BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 314 HEARING: 5/11/11
AUTHOR: Vargas FISCAL: No
VERSION: 3/24/11 TAX LEVY: No
CONSULTANT: Grinnell
POSSESSORY INTERESTS & MILITARY HOUSING
Extends the time period for Assessors to issue escape
assessments on military housing projects.
Background and Existing Law
The California Constitution provides that all property is
taxable unless explicitly exempted by the Constitution or
federal law. The possessory interest tax is imposed on
real property interests located on public land that are
independent, durable, and exclusive, terms defined by
statute and case law. Basically, private interests on
federal land, such as a vacation cabin on Forest Service
land, are subject to the possessory interest tax.
Conflicts over whether possessory interest tax applies to
private military housing in California are as old as
private military housing in California itself. In 1955,
Congress authorized the Wherry Housing Program that used
private builders to construct the original De Luz homes,
which were subject to possessory interest taxes, bringing
forth a famous possessory interest tax lawsuit because of
the amount of tax due (De Luz Homes, Inc. v. County of San
Diego, (1955) 45 Cal.2d 546). Congress subsequently
repurchased these homes beginning in 1957, until conveying
them to De Luz in 2000.
In 2004, the Legislature provided a safe harbor by enacting
specific conditions for military housing projects to meet
to qualify as not "independent," including that it is
constructed, renovated, rehabilitated, replaced, managed or
maintained for military personnel pursuant to a contract
(SB 451, Ducheny, 2004). To maintain its designation as
not "independent," the housing must be situated at a
military facility, under military control, managed by
private contractor, and constructed according to military
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guidelines. SB 451 further required that the military
housing is considered not independent only if the reduction
of property taxes, or the private contractor's estimate if
that amount is unknown, on leased property used for
military housing "inures solely to the benefit of the
residents of the military housing through improvements,
such as a child care center, provided by the private
contractor." If the foregone possessory interest tax
revenues do not inure solely to the benefit of the
residents, the safe harbor disappears, and the housing
project may be subject to the possessory interest tax.
Assessors levy escape assessments when an error or mistake
led to a property being under-assessed, or not assessed at
all. Upon discovering that a property "escaped"
assessment, the assessor determines the fair market value
of the property for the appropriate date, enters the
revised value on the property tax roll, and sends the
taxpayer escape assessments for all years within the
statute of limitations. The general statute of limitations
for escape assessments is four years.
Proposed Law
Senate Bill 314 provides that the county assessor may levy
an escape assessment on a military housing project within
four years after July 1st of the assessment year in which
property tax savings are withdrawn from a reserve account
when the military requires a reserve account for use in
future project construction.
State Revenue Impact
According to BOE, SB 314 has no revenue effect.
Comments
1. Purpose of the bill . According to the Author, "There
continues to be a need for more and better military housing
in California. In 1996, California and the nation faced a
severe military housing shortage. Across the nation there
was a dire need for 200,000 new housing units and for the
substantial repair, renovation or replacement of an
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additional 200,000 units because the existing housing was
in such disrepair as to be unlivable.
This problem was particularly acute in California where,
due to the high cost of housing, there was scant available
off-base housing within the financial reach of most
military families. In San Diego, some Department of
Defense estimates placed the number of military families
forced to live in Tijuana due to the affordable housing
shortage at almost 5,000.
In order to deal with this problem, Congress passed the
Military Housing Privatization Initiative in 1996. Under
the MHPI, the government grants a ground lease to a private
developer who then uses their private borrowing power, a
power not available to the military, to finance
construction of military housing. These developments are
under the tight control of the military which controls
project revenues, sets the rents, approves the tenants,
provides security and other municipal services, controls
evictions, etc.
As the first of these MHPI projects were built, there was a
question as to whether the privatized housing was subject
to possessory interest taxes. Some school districts were
concerned that if the possessory interest taxes were
assessed the federal government would no longer provide
Federal Impact Funds to school districts, a greater source
of revenue than the school district's share of the
possessory interest taxes would be. Because of the tight
control exerted by the military, some County Assessors and
the Board of Equalization tax counsel reasoned that the
privatized projects did not rise to the level of a
possessory interest because there was a lack of one of the
three critical components required by law, independence
from the governing body that owns the land.
Others suggested that the privatized nature of the
development required the assessment of the possessory
interest taxes. Since the statute contained no definition
for the term "Independence" a legislative clarification was
needed if the uncertainties were to be resolved and the
much needed new housing was to be developed. To resolve
this uncertainty, SB 451 (Ducheny) was passed in 2004.
This legislation created a safe harbor for on-base housing
developments through the creation of a presumptive
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threshold of fifteen criteria which if all were met would
deem the project to lack the necessary element of
independence.
Passage of the legislation in 2004 effectively settled the
question for most California counties and resulted in the
creation of safe and secure quality housing for tens of
thousands of military families. However, there were two
problems with SB 451 that needed to be resolved. First,
the bill mistakenly included the word "family" in reference
to military housing thereby limiting it only to military
family housing. Since the military would also like to use
this financing tool to construct quarters for
"unaccompanied" military personnel, most specifically,
unaccompanied sailors, the word family needed to be deleted
allowing the safe harbor provisions to apply to on-base
unaccompanied housing developments. Senate Bill 1250
(Ducheny) passed last year corrected this error.
The second error dealt with the ability of a County
Assessor to hold a contractor accountable for the proper
expenditure of "tax savings." In most cases the government
demands that all funds not allocated to operations or debt
service be held in a secure reserve account governed by a
lockbox agreement. These funds cannot be released without
the written approval of the government. If the government
requires these funds to be held for more than four years
the County loses the ability to impose an escape assessment
even if the funds are used improperly.
In the case of De Luz, the Navy requires that these reserve
funds be held for as much as 28 years at which time they
are required to be used for project improvements. While
this use is in keeping with the current requirement of
"inuring to the benefit of the residents" should the funds
be used for another purpose that does not meet this
requirement, the County would have no recourse to impose
the escape assessment.
SB 314 will correct this error in the current statute
created by SB 451. Under SB 314, a County will have a
period of four years from the time the funds are withdrawn
from the reserve account to impose an escape assessment.
This four-year period is consistent with current escape
assessment statutes. The only difference between current
escape assessment law and SB 314 is that the four-year
period would begin when the funds are withdrawn from
reserve instead of the original tax year. Under SB 314 a
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County Assessor will have the ability to insure that the
Legislature's intent is met and that the tax savings will
indeed inure to the benefit of the residents.
By resolving this issue, SB 314 will help to insure that
the military and their private contractors will have the
ability to construct additional future housing projects for
both military families and unaccompanied military personnel
as well as to maintain the reserves necessary to insure the
constructed housing is properly maintained for future
residents.
SB 314 is sponsored by De Luz Family Housing, LLC. De Luz
Family Housing is a privatized military family housing
project located on Camp Pendleton. Initial construction of
the 702 new and renovated homes began in 2000.
Prior to the beginning of the project, there were 502
existing homes in various stages of disrepair; many of them
were totally uninhabitable. The project which was
authorized under the Military Housing Privatization
Initiative (a portion of the 1996 National Defense
Authorization Act) replaced 200 of the homes with new
construction and substantially rehabbed the other 302
homes. In addition, 200 new homes were constructed and
added to the project. "
2. Come together . The San Diego County Assessor and De
Luz had a long-standing disagreement regarding whether the
De Luz property was "independent" for purposes of assessing
the possessory interest tax. The assessor applied the tax
from 2001 to 2004; De Luz paid it, but appealed to the
assessment appeals board, who agreed with the Assessor.
After the Legislature enacted SB 451, the Assessor and De
Luz continued to disagree regarding whether De Luz had
spent the foregone possessory interest taxes to the benefit
of the residents, thereby taking it out of the safe harbor.
According to the Assessor, the Assessor applied a
possessory interest tax from 2005 to 2008 for around
$520,000 per year. In 2009, the Assessor and De Luz
entered into an agreement specifying the future use of the
foregone possessory interest taxes. The assessor then
cancelled the past taxes and revoked the imposition of the
possessory interest for the future.
SB 314 lets bygones be bygones between the two parties by
SB 314 -- 3/24/11 -- Page 6
extending the statute of limitations for the assessor to
levy an escape assessment to provide a longer time period
for the assessor to enforce SB 451. De Luz argues that the
military requires the property tax savings along with all
moneys received after paying debt and operating the project
to flow into a reserve account, out of which De Luz pays
for improvements determined or permitted by the military.
The previous assessor believed the property tax savings had
to be spent annually to benefit the residents; De Luz
countered that they could only build what the military told
them to and couldn't spend the savings annually because the
military had not directed them to do so. De Luz states
that the military will ultimately determine or permit use
of the funds in the reserve account, as they already have
with a renovation project, but at that point, the assessor
will only be able to issue escape assessments for the four
years preceding the assessor's determination that the
fund's use did not benefit the residents as required.
Under SB 314, the assessor has four years from the time of
the funds' withdrawal to determine whether its use complies
with current law, and can issue escape assessments for all
years all the way back to when forgone taxes began accruing
in the reserve account.
3. Military Housing in California . Congress approved the
Military Housing Privatization Initiative (MHPI) in 1996 to
build military housing by using private sector know-how to
build better housing more expeditiously at less cost,
thereby improving the quality of life for military
personnel. In practice, the military enters into a
contract with a developer to build, own, maintain, and
operate housing under a fifty year lease. In 2000, the
military selected through a competitive bidding process
Hunt Building Corporation to restore the De Luz project at
Camp Pendleton for the first of these projects. Over the
next few years, Clark Pinnacle, a partnership of
Maryland-based Clark Realty Capital and Pinnacle from
Seattle, entered into a private-public partnership to
operate and construct military family housing communities
in several other sites in California, including Alameda,
Monterey, and San Bernardino Counties. Clark Pinnacle is
also a partner in Pacific Beacon, LLC, which entered an
agreement with the military to privatize 258 units of
Navy-owned, non-family "bachelor" housing, and broke ground
in January, 2007 to construct an additional 941 apartments.
Last year, the Legislature enacted SB 1250 (Ducheny),
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which applies the safe harbor for independence for military
housing projects added by SB 451 to single housing, when it
had previously only applied to family housing.
4. Amendment Needed . To clarify that the escape
assessment can be levied when the taxpayer does not spend
the savings in a way consistent with existing law, the
Committee should amend SB 314 to provide that the
withdrawal from the reserve account is for purposes in
"Paragraph (13)," not "for use in project construction."
Support and Opposition (5/4/11)
Support : De Luz Family Housing.
Opposition : Unknown.