BILL ANALYSIS �
AB 1760
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Date of Hearing: May 5, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 1760 (Chau) - As Amended: April 1, 2014
REVISED
Majority vote.
SUBJECT : Property taxation: welfare exemption: rental housing
and related facilities: payment in lieu of taxes agreement
SUMMARY : Provides that, on or after January 1, 2015, a "local
government" shall not enter into a "payment in lieu of taxes
agreement" (PILOT agreement) with a "low-income housing project"
owner. Specifically, this bill :
1)Provides that any PILOT agreement entered into in violation of
this prohibition shall be void and unenforceable.
2)Establishes a presumption that any payments made under a PILOT
agreement entered into before January 1, 2015, are used to
maintain the affordability of, or reduce rents otherwise
necessary for, the units occupied by lower income households.
3)Defines a "local government" as any city, county, city and
county, housing authority, housing successor to a
redevelopment agency, or a joint powers agency that has
approved land use entitlements or building permits, provided
land or financing, or approved the issuance of tax-exempt
bonds pursuant to the federal Tax Equity and Fiscal
Responsibility Act for the low-income housing project.
4)Defines a "PILOT agreement" as any agreement entered into
between a local government and a "low-income housing project"
owner that requires the owner to pay the local government a
"charge", including any charge designed to compensate the
local government for lost property tax revenues resulting from
the low-income housing project receiving a welfare exemption.
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5)Specifies that the term "charge" shall not include an impact
fee consistent with fees paid by all other residential
developments.
6)Defines a "low-income housing project" as a low-income housing
project that is eligible for the welfare exemption.
EXISTING LAW :
1)Authorizes the Legislature to exempt from taxation property
used exclusively for religious, hospital, or charitable
purposes, as specified. (California Constitution Article
XIII, Section 4(b).) The Legislature has implemented this
"welfare exemption" in Revenue and Taxation Code (R&TC)
Section 214.
2)Exempts low-income housing developments operated by non-profit
organizations, as specified. (R&TC Section 214(g).)
3)Imposes a "certification requirement" for low-income housing
owners seeking the welfare exemption. Specifically, the law
requires a project's owner to "[c]ertify that the funds that
would have been necessary to pay property taxes are used to
maintain the affordability of, or reduce rents otherwise
necessary for, the units occupied by lower income households."
(R&TC Section 214(g)(2)(B).)
FISCAL EFFECT : Unknown. The State Board of Equalization (BOE)
notes that information on the number of PILOT agreements in
place has been difficult to obtain, making it impossible to
assess the full fiscal impact of this proposal. To date, the
BOE has identified four low-income housing projects that have
received escape assessments for prior years' taxes as a result
of PILOT payments. Two of these projects have entered into
five-year payment plans and have paid a total of $450,000 toward
outstanding liabilities of over $6.1 million. In other projects
where PILOT agreements became an issue, the local government
dropped the PILOT payment requirement to ensure the project
would remain eligible for the welfare exemption.
COMMENTS :
1)The author has provided the following statement in support of
this bill:
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Beginning in 1987, low-income housing developers were
authorized to claim a property tax welfare exemption.
Low-income housing developers have come to rely upon the
welfare exemption as a way to build housing that is
affordable to low-income tenants. At the same time, some
low-income housing developers have entered into PILOTs, to
pay cities and counties all or a portion of the property
taxes they would have received, but for the exemption.
These agreements are now jeopardizing the developers'
welfare exemption and threatening the future of the
projects. More importantly, they are threatening the
tenants that live in the developments and rely upon the
housing. AB 1760 protects those tenants by preserving the
welfare exemption of low-income housing developments with
PILOTs and outlaws PILOTs going forward.
2)Proponents of this bill note the following:
Under existing law, low-income housing developments owned
by nonprofit developers are eligible to receive a welfare
exemption from property taxes. If developers receive the
exemption, they are required to use the property tax
savings to provide lower rent or improve overall
affordability for their tenants. However, some local
governments are imposing PILOTS (payments made to local
governments as a substitute for property taxes) on housing
developments that receive the property tax exemption.
Recently, specifically in Ventura County, county assessors
have revoked the welfare property tax exemption for
properties that are subject to [PILOTs], claiming that the
property tax savings from the exemption are being used to
fulfill PILOT obligations rather than to increase
affordability. The imposition of property taxes in such
cases imposes an economic burden that cannot be supported
by the restricted rents, jeopardizing the feasibility of
these projects, making it difficult, if not impossible, to
maintain affordability.
AB 1760 (Chau) resolves this financial burden by
prohibiting local governments from entering into PILOT
agreements with low-income housing developers, staring in
2015. The elimination of PILOT agreements will allow
non-profit low-income housing developers to maintain unit
affordability and utilize their welfare property tax
exemption accordingly.
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3)Opponents of this bill note the following:
The League supports your efforts to ensure that the welfare
exemptions of affordable housing developers are not
jeopardized and agrees a PILOT agreement should not make a
low-income housing project ineligible for the welfare
exemption. However, we would like to ensure fees imposed
in accordance with the Mitigation Fee Act are not
negatively impacted by SB 1203.
4)The BOE notes the following in its staff analysis of this
bill:
a) PILOT issue simplified : "Low-income housing property
may be exempt from property taxation under the Welfare
Exemption. Since the local government will not receive its
portion of property tax if the property is exempt,
low-income housing developers or owners sometimes enter
into agreements (often called PILOT agreements) to
compensate local government for costs associated with the
property. For property tax purposes, some concern exists
regarding the effect of a PILOT on a low-income housing
property's eligibility for the Welfare Exemption."
b) Property tax savings use requirement : "This bill
creates a presumption that any payments made under any
PILOT agreement entered into before January 1, 2015 are
used to maintain the affordability of, or reduce rents
otherwise necessary for, the units occupied by lower income
households. The purpose of the presumption is to allow the
low-income housing developer to make the necessary
certification related to the use of property tax savings."
c) This bill provides legislative guidance that may reduce
uncertainty regarding this issue : "The BOE, assessors,
local governments, nonprofit organizations, and project
financiers have an interest in clear and consistent
treatment of properties subject to existing PILOT
agreements when Welfare Exemption eligibility is at stake."
d) Financial implications of retroactive property tax
exemption revocation : "The low-income housing project
owners are very concerned about the prospect of losing the
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welfare exemption for prior years in which they made PILOT
payments. Since they did not anticipate such liabilities,
they have insufficient funds to pay back taxes (escape
assessments) and associated penalties."
5)Committee Staff Comments
a) The welfare exemption for low-income housing
developments : Article XIII, Section 4(b) of the California
Constitution authorizes the Legislature to exempt from
taxation property used exclusively for religious, hospital,
or charitable purposes, as specified. The Legislature has
implemented this "welfare exemption" in R&TC Section 214.
AB 2144 (Filante), of the 1987-88 Regular Session, amended
R&TC Section 214 specifically to exempt low-income housing
developments operated by non-profit organizations. As
noted in the Senate Revenue and Taxation Committee
analysis, AB 2144's proponents argued that the property tax
funds then being paid "could better be used in furtherance
of the goals of providing low income housing."
To this end, R&TC Section 214(g) currently includes a
"certification requirement" for low-income housing owners
seeking the welfare exemption. Specifically, the law
requires a project's owner to "[c]ertify that the funds
that would have been necessary to pay property taxes are
used to maintain the affordability of, or reduce rents
otherwise necessary for, the units occupied by lower income
households." (R&TC Section 214(g)(2)(B).)
b) PILOT agreements : Since local governments do not
receive their share of property taxes from exempt
properties, certain local governments have entered into
agreements with low-income housing developers to compensate
them for their lost revenues. These agreements, known as
PILOT agreements, often provide for payments that closely
resemble property tax payments.
A recent informal survey of low-income housing developers
provides some insight into the nature and structure of
PILOT agreements currently in place in California.
According to the survey, payment amounts are determined in
various ways, including as: a portion or all of the
property taxes the local government would have received
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without the exemption, a percentage of the project's
assessed value, a flat fee, and an amount to compensate for
police and fire service needs generated by the project's
residents. A few PILOT agreements provided to Committee
staff were also structured to increase the payment amount
over time.
While there is no express authority for low-income housing
developers to pay PILOTs, PILOTs are authorized in state
statute in two cases: for low-income housing owned by
either public housing authorities or federally recognized
Indian tribes.
c) The potential impact of a PILOT agreement on a project's
welfare exemption : Recently, a question has arisen
regarding whether the existence of a PILOT agreement
jeopardizes a low-income development's welfare exemption.
Specifically, some have argued that the existence of a
PILOT agreement negates a developer's ability to certify,
as required by R&TC Section 214(g)(2)(B), that property tax
savings are being used to reduce rents or maintain unit
affordability. As a result, at least one county assessor
has begun to pursue escape assessments for prior years,
claiming that back property taxes are owed for prior years
in which PILOT payments were made. Affordable housing
advocates and low-income developers alike note that the
economic burden of these escape assessments jeopardizes the
very feasibility of these projects.
d) How this bill addresses the problem : This bill
addresses the prevailing state of confusion by making clear
that low-income housing developments should not face the
retroactive revocation of their welfare exemption simply by
virtue of having made payments under a PILOT agreement.
Specifically, this bill establishes a presumption that
payments made under a PILOT agreement entered into before
January 1, 2015, were and are used to maintain the
affordability of the low-income units. This provision is
intended to preserve the welfare exemption for low-income
projects subject to a PILOT agreement entered into before
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January 1, 2015.<1>
This bill also reasserts the underlying purpose of the
welfare exemption by prohibiting local governments and
low-income housing owners from entering into any PILOT
agreement on or after January 1, 2015. A PILOT agreement
entered into in violation of this prohibition would be void
and enforceable. This bill would, however, preserve the
ability of local governments to impose impact fees
consistent with those fees paid by all other residential
developments.
e) Amendments proposed by the author : The author has
proposed taking amendments in Committee to clarify that:
i) A local government may impose a development impact
fee permitted under the Mitigation Fee Act that is
consistent with fees paid by all other residential
developments pursuant to Government Code Section
65008(d)(1); and,
ii) Any outstanding ad valorem tax, interest, or penalty
that was levied between January 1, 2012, and January 1,
2015, as a result of a PILOT agreement shall be canceled
and any tax, interest, or penalty, as so levied, that was
paid prior to January 1, 2015, shall be refunded.
f) Related legislation : SB 1203 (Jackson) would, among
other things, prohibit any local agency from entering into
an agreement to charge a fee to a low-income housing
project eligible for the welfare exemption, unless the fee
meets specified criteria. SB 1203 also eliminates the
current certification requirement for low-income
development owners seeking a welfare exemption. SB 1203 is
currently pending action on the Senate Floor.
REGISTERED SUPPORT / OPPOSITION :
Support
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<1> It should be noted, however, that this bill makes no
statement regarding the underlying legality or validity of such
PILOT agreements. This bill simply establishes a presumption
that payments made pursuant to such agreements do not, by
themselves, render a low-income developer ineligible for the
welfare exemption.
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BRIDGE Housing
California Coalition for Rural Housing
California Housing Consortium
California Infill Builders Federation
LeadingAge California
Opposition
League of Cities
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098