BILL ANALYSIS �
SB 1203
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Date of Hearing: June 25, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
SB 1203 (Jackson) - As Amended: May 22, 2014
Majority vote.
SENATE VOTE : 33-0
SUBJECT : Property taxation: welfare exemption: rental housing
and related facilities: payment-in-lieu-of-taxes agreements
SUMMARY : Prohibits a local agency from entering into an
agreement to charge, or newly imposing a charge, or fee on a
low-income housing development, unless the charge or fee meets
specified conditions. Specifically, this bill :
1)Contains the following legislative findings:
a) In Health and Safety Code (H&SC) Section 50001, the
Legislature has long declared that the subject of housing
is of vital statewide importance to the health, safety, and
welfare of the residents of this state;
b) The lack of housing, and in particular the lack of
decent, safe, and sanitary housing that is affordable to
low-income households, is a critical problem that continues
to threaten the economic, environmental, and social quality
of life in California; and,
c) The Legislature, in enacting Revenue and Taxation Code
(R&TC) Section 214(g) in 1987, determined that the funds
being paid in property taxes could better be used in
furtherance of the goals of providing low-income housing
and that a property tax exemption was necessary to ensure
that low-income housing properties with restricted rents
would be able to provide the residents with a livable
community and remain financially feasible over the life of
the deed restrictions, generally 55 years.
2)Prohibits, on and after January 1, 2015, a local agency from:
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a) Entering into an agreement to charge a charge or fee on
a low-income housing development, unless the charge or fee
meets specified conditions; and,
b) Newly imposing a charge or fee on a low-income housing
development, unless the charge or fee meets specified
conditions.
3)Specifies that any charge or fee imposed on a low-income
housing development must meet one of the following two
conditions:
a) The charge or fee is imposed under the Mitigation Fee
Act and its imposition does not prohibit or discriminate
against the housing development project because of any of
the following:
i) The method of financing the development;
ii) The development is intended for occupancy by persons
and families of very low, low, or moderate income, as
defined in H&SC Section 50093, or persons and families of
middle income; or,
iii) The development is subsidized, financed, insured, or
otherwise assisted by the federal or state government or
by a local public entity as defined in H&SC Section
50079.
b) The charge or fee is for a specific service or product
provided directly to the housing development project, the
service or product is not provided to those developments
not charged, and the charge or fee does not exceed the
actual cost of providing the service or product.
4)Contains a legislative finding that payment-in-lieu-of-taxes
(PILOT) agreements are an issue of statewide concern because
of the need to prevent arbitrary and discriminatory financial
barriers that prevent the construction of needed low-income
housing in the state. Therefore, restricting agreements with
a local agency is a matter of statewide concern, and not a
municipal affair, as that term is used in Section 5 of Article
XI of the California Constitution.
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5)Eliminates the "certification requirement" for low-income
housing owners seeking the welfare exemption. Specifically,
owners will no longer have to certify that funds that would
have been necessary to pay property taxes are used to maintain
unit affordability or reduce rents.
6)Prohibits an assessor from levying any escape or supplemental
assessment as a result of the certification requirement as it
read prior to January 1, 2015, because of a property owner's
certification concerning the use of funds that would have been
necessary to pay property taxes and a PILOT agreement with a
local government "for which the assessor did not, prior to
January 1, 2015, levy any assessment."
7)Requires the cancellation of any outstanding ad valorem tax,
interest, or penalty that was levied between January 1, 2012,
and January 1, 2015, because of a property owner's
certification concerning the use of funds that would have been
necessary to pay property taxes and a PILOT agreement with a
local government.
8)Prohibits the refund of tax, interest, or penalty, as so
levied, that was paid prior to January 1, 2015.
9)Defines "related facilities" to mean any manager's units and
any and all common area spaces that are included within the
physical boundaries of the low-income apartment development,
including common area space, walkways, balconies, patios,
clubhouse space, meeting rooms, and parking areas, except any
portions of the overall project that are nonexempt commercial
structures.
10)Provides that no inference shall be drawn from the changes
made by this bill with regard to whether existing law allows a
local agency to enter into a PILOT agreement with a property
owner of a low-income housing project eligible for the
property tax 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 R&TC Section 214.
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2)Exempts low-income housing developments operated by non-profit
organizations, as specified. (R&TC Section 214(g).)
3)Imposes a "certification requirement" on 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 bill. 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:
As a condition of project approval, some local governments
have required affordable housing developers to agree to
annual PILOT payments, often equal to the share of the
jurisdiction's share of the property tax.
Most recently, some county assessors are threatening
certain affordable housing projects that make PILOT
payments with the cancellation of their welfare exemption
and the imposition of back taxes for past years when PILOT
payments were made.
Back taxes on PILOT agreements are often in the hundreds of
thousands of dollars. These assessments threaten to
bankrupt the affordable housing developments, which would
result in the loss of precious affordable housing.
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Affordable housing developments provide critical
opportunities for our low-income residents. Often, these
units can be their last resort before becoming homeless.
As confirmed by Legislative Counsel in 2012, there is no
legal authority to charge these PILOT fees. Affordable
housing developments should be protected by the welfare
exemption, not burdened by local governments requiring
PILOT fees.
2)Proponents of this bill note the following:
SB 1203 helps protect affordable housing by preserving the
welfare exemption for thousands of affordable housing
projects. Specifically, the new restrictions on PILOT
agreements under this bill, as well as the elimination of
the burdensome certification requirement for developers,
will help to increase the supply of affordable housing
options for those who are most in need.
The Board of Equalization (BOE) has recently been involved
in clarifying our annotations to ensure that low-income
housing developments are not precluded from claiming the
property tax exemption simply because they have entered
into a PILOT agreement with a local agency. However,
thousands of affordable housing projects are still at risk
for up to eight years of property tax assessments. SB 1203
is needed to remedy this issue.
3)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) Financial implications of retroactively revoking a
property tax exemption : "The low-income housing project
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owners are very concerned about the prospect of losing the
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 and
associated penalties."
4)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
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property taxes the local government would have received
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 seeks to
remedy 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.
This bill also reasserts the underlying purpose of the
welfare exemption by prohibiting a local agency from
entering into an agreement to charge, or newly imposing a
charge, or fee on a low-income housing development, unless
the charge or fee meets specified conditions. Finally,
this bill prospectively eliminates the "certification
requirement" for low-income housing owners seeking the
welfare exemption. Specifically, owners will no longer
have to certify that funds that would have been necessary
to pay property taxes are used to maintain unit
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affordability or reduce rents.
e) Why is this all so familiar ? Earlier this year, this
Committee heard and passed AB 1760 (Chau and Bocanegra),
which addresses many of the same issues. While the goals
of AB 1760 and this bill appear largely compatible, the
bills do differ in a number of respects. The following
discussion outlines a few of the major differences:
i) The certification requirement : AB 1760 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. This bill, on the other hand, appears
largely silent regarding past PILOT payments, but
prospectively eliminates the certification requirement
outright.
Advocates of eliminating the certification requirement
argue that it is effectively impossible to demonstrate
that property tax savings are being used to reduce rents
or maintain unit affordability. Thus, they argue that
the state should dispense with the "legal fiction" that
gave rise to the present controversy. However, critics
of outright elimination contend that some certification
mechanism is useful to allow county assessors to ensure
that low-income housing developments are appropriately
claiming the welfare exemption. Irrespective of how this
issue is resolved, the author may wish to take amendments
establishing a conclusive presumption that PILOT payments
made under an agreement dated before January 1, 2015,
were used in compliance with the certification
requirements then in place.
ii) Cancellations vs. refunds : AB 1760 cancels any
outstanding tax, interest, or penalty levied between
January 1, 2012, and January 1, 2015, as a result of a
PILOT agreement. AB 1760 also requires the refund of any
tax, interest, or penalty paid prior to January 1, 2015.
This bill, on the other hand, would cancel any
outstanding tax, interest, or penalty amounts, but would
affirmatively prohibit the refund of any tax, interest,
or penalty paid prior to January 1, 2015. Committee
staff questions the precedent of canceling outstanding
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tax bills while refusing to refund amounts already paid.
Such an approach would seem to penalize those who have
already proactively paid what they were told was owed.
Such an approach would also likely encourage those who
have received escape assessments, but not made payments,
to pay nothing and simply wait for this bill to take
effect. As such, the author may wish to amend this bill
to require the refund of any tax, interest, or penalty
paid prior to January 1, 2015.
iii) Agreements, direct fees, or both ? AB 1760 prohibits
parties from entering into new PILOT agreements on or
after January 1, 2015. On the other hand, this bill
applies to both agreements and directly imposed fees.
Specifically, this bill prohibits a local agency from
entering into an agreement to charge, or newly imposing a
charge, or fee on a low-income housing development,
unless the charge or fee meets specified conditions.
This bill allows a charge or fee if it is for "a specific
service or product" provided directly to the housing
development project, the service or product is not
provided to those developments not charged, and the
charge or fee does not exceed the actual cost of
providing the service or product. However, it is unclear
to Committee staff what the phrase "specific service or
product" is meant to encapsulate. While proponents of
this provision argue that the language simply reasserts
the existing constitutional authority of local
governments, Committee staff questions whether it might
inadvertently be read to confer additional authority on
local governments. Specifically, Committee staff is
concerned that such language might inadvertently be read
as conferring authority to impose project-specific fees
for services like additional fire response. Obviously,
low-income housing advocates would argue that this bill's
language precludes the imposition of such charges since
fire services are provided universally, including to
those developments not charged a fee. Nevertheless, as
has been seen, fiscal necessity is the mother of legal
invention, and Committee staff questions whether some
local governments might view "supplemental" services as
distinct from normal fire services in such a scenario.
iv) Related facilities : R&TC Section 214(g)'s
low-income housing provisions apply the welfare exemption
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to property used exclusively for rental housing and
related facilities, as specified. Qualifying properties
are entitled to a partial exemption equal to that
percentage of the property's value that the portion of
the property serving lower income households represents
of the total property. Unlike AB 1760, this bill defines
the term "related facilities" to include any manager's
units and any and all common area spaces included within
the development. While Committee staff assumes such
spaces would fall under the "proportional allocation"
formula, depending on the property's mix of market rate
and affordable units, the author may wish to take
amendments making this intent perfectly clear.
f) Suggested technical amendment : The author may wish to
consider amending this bill's "related facilities"
provisions as outlined in the BOE's staff analysis. These
amendments would strike the phrase "low-income apartment"
and insert the phrase "rental housing" instead. In
addition, these amendments would insert the term
"development" after the phrase "overall project".
REGISTERED SUPPORT / OPPOSITION :
Support
Cabrillo Economic Development Corporation
California Housing Consortium
City of Sacramento
Housing Authority of the City of San Buenaventura
Pacific Housing, Inc.
State Board of Equalization Member Jerome E. Horton
State Board of Equalization (with respect to specified
provisions)
Opposition
None on file
Analysis Prepared by : M. David Ruff / REV. & TAX. / (916)
319-2098
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