their growth are being increasingly hit with
substantial property tax obligations.
"Assembly Bill 1788 will clarify the term "course of
construction" begins with the filing of a completed
application for a building permit. This will exempt
non-profit and charitable organizations from property taxation
while attending to environmental, cultural and other
permitting requirements. AB 1788 will ensure that entities
operating solely in the public interest will have the
financial means necessary to perform their vital functions;
these entities should not be unduly penalized for their
efforts."
2)Arguments in Support . The proponents state that AB 1788 "will
uphold the intentions of Proposition 4, which provided
religious, hospital, and charitable organizations with a
property tax exemption." Under current law, the exemption is
not available until "construction of a building that will be
used for charitable purposes has physically begun." The
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proponents argue that increasing fees and permitting
requirements delay construction projects that otherwise would
qualify for the property tax exemption. They assert that AB
1788 would alleviate the financial burden placed on charitable
organizations by "extending the existing exemption to the time
between filing a building permit and beginning construction"
and would allow those organizations "operating for the public
good to focus their resources on the health, citizenship, and
welfare services they offer our communities on a daily basis."
3)Arguments in Opposition . Opponents state that, "While we
understand the logic of this bill, the fact is that property
may be held a long time without construction to begin the
exemption." The opponents argue that "despite a permit, the
property could change use and be used for commercial purposes"
and, thus, could be removed "from the tax rolls
inappropriately." They assert that the beginning of
construction represents evidence that the property would be
used for exempt purposes, and therefore, current law should
not be changed.
4)The Welfare Exemption . The California Constitution provides
that all property is taxable unless explicitly exempted by the
Constitution or federal law. The Constitution limits the
maximum amount of any ad valorem tax on real property at 1% of
full cash value, plus any locally-authorized bonded
indebtedness. Assessors reappraise property whenever it is
purchased, newly constructed, or when ownership changes.
The California Constitution allows the Legislature to establish
a property tax exemption for property exclusively used for
charitable purposes and owned by nonprofit entities organized
and operated for charitable purposes. �California
Constitution, Article XIII, Section (4)(b)]. The Constitution
also specifies that the exemption, if authorized, must apply
to buildings under construction, the land on which the
buildings are situated, and equipment in the buildings if
their intended use is exclusively for exempt purposes.
(California Constitution, Article XIII, Section 5). In 1954,
the Legislature enacted the exemption, commonly known as the
"welfare exemption," providing, as required by the
Constitution, that qualified property includes a) facilities
in the course of construction, and b) the land on which the
facilities are located.
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Thus, under current law, property is not eligible for the
welfare exemption unless it is used by a nonprofit entity for
exempt purposes and activities. Therefore, vacant or unused
property held for future construction does not qualify for the
welfare exemption since it is not being used for an exempt
purpose. The welfare exemption may be claimed, however, as
soon as the property is "under construction." The phrase "in
the course of construction" requires commencement of physical
activity connected with construction that results in physical
changes visible to a person inspecting the site. (R&TC
Sections 214.1 and 214.2). For example, a demolition or
razing of a building with the intent to replace the building
with a facility to be used for qualified charitable purposes
serves as evidence of construction. Further, the digging of
trenches for the foundation of a building prior to the lien
date constitutes "construction." �National Charity League v.
County of Los Angeles (1958) 164 Cal. App. 2d 241]. Activity
having been commenced and not yet finished establishes that a
building or improvement is "under construction," unless
abandoned. The construction is not considered to be
"abandoned" if it is delayed due to reasonable causes and
circumstances beyond the owner's control.
5)What Does this Bill Do? AB 1788 would, first, expand the
definition of the phrase "in the course of construction" to
include prospective construction or rehabilitation of a new or
existing building or improvement, as long as an application
for a building permit has been filed with the local planning
or building department. The new building or improvement would
still be required to be used exclusively for religious,
hospital, or charitable purposes. This proposed change would,
in effect, allow nonprofit organizations to receive a property
tax exemption on vacant property, prior to commencement of
actual physical construction.
Secondly, this bill would allow a retroactive application of the
welfare property tax exemption to the date of the building
permit filing, but only after it has been verified that actual
physical construction has commenced. Any tax, penalty, or
interest levied on the exempt portion of the assessment will
have to be refunded or cancelled; however, a four-year statute
of limitation would apply to a claim for refund or a request
for cancellation.
6)The Proposed Solution. AB 1788 would allow a nonprofit
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organization to qualify for the welfare exemption as soon as
it has expressed intent - via filing a building permit
application - to construct a qualified facility. This
language would significantly broaden existing law, which
allows the welfare exemption for property used for exempt
purposes and activities but gives a nonprofit organization up
to 90 days from the date of purchase to begin demolition or
construction on property in order to qualify for a full
exemption. Generally, a relatively minor preparatory activity
that results in physical changes visible to any person
inspecting the site may evidence the beginning of construction
or demolition. According to the BOE staff, grading vacant
land or tearing down a building would qualify the property as
being "under construction."
The Committee staff is cognizant of the fact that the processing
time for building permits and the associated costs have
increased dramatically. It has also been pointed out that
non-profit organizations often need time, beyond the 90 days,
to raise funds to begin construction. Thus, the question
arises as to whether the problem of delayed permitting process
or a need for an increased time to raise funds could be solved
without expanding the welfare exemption. The Committee may
wish to consider whether the proposed approach is the most
effective and appropriate way to deal with these problems.
7)Exemption for Vacant Land. The BOE staff notes certain vacant
land acquired or donated to organizations like Habitat for
Humanity for the future construction of a single or
multifamily residence that will be sold at cost, with zero
interest loans, is eligible for the welfare exemption.
However, BOE staff points out that, "in this situation, the
charitable activity of the organization is the acquisition of
vacant land to construct homes that will subsequently become
subject to property taxation upon acquisition by low-income
families. In contrast, most entities eligible for the welfare
exemption are long-term owners of properties and the exemption
from property taxation for their properties will likely apply
indefinitely."
8)Related Legislation .
AB 722 (Emerson), introduced in the 2005-06 Legislative Session,
was similar to this bill. It would have allowed for the
welfare exemption to apply only after actual construction
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commenced, but retroactively to the date of the building
application. AB 722 was held under submission in the Assembly
Committee on Appropriations.
AB 3075 (Committee on Revenue and Taxation), introduced in the
2003-04 Legislative Session, would have granted the welfare
exemption to properties held by limited liability companies.
AB 3075 passed out of the Assembly but was never heard in the
Senate.
AB 783 (Maddox), introduced in 2003-04 Legislative Session,
would have expanded the "course of construction" definition
to include the period subsequent to filing a completed
application for a building permit with an appropriate local
agency. AB 783 was held in the Assembly Appropriations.
REGISTERED SUPPORT / OPPOSITION :
Support
Traditional Values Coalition (Sponsor)
Adventist Health
Aging Services of California
California Catholic conference
Catholic Community of St. Joseph
Echos of Faith World Outreach Ministries
George Runner, Member, Board of Equalization
Highland Baptist Temple
Loma Linda Unversity Medical Center
Pacific Justice Institute
Spirit of Love Church
Councilman Alan D. Wapner, City of Ontario
Andrew S. Phillips, individual
Opposition
California Tax Reform Association
California School Employees Association
California Federation of Teachers
The American Federation of State, County and Municipal
Employees, AFL-CIO
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Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098