Date of Hearing: May 16, 2019

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

ABPCA Bill Id:AB 1734

Author:(Chiu) – As Amended Ver:April 22, 2019

Urgency: No State Mandated Local Program: Yes Reimbursable: Yes

SUMMARY:

This bill creates, for tax liens dates on or after January 1, 2020, and before January 1, 2025, a property tax exemption for nonprofit-owned rental housing occupied by moderate-income households. Specifically, this bill:

1. Qualifies a property for the property tax exemption if it is rental housing with five or more units and receives funding from a state or local agency. The owner must certify there is an agreement or legal document to restrict the property’s use and must use the property tax savings to maintain the affordability of the units occupied by moderate-income households.
2. Specifies that all rents charged must be at least 20% below a county’s fair market rate and defines “moderate-income households” as households with incomes between 80% and 120% of the area median income (AMI).
3. Requires the Legislative Analyst’s Office to review each year the effectiveness of the proposed exemption and its economic impact.

FISCAL EFFECT:

1. Local revenue loss is unknown because it is unclear how many properties will be eligible for the new exemption. The average local property tax loss per eligible property will be in the range of $16,000 and General Fund Proposition 98 spending will increase by roughly 50% of the total local revenue loss.
2. Unknown, and potentially reimbursable, costs for local county officials related to the property tax assessment process.
3. Costs, likely in the tens of thousands of dollars each year, for the LAO to conduct the annual study of this property tax exemption’s effectiveness.

COMMENTS:

1. Background. All property in California is taxable unless explicitly exempted. Specifically, the Legislature may exempt property owned by nonprofit entities organized and operated for charitable purposes. This welfare exemption currently results in $3 billion in annual foregone local property tax revenues.

Nonprofit-owned low-income housing is eligible for the welfare exemption if certain conditions apply. Moreover, the exemption applies differently to projects receiving government assistance: Nonprofit-owned low-income rental housing receiving government financing or low-income housing tax credits are allowed an unlimited exemption, whereas similar properties that do not receive such financing or tax credits are allowed an exemption for up to $20 million in assessed value. Moreover, properties rented to low- or moderate-income elderly or handicapped families qualify for a partial exemption equal to the share of occupants that are low- or moderate- income elderly and handicapped families.

1. Proposed amendments. The author has committed to amend this bill as follows:
2. Remove the property tax exemption and replace it with language authorizing a city or county to provide an incentive based an eligible property’s property tax liability.
3. Restrict eligibility to properties currently not qualifying for the existing property welfare exemption.
4. Requires the property, as part of the incentive agreement, to keep rents to at least 20% below the fair market rent and to limit annual rent increases to the percentage increase in the AMI.

The above amendments will align this bill with AB 723 (Wicks), of the 2019-20 Legislative Session, which is pending in the Senate Rules Committee.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081

Date of Hearing: May 6, 2019

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

ABPCA Bill Id:AB 1734 (

Author:Chiu) – As Amended Ver:April 22, 2019

FOR VOTE ONLY

Majority vote. Tax levy. Fiscal committee.

SUBJECT: Property taxation: welfare exemption: rental housing: moderate income housing

SUMMARY: Creates a property tax exemption for qualified rental housing occupied by moderate-income households. Specifically, this bill:

1. Exempts, on and after January 1, 2020, and before January 1, 2025, under the welfare exemption, "qualified property" used exclusively for rental housing for moderate-income households and related facilities owned and operated by non-profit organizations, including limited partnerships in which the managing general partner is an eligible non-profit corporation or an eligible limited liability company, as specified.
2. Deems qualified property to be within the charitable exemption provided for in the California Constitution if the non-profit organization that owns and operates the property, or the non-profit organization that serves as the managing general partner in a limited partnership, meets all welfare exemption requirements (Article XIII Section 4(b) and Section 5; Revenue and Taxation Code (R&TC Section 214).).
3. Defines a "qualified property" as property that both:
   1. Is a rental housing development of three or more units; and,
   2. Is constructed on public land or is receiving or has received funding from a local or state agency, including, but not limited to, the California Housing Finance Agency or the California Tax Credit Allocation Committee (TCAC).
4. Allows a partial exemption equal to that percentage of the property's value that is equal to the percentage that the number of units serving moderate-income households represents to the total number of residential units.
5. Allows the partial exemption percentage, as calculated above, to apply to related facilities.
6. Defines "related facilities" as any manager's units and any and all common area spaces that are included within the physical boundaries of the rental housing development, including, but not limited to, common area space, walkways, balconies, patios, clubhouse space, meeting rooms, laundry facilities, and parking areas, except any portions of the overall development that are nonexempt commercial space.
7. Requires the property owner to certify, under penalty of perjury, the following:
   1. That there is an enforceable and verifiable agreement with a public agency or a recorded deed restriction that restricts the project's usage and that provides that the units designated for use by moderate-income households are continuously available to, or occupied by, moderate-income households;
   2. 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, moderate-income household occupied units; and,
   3. That, at the time of the execution of the agreement or deed restriction, as required above, the rents to be charged to the moderate-income households are either:
      1. At least 20% below the fair market rent for the county at that time, as determined by the federal Department of Housing and Urban Development (HUD); or,
      2. At least 20% below a higher fair market rent based on a market study, as specified, provided by a city, county, or third party that has been "reviewed and certified" by the public agency contributing funding to the project, as specified.
   4. That annual rent increases will be limited to the percentage increase in Area Median Income (AMI) as determined by HUD for the county in which the property is located.
8. Requires the public agency contributing to the project through funding or LIHTCs to review and certify the validity of a rent market study submitted by a city, county, or third party to establish a higher fair market rent for a county for purposes of the moderate-income exemption.
9. Requires rent market studies to be prepared in accordance with TCAC market study guidelines in effect at the time an agreement, deed restriction, or other legal document is executed.
10. Disallows the use of an "other legal document" to certify moderate-income occupancy restrictions at specified rents when the property is owned by a limited partnership in which a non-profit organization serves as the managing general partner.
11. Defines "moderate-income households" as households between 80% and 120% of AMI, adjusted for household size, as defined by Health and Safety Code (H&SC) Section 50093.
12. Allows units occupied by households earning up to 140% of AMI, adjusted for family size to remain eligible for the exemption if the unit remains rent restricted.
13. Cancels the exemption on qualified property if the property is sold, but allows the purchaser to be eligible for the exemption if the purchaser independently qualifies.
14. Takes immediate effect as a tax levy, but applies beginning with lien dates (January 1) occurring on and after January 1, 2020, and before January 1, 2025.
15. Contains the following findings and declarations for purposes of complying with the intent of R&TC Section 41:
    1. The specific goals, purposes, and objectives this bill's tax exemption, will achieve are as follows:
       1. Reducing the cost to produce housing units affordable to moderate-income residents.
       2. Reducing the rents of existing housing units to make them affordable to moderate-income residents.
       3. Relieving part of the significant financial burden that moderate-income households face for rent costs they often cannot afford.
    2. Detailed performance indicators for the Legislature to use in determining whether this bill's tax exemption meets the goals, purposes, and objectives described above are as follows:
       1. The number of new and acquired properties claiming the exemption.
       2. The number of housing units in properties claiming the exemption.
       3. The assessed value of property claiming the exemption.
    3. Requires the Legislative Analyst's Office (LAO), on an annual basis beginning January 1, 2021, and until January 1, 2026, to collaborate with the State Board of Equalization (BOE) to review the effectiveness of this bill's tax exemption. Requires the review to include, but is not limited to, an analysis of the demand for this bill's tax exemption, the tax exemption's economic impact, and the performance indicators described above. Requires the LAO to submit their review in a report to the Legislature in compliance with Government Code Section 9795. Requires any individually identifiable information collected and used in the report to be compiled in an aggregate or anonymized manner to preserve confidentiality.
    4. The data collection requirements for determining whether this bill's tax exemption is meeting, failing to meet, or exceeding its articulated goals, purposes, and objectives are as follows:
       1. To assist the Legislature in determining whether this bill's tax exemption meets the goals, purposes, and objectives described above and in carrying out the LAO's duty to review the effectiveness of this bill's tax exemption, allows the LAO to request information from the BOE.
       2. Requires the BOE to provide any LAO-requested data requested.
       3. To assist the Legislature in determining whether this bill's tax exemption meets the goals, purposes, and objectives described in subdivision (a), and in carrying out their duties under subdivision (c), allows the BOE to request information from each county assessor.
       4. Requires each county assessor to provide any BOE-requested data.
16. Specifies that the state will not reimburse any local agency for any resulting property tax revenue loss from the exemption.
17. Provides that local agency cost reimbursement shall be made only if the Commission on State Mandates determines that this bill contains state-mandated costs.

EXISTING LAW:

1. Authorizes the Legislature to exempt from taxation, in whole or in part, 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.
2. Exempts under the welfare exemption low-income rental housing owned and operated by non-profit organizations, as specified. (R&TC Section 214(g).)
3. Allows the exemption of low-income rental housing owned and operated by a limited partnership in which the managing general partner is an eligible non-profit corporation or eligible limited liability company, as specified. (R&TC Section 214(g).)
4. Defines "low-income" as households at 80% of AMI adjusted for family size. Provides an exception for a unit occupied by a household that initially qualified at move-in and household income subsequently increases up to 140% AMI, provided the unit's rent remains restricted. (R&TC Section 214(g)(2)(C)(i).)
5. Exempts moderate-income rental housing owned and operated by non-profit organizations, only if the housing is for elderly or disabled families and rented at an affordable rent. (R&TC Section 214(f).)
6. Disallows the extension of the welfare exemption to both low-income and moderate-income rental housing for the elderly and disabled families where a non-profit organization serves as the managing general partner in a limited partnership with for-profit limited partners. (R&TC Section 214(f).)
7. Disallows the use of "other legal document" to certify low-income occupancy restrictions at specified rents where a non-profit organization serves as the managing general partner in a limited partnership. (R&TC Section 214(g)(2)(A)(ii).)

FISCAL EFFECT: Unknown

COMMENTS:

1. The author has provided the following statement in support of this bill:

Addressing the lack of units for extremely low- and very low-income households should continue to be a priority for California. But the state cannot afford to ignore the major gap in available housing for low- to moderate-income households. To adequately solve our ongoing housing crisis, we need a series of policies that make up a comprehensive solution. AB 1734 would provide an incentive to developers and property owners to include rental units for community members making 80-120% of Area Median Income – these are our teachers, our nurses, our firefighters, and our other middle-class workers who cannot afford market rate housing but do not qualify for affordable housing programs. These community members are often commuting long distances from low-cost rental markets into high-cost areas because they cannot find housing near where they work. This bill will assist in the production and acquisition of housing, and ensure that we're meeting the needs of our state's missing middle class.

1. The City of San Diego, this bill's sponsor, states:

For years California has been unable to produce enough housing to meet the needs of its growing population. Insufficient supply has been driving up the cost of housing across the state and more acutely in major metropolitan areas. The cost to buy or rent in areas like Los Angeles, San Diego, and San Francisco has become prohibitively expensive. At the same time, the units that are being produced are almost entirely being built for the top of the market while a small share are being built to meet affordable housing needs. Almost entirely missing from new development is housing stock aimed at the entry level market. In order to fill the missing middle, the state needs a tool to incentivize the development of housing stock that can meet the needs of our working families and middle class.

1. In support of this bill the California Council for Affordable Housing states:

California's housing crisis disproportionately affects low- and very low-income households, however many low- and moderate-income household also have trouble renting a home at an affordable level, particularly in high cost areas. According to the National Low Income Housing Coalition, California has a short-fall of 61,000 moderate income housing units.

In 2017, as part of the housing package, SB 2 (Atkins), Chapter 364, directed 15% of the revenues from the recording fee to the California Housing Financing Agency (CalHFA) to fund the construction of rental units for the "missing middle" or 80% to 120% of AMI. This bill would assist in the creation of those units by providing an additional subsidy in the form of a property tax exemption that can be invested into the developments, reducing the cost of the units.

1. In opposition to this bill, the California Assessors' Association (CAA) states that this bill requires assessors to track different rent restrictions for properties, a significant administrative cost and burden. The CAA notes assessors currently rely upon a single set of restrictions published by the Board of Equalization.
2. Committee Staff Comments:
   1. The welfare exemption: The California Constitution provides that all property is taxable, unless explicitly exempted by the Constitution or federal law.

In 1944, voters amended the California Constitution to allow the Legislature to establish a property tax exemption for property: (i) exclusively used for religious, hospital, or charitable purposes, (ii) owned by non-profit entities organized and operated for charitable purposes, and (iii) no part of whose net earnings inures to the benefit of any private shareholder or individual.^[1] This exemption is commonly known as the "welfare exemption". In 1945, the Legislature enacted the exemption, providing that a qualifying non-profit organization's property may be exempted fully or partially from property taxes, depending on how much of the property is used for qualified purposes and activities. (R&TC Section 214.)

In 1954, voters amended the Constitution to expand the umbrella of the welfare exemption to include buildings under construction and the land upon which they are situated, if the building's intended use would qualify for the welfare exemption. Previously, the law required property to be in operation before the exemption could commence.

• 1. The welfare exemption and low-income rental housing: Over the years, the scope of the welfare exemption has expanded. Historically, the welfare exemption applies to low-income rental housing for units occupied by households up to 80% of AMI. In 2017, however, the exemption was extended to units occupied by tenants earning up to 140% of AMI so long as they were income-qualified when they initially moved into the unit and the rent charged to that tenant remained restricted.
  2. Limited partnership arrangements: The federal Tax Reform Act of 1986 created the Low Income Housing Tax Credit (LIHTC) program to provide incentives for private investment in housing for low-income families. Shortly thereafter, the Legislature authorized a state LIHTC to augment the federal LIHTC.

In 1988, California's welfare exemption eligibility as it applies to low-income rental housing was expanded^[2] to, among other things, allow low-income rental housing owned and operated by a limited partnership in which the managing general partner is an eligible non-profit corporation.^[3] This marked the first time an ownership structure involving a for-profit entity was permitted to qualify for the welfare exemption.

Thus, low-income rental housing is unique in that, while it is owned and operated by a limited partnership that is not itself a non-profit organization, the property may still be eligible for the welfare exemption if the managing general partner is an eligible non-profit organization or eligible LLC with sufficient management authority and duties.

In 1999, the Legislature curtailed the low-income housing exemption due to perceived abuses of the exemption. Investigations into substandard rental housing revealed some properties benefiting from the property tax exemption under the previous welfare exemption expansions. Additionally, the Legislature imposed added oversight by requiring property owners to certify the existence of an enforceable and verifiable agreement with a public agency or a recorded deed restriction as to property use.^[4]

• 1. Is providing rental housing to moderate-income households a charitable endeavor? This bill sets a precedent of exempting moderate-income (between 80% and 120% of AMI, and as high as 140% of AMI) rental housing that does not serve persons with special needs, such as the elderly and disabled. Courts have noted, with respect to the rental housing exemption provided to the elderly and the disabled under the welfare exemption that "[s]ince the enactment of the Statute of Charitable Uses [1601] during the reign of Elizabeth, aid to the aged and infirm has been recognized as charitable." The courts have taken the view that constitutional provisions granting property tax exemptions are to be construed strictly, but reasonably. The proposed exemption permits the two-entity structure currently only allowed under the welfare exemption for low-income housing. That is, it permits a limited partnership with for-profit partners and a non-profit managing general partner.
  2. What are the rental housing income limits? The following table lists the income limits for a household size of four for selected counties:

• 1. No minimum level of local or state agency funding required: The exemption requires that the rental housing receive "funding", or previously received funding, from a local or state agency; but there is no minimum amount of public funding stated. For example, if a city provided a de minimis grant of funds to a property developer, would this qualify the housing for the property tax exemption?
  2. What is past is prologue: This bill does not limit the exemption to the construction of new rental housing. As noted above, in the past, tax exemptions were bestowed on pre-existing substandard properties. Without sufficient controls, this bill raises the possibility of a repeat scenario.
  3. Does this bill unintentionally create an incentive to convert existing low-income housing units into moderate-income housing units? For both exemptions, a 100% exemption would be available. Will property owners transition their units from low-income to moderate-income units as soon as possible? The Committee may wish to consider limiting the percentage of the exemption provided to moderate-income units to a level less than 100% to minimize this possibility.
  4. Reasonable public benefit? The Committee may wish to weigh whether the property tax exemption and the forgone property tax revenue is a fair exchange to the public in terms of the community benefit provided. Revenues could arguably be dedicated to more inclusive community need such as the unprecedented homelessness crises impacting communities throughout California and the associated public health concerns. These units will be occupied by a finite number of households selected to privately benefit from restricted below market rents. Those selected may occupy the units if they subsequently earn up to 140% of AMI. Others in the community with greater financial need will be unable to access the units given the lengthy or closed waiting lists for affordable rental housing opportunities.
  5. Erosion of the property tax base: Rental residential housing is a core component of the property tax base. Property tax revenues are a primary source of local government and school funding. Beginning in 2015, the Legislature prohibited payment in lieu of taxes (PILOT) agreements, which are agreements between a local government and a property owner of a low-income housing project that require the owner to pay a charge to compensate for lost revenue.^[5] The dual-prong impact of more people and property requiring government services, but no property tax revenue, puts financial pressure on local governments to reduce or cut services or enact parcel taxes, other special taxes, or property-related charges and fees to fund necessary local government services. Additionally, an inherent policy tension exists when addressing the housing affordability crisis for a person of moderate income through a new tax exemption that, in turn, reduces funds to address other pressing housing needs like homelessness.
  6. Annual rent increases: This bill requires the property owner to certify that future rent increases will be keyed to HUD county-based AMI percentage increases. What if rents decrease?
  7. Rents below 20% of market: The rent threshold eligibility certification for the new moderate-income exemption is based on a fixed point in time; that is, rents below 20% of market value on the date when the necessary agreements and restrictions are executed. Deed restrictions can run 55 years and some run into perpetuity. What role does this 20% below market rent requirement play in future years? As a fixed amount to which this bill's annual rent increase limitation applies? How would the 20% below market rent requirement be administered in the case of property already subject to an agreement or restriction?
  8. Governor Newsom's budget proposals: The Governor's budget proposes two new programs to expand moderate-income housing. First, $500 million in one-time funding for the development of moderate-income housing by expanding the California Housing Finance Agency’s mixed-income loan program. Second, $200 million in funding for a new tax credit program targeted at moderate-income housing development. Supporters of this bill state that the property tax exemption this bill proposes would allow more units to be built with the property tax savings.
  9. The LAO's review of the Governor's housing plan: The LAO suggests the Legislature consider prioritizing General Fund resources towards programs that assist low-income households because the need for housing assistance outstrips current resources and there are fewer policy options to address affordability for low-income households.^[6] The LAO notes that the Legislature could help address housing affordability for middle-income households by removing some of the barriers to private development. But low-income households would still struggle with housing affordability. For this reason, the LAO recommends focusing efforts on low-income households.
  10. What is a "tax expenditure"? Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, United States Treasury officials began arguing that these features of the tax law should be referred to as "expenditures," since they are generally enacted to accomplish some governmental purpose and there is a determinable cost associated with each of them (in the form of forgone revenues). This bill would enact a new tax expenditure program in the form of a property tax exemption for qualified moderate-income rental housing.
  11. Committee's tax expenditure policy: SB 1335 (Leno), Chapter 845, Statutes of 2014, added R&TC Section 41, which recognized that the Legislature should apply the same level of review used for government spending programs to tax credits introduced on or after January 1, 2015. This year, this Committee adopted a policy requiring that all new tax expenditure proposals, including a new property tax exemption such as this bill proposes, comply with the requirements of R&TC Section 41. A tax expenditure proposal must outline specific goals, performance indicators, and data collection provisions for the Legislature to evaluate the effectiveness of the tax expenditure. A tax expenditure bill will not be eligible for a Committee vote unless it has complied with these requirements. This bill has been amended to comply with the spirit of R&TC Section 41.
  12. Five-year sunset provisions: In addition to the R&TC Section 41 requirements, this Committee's policy also requires that all tax expenditure proposals contain an appropriate sunset provision to be eligible for a vote. According to the policy, this means five years. Without a sunset, tax expenditures are created with a majority vote, but require a 2/3rds vote to rescind. This bill complies with the Committee's policy on sunset dates.
  13. Related legislation:
      1. AB 1326 (Gloria) would make permanent the expansion of the low-income housing welfare exemption to units occupied by "over-income" tenants, that is up to 140% of AMI. AB 1326 has not been heard by this Committee.
      2. AB 1453 (Chui) would expand the welfare exemption to include low-income historical housing financed with both LIHTCs and historic tax credits. AB 1453 has not been heard by this Committee.
      3. SB 294 (Hill) would increase to $250 million an exemption cap specific to non-government financed or non-LIHTCs low-income rental housing properties. SB 294 also reduces the low-income occupancy threshold from 90% to 50% in these properties. SB 294 is pending hearing by the Senate Appropriations Committee.
  14. Previous legislation:
      1. AB 3152 (Chui) of the 2017-18 Legislative Session, would have created a property tax exemption for rental housing occupied by moderate-income households in "high cost" counties if rents charged are 10% less than fair market rent for that county. AB 3152 was held on the Assembly Appropriations' Committee Suspense File.
      2. AB 2818 (Chiu), Chapter 701, Statutes of 2015, included provisions to exempt properties providing moderate-income housing relating to community land trusts. These provisions were deleted prior to enactment.
      3. AB 1193 (Gloria), Chapter 756, Statutes of 2017, extended the welfare exemption to units occupied by persons up to 140% of AMI if they were initially income qualified (80% of AMI) when they moved in, so long as rent restrictions remain in effect.
      4. SB 2 (Atkins), Chapter 364, Statutes of 2017, in part, created a funding stream for affordable housing that included a component for moderate-income housing through additional fees charged when certain documents are recorded.

REGISTERED SUPPORT / OPPOSITION:

Support

City of San Diego (Sponsor)

California Apartment Association

California Council for Affordable Housing

California Housing Consortium

Opposition

California Assessors' Association

Santa Clara County Assessor

Analysis Prepared by: Rose Marie Kinnee / REV. & TAX. / (916) 319-2098

1. California Constitution, Article XIII, Section (4)(b) adopted by the voters on November 7, 1944. Proposition 4 (1944) via ACA 17 from 1943. (Formerly Article XIII, Section 1(c).) ↑

2. AB 2144 (Filante), Chapter 1469, Statutes of 1987, added R&TC Section 214(g) to allow the welfare exemption apply in a limited partnership beginning with the 1988-89 fiscal year. ↑

3. AB 3073 (Committee on Revenue & Taxation), Chapter 354 of the Statues of 2004, allowed eligible LLCs to qualify for the welfare exemption and allowed eligible LLCs to be a managing general partner. ↑

4. AB 1559 (Wiggins), Chapter 927, Statutes of 1999. Subsequent legislation has relaxed some of the initial constraints and controls enacted by AB 1559. ↑

5. SB 1203 (Jackson), Chapter 693, Statutes of 2014, and AB 1760 (Chau and Bocanegra), Chapter 671, Statutes of 2014. ↑

6. LAO Report, The 2019-18 Budget Considerations for the Governor's Housing Plan, February 20, 2019. ↑

Date of Hearing: April 8, 2019

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn R. Burke, Chairwoman

ABPCA Bill Id:AB 1734 (

Author:Chiu) – As Introduced Ver:February 22, 2019

FOR TESTIMONY ONLY

Majority. Tax levy. Fiscal committee.

SUBJECT: Property taxation: welfare exemption: rental housing: moderate income housing

SUMMARY: Creates a property tax exemption for qualified rental housing occupied by moderate-income households. Specifically, this bill:

1. Exempts, under the welfare exemption, "qualified property" used exclusively for rental housing for moderate-income households and related facilities owned and operated by non-profit organizations, including limited partnerships in which the managing general partner is an eligible non-profit corporation or an eligible limited liability company, as specified.
2. Deems qualified property to be within the charitable exemption provided for in the California Constitution if the non-profit organization that owns and operates the property, or the non-profit organization that serves as the managing general partner in a limited partnership, meets all welfare exemption requirements (Article XIII Section 4(b) and Section 5; Revenue and Taxation Code (R&TC Section 214).).
3. Defines a "qualified property" as property that both:
   1. Is a rental housing development of five or more units; and,
   2. Is receiving funding from a local or state agency, including, but not limited to, through an allocation of state or federal housing tax credits by the California Tax Credit Allocation Committee (TCAC).
4. Allows a partial exemption equal to that percentage of the property's value that is equal to the percentage that the number of units serving moderate-income households represents to the total number of residential units.
5. Allows the partial exemption percentage, as calculated above, to apply to related facilities.
6. Defines "related facilities" as any manager's units and any and all common area spaces that are included within the physical boundaries of the rental housing development, including, but not limited to, common area space, walkways, balconies, patios, clubhouse space, meeting rooms, laundry facilities, and parking areas, except any portions of the overall development that are nonexempt commercial space.
7. Requires the property owner to certify, under penalty of perjury, the following:
   1. That there is an enforceable and verifiable agreement with a public agency, a recorded deed restriction, or other legal document that restricts the project's usage and that provides that the units designated for use by moderate-income households are continuously available to, or occupied by, moderate-income households;
   2. 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, moderate-income household occupied units; and,
   3. That, at the time of the execution of the agreement, deed restriction, or legal document required above, the rents to be charged to the moderate-income households are either:
      1. At least 20% below the fair market rent for the county at that time, as determined by the federal Department of Housing and Urban Development (HUD); or,
      2. At least 20% below a higher fair market rent based on a market study, as specified, provided by a city, county, or third party that has been "reviewed and certified" by the public agency contributing funding to the project, as specified.
   4. That annual rent increases will be limited to the percentage increase in Area Median Income (AMI) as determined by HUD for the county in which the property is located.
8. Requires the public agency contributing to the project through funding or LIHTCs to review and certify the validity of a rent market study submitted by a city, county, or third party to establish a higher fair market rent for a county for purposes of the moderate-income exemption.
9. Requires rent market studies to be prepared in accordance with TCAC market study guidelines in effect at the time an agreement, deed restriction, or other legal document is executed.
10. Disallows the use of an "other legal document" to certify moderate-income occupancy restrictions at specified rents when the property is owned by a limited partnership in which a non-profit organization serves as the managing general partner.
11. Defines "moderate-income households" as households between 80% and 120% of AMI, adjusted for household size.
12. Allows units occupied by households earning up to 140% of AMI, adjusted for family size to remain eligible for the exemption if the unit remains rent restricted.
13. Provides competing definitions of "moderate-income household" and allowable "rent" by also defining the phrase "units serving moderate-income households" as units that are occupied by moderate-income households at an affordable rent, as defined by Health and Safety Code Section 50053.
14. Cancels the exemption on qualified property if the property is sold, but allows the purchaser to be eligible for the exemption if the purchaser independently qualifies.
15. Takes immediate effect as a tax levy, but applies beginning with lien dates (January 1) occurring on and after January 1, 2020.
16. Specifies that the state will not reimburse any local agency for any resulting property tax revenue loss from the exemption.
17. Provides that local agency cost reimbursement shall be made only if the Commission on State Mandates determines that this bill contains state-mandated costs.

EXISTING LAW:

1. Authorizes the Legislature to exempt from taxation, in whole or in part, 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.
2. Exempts under the welfare exemption low-income rental housing owned and operated by non-profit organizations, as specified. (R&TC Section 214(g).)
3. Allows the exemption of low-income rental housing owned and operated by a limited partnership in which the managing general partner is an eligible non-profit corporation or eligible limited liability company, as specified. (R&TC Section 214(g).)
4. Defines "low-income" as households at 80% of AMI adjusted for family size. Provides an exception for a unit occupied by a household that initially qualified at move-in and household income subsequently increases up to 140% AMI, provided the unit's rent remains restricted. (R&TC Section 214(g)(2)(C)(i).)
5. Exempts moderate-income rental housing owned and operated by non-profit organizations, only if the housing is for elderly or disabled families and rented at an affordable rent. (R&TC Section 214(f).)
6. Disallows the extension of the welfare exemption to both low-income and moderate-income rental housing for the elderly and disabled families where a non-profit organization serves as the managing general partner in a limited partnership with for-profit limited partners. (R&TC Section 214(f).)
7. Disallows the use of "other legal document" to certify low-income occupancy restrictions at specified rents where a non-profit organization serves as the managing general partner in a limited partnership. (R&TC Section 214(g)(2)(A)(ii).)

FISCAL EFFECT: Unknown

COMMENTS:

1. The author has provided the following statement in support of this bill:

Addressing the lack of units for extremely low- and very low-income households should continue to be a priority for California. But the state cannot afford to ignore the major gap in available housing for low- to moderate-income households. To adequately solve our ongoing housing crisis, we need a series of policies that make up a comprehensive solution. AB 1734 would provide an incentive to developers and property owners to include rental units for community members making 80-120% of Area Median Income – these are our teachers, our nurses, our firefighters, and our other middle-class workers who cannot afford market rate housing but do not qualify for affordable housing programs. These community members are often commuting long distances from low-cost rental markets into high-cost areas because they cannot find housing near where they work. This bill will assist in the production and acquisition of housing, and ensure that we're meeting the needs of our state's missing middle class.

1. The City of San Diego, this bill's sponsor, states:

For years California has been unable to produce enough housing to meet the needs of its growing population. Insufficient supply has been driving up the cost of housing across the state and more acutely in major metropolitan areas. The cost to buy or rent in areas like Los Angeles, San Diego, and San Francisco has become prohibitively expensive. At the same time, the units that are being produced are almost entirely being built for the top of the market while a small share are being built to meet affordable housing needs. Almost entirely missing from new development is housing stock aimed at the entry level market. In order to fill the missing middle, the state needs a tool to incentivize the development of housing stock that can meet the needs of our working families and middle class.

1. In support of this bill the California Council for Affordable Housing states:

California's housing crisis disproportionately affects low- and very low-income households, however many low- and moderate-income household also have trouble renting a home at an affordable level, particularly in high cost areas. According to the National Low Income Housing Coalition, California has a short-fall of 61,000 moderate income housing units.

In 2017, as part of the housing package, SB 2 (Atkins), Chapter 364, directed 15% of the revenues from the recording fee to the California Housing Financing Agency (CalHFA) to fund the construction of rental units for the "missing middle" or 80% to 120% of AMI. This bill would assist in the creation of those units by providing an additional subsidy in the form of a property tax exemption that can be invested into the developments, reducing the cost of the units.

1. In opposition to this bill, the California Assessors' Association (CAA) states:

[V]astly expands the administration of the property tax exemption, substantially complicates compliance, and reduces oversight. This legislation will create a significant increase in workload for Assessors and essentially creates an unfunded mandate. [The] most significant issue concerns the vague and confusing language relating to what constitutes proper rent restrictions."

Additionally, the CAA explains that this bill creates two standards for what might be qualified, rent restrictions. This, in turn, requires Assessors to track different rent restrictions for properties, a significant administrative cost and burden. The CAA notes Assessors currently rely upon a single set of restrictions published by the Board of Equalization.

1. Committee Staff Comments:
   1. The welfare exemption: The California Constitution provides that all property is taxable, unless explicitly exempted by the Constitution or federal law.

In 1944, voters amended the California Constitution to allow the Legislature to establish a property tax exemption for property: (i) exclusively used for religious, hospital, or charitable purposes, (ii) owned by non-profit entities organized and operated for charitable purposes, and (iii) no part of whose net earnings inures to the benefit of any private shareholder or individual.^[1] This exemption is commonly known as the "welfare exemption". In 1945, the Legislature enacted the exemption, providing that a qualifying non-profit organization's property may be exempted fully or partially from property taxes, depending on how much of the property is used for qualified purposes and activities. (R&TC Section 214.)

In 1954, voters amended the Constitution to expand the umbrella of the welfare exemption to include buildings under construction and the land upon which they are situated, if the building's intended use would qualify for the welfare exemption. Previously, the law required property to be in operation before the exemption could commence.

• 1. The welfare exemption and low-income rental housing: Over the years, the scope of the welfare exemption has expanded. Historically, the welfare exemption applies to low-income rental housing for units occupied by households up to 80% of AMI. In 2017, however, the exemption was extended to units occupied by tenants earning up to 140% of AMI so long as they were income-qualified when they initially moved into the unit and the rent charged to that tenant remained restricted.
  2. Limited partnership arrangements: The federal Tax Reform Act of 1986 created the Low Income Housing Tax Credit (LIHTC) program to provide incentives for private investment in housing for low-income families. Shortly thereafter, the Legislature authorized a state LIHTC to augment the federal LIHTC.

In 1988, California's welfare exemption eligibility as it applies to low-income rental housing was expanded^[2] to, among other things, allow low-income rental housing owned and operated by a limited partnership in which the managing general partner is an eligible non-profit corporation.^[3] This marked the first time an ownership structure involving a for-profit entity was permitted to qualify for the welfare exemption.

Thus, low-income rental housing is unique in that, while it is owned and operated by a limited partnership that is not itself a non-profit organization, the property may still be eligible for the welfare exemption if the managing general partner is an eligible non-profit organization or eligible LLC with sufficient management authority and duties.

In 1999, the Legislature curtailed the low-income housing exemption due to perceived abuses of the exemption. Investigations into substandard rental housing revealed some properties benefiting from the property tax exemption under the previous welfare exemption expansions. Additionally, the Legislature imposed added oversight by requiring property owners to certify the existence of an enforceable and verifiable agreement with a public agency or a recorded deed restriction as to property use.^[4]

• 1. Is providing rental housing to moderate-income households a charitable endeavor? This bill sets a precedent of exempting moderate-income (between 80% and 120% of AMI, and as high as 140% of AMI) rental housing that does not serve persons with special needs, such as the elderly and disabled. Courts have noted, with respect to the rental housing exemption provided to the elderly and the disabled under the welfare exemption that "[s]ince the enactment of the Statute of Charitable Uses [1601] during the reign of Elizabeth, aid to the aged and infirm has been recognized as charitable." The courts have taken the view that constitutional provisions granting property tax exemptions are to be construed strictly, but reasonably. The proposed exemption permits the two-entity structure currently only allowed under the welfare exemption for low-income housing. That is, it permits a limited partnership with for-profit partners and a non-profit managing general partner.
  2. What are the rental housing income limits? The following table lists the income limits for a household size of four for selected counties:

• 1. No minimum level of local or state agency funding required: The exemption requires that the rental housing receive "funding" from a local or state agency; but there is no minimum amount of public funding stated. For example, if a city provided a de minimis grant of funds to a property developer, would this qualify the housing for the property tax exemption?
  2. What is past is prologue: This bill does not limit the exemption to the construction of new rental housing. As noted above, in the past, tax exemptions were bestowed on pre-existing substandard properties. Without sufficient controls, this bill raises the possibility of a repeat scenario.
  3. Does this bill unintentionally create an incentive to convert existing low-income housing units into moderate-income housing units? For both exemptions, a 100% exemption would be available. Will property owners transition their units from low-income to moderate-income units as soon as possible? The Committee may wish to consider limiting the percentage of the exemption provided to moderate-income units to a level less than 100% to minimize this possibility.
  4. Reasonable public benefit? The Committee may wish to weigh whether the property tax exemption and the forgone property tax revenue is a fair exchange to the public in terms of the community benefit provided. Revenues could arguably be dedicated to more inclusive community need such as the unprecedented homelessness crises impacting communities throughout California and the associated public health concerns. These units will be occupied by a finite number of households selected to privately benefit from restricted below market rents. Those selected may occupy the units if they subsequently earn up to 140% of AMI. Others in the community with greater financial need will be unable to access the units given the lengthy or closed waiting lists for affordable rental housing opportunities.
  5. Erosion of the property tax base: Rental residential housing is a core component of the property tax base. Property tax revenues are a primary source of local government and school funding. Beginning in 2015, the Legislature prohibited payment in lieu of taxes (PILOT) agreements, which are agreements between a local government and a property owner of a low-income housing project that require the owner to pay a charge to compensate for lost revenue.^[5] The dual-prong impact of more people and property requiring government services, but no property tax revenue, puts financial pressure on local governments to reduce or cut services or enact parcel taxes, other special taxes, or property-related charges and fees to fund necessary local government services. Additionally, an inherent policy tension exists when addressing the housing affordability crisis for a person of moderate income through a new tax exemption that, in turn, reduces funds to address other pressing housing needs like homelessness.
  6. Annual rent increases: This bill requires the property owner to certify that future rent increases will be keyed to HUD county-based AMI percentage increases. What if rents decrease?
  7. Rents below 20% of market: The rent threshold eligibility certification for the new moderate-income exemption is based on a fixed point in time. That is, rents below 20% of market value on the date when the necessary agreements, restrictions, and other legal documents are executed. Deed restrictions can run 55 years and some run into perpetuity. What role, if any, does this 20% below market rent requirement play in future years? As a fixed amount to which this bill's annual rent increase limitation applies? How does the existing "affordable rent" definition interact with the 20% below market rent requirement? How would the 20% below market rent requirement be administered in the case of property already subject to an agreement or restriction? The multiple rent references are confusing.
  8. Governor Newsom's budget proposals: The Governor's budget proposes two new programs to expand moderate-income housing. First, $500 million in one-time funding for the development of moderate-income housing by expanding the California Housing Finance Agency’s mixed-income loan program. Second, $200 million in funding for a new tax credit program targeted at moderate-income housing development. Supporters of this bill state that the property tax exemption this bill proposes would allow more units to be built with the property tax savings.
  9. The LAO's review of the Governor's housing plan: The LAO suggests the Legislature consider prioritizing General Fund resources towards programs that assist low-income households because the need for housing assistance outstrips current resources and there are fewer policy options to address affordability for low-income households.^[6] The LAO notes that the Legislature could help address housing affordability for middle-income households by removing some of the barriers to private development. But low-income households would still struggle with housing affordability. For this reason, the LAO recommends focusing efforts on low-income households.
  10. What is a "tax expenditure"? Existing law provides various credits, deductions, exclusions, and exemptions for particular taxpayer groups. In the late 1960s, United States Treasury officials began arguing that these features of the tax law should be referred to as "expenditures," since they are generally enacted to accomplish some governmental purpose and there is a determinable cost associated with each of them (in the form of forgone revenues). This bill would enact a new tax expenditure program in the form of a property tax exemption for qualified moderate-income rental housing.
  11. Committee's tax expenditure policy: SB 1335 (Leno), Chapter 845, Statutes of 2014, added R&TC Section 41, which recognized that the Legislature should apply the same level of review used for government spending programs to tax credits introduced on or after January 1, 2015. This year, this Committee adopted a policy requiring that all new tax expenditure proposals comply with the requirements of R&TC Section 41. A tax expenditure proposal must outline specific goals, performance indicators, and data collection provisions for the Legislature to evaluate the effectiveness of the tax expenditure. A tax expenditure bill will not be eligible for a Committee vote unless it has complied with these requirements. This bill does not contain goals, performance indicators, or data collection as required by this Committee's tax expenditure policy.
  12. Lacks sunset provisions: In addition to the R&TC Section 41 requirements, this Committee's policy also requires that all tax expenditure proposals contain an appropriate sunset provision to be eligible for a vote. According to the new policy, this means five years. Without a sunset, tax expenditures are created with a majority vote, but require a 2/3rds vote to rescind. This bill lacks any sunset provision.
  13. Related legislation:
      1. AB 1326 (Gloria) would make permanent the expansion of the low-income housing welfare exemption to units occupied by "over-income" tenants, that is up to 140% of AMI. AB 1326 is pending hearing by this Committee.
      2. AB 1453 (Chui) would expand the welfare exemption to include low-income historical housing financed with both LIHTCs and historic tax credits. AB 1453 is pending hearing by this Committee.
      3. SB 294 (Hill) would increase to $250 million an exemption cap specific to non-government financed or non-LIHTCs low-income rental housing properties. SB 294 also reduces the low-income occupancy threshold from 90% to 50% in these properties. SB 294 is pending hearing by the Senate Appropriations Committee.
  14. Previous legislation:
      1. AB 3152 (Chui) of the 2017-18 Legislative Session, would have created a property tax exemption for rental housing occupied by moderate-income households in "high cost" counties if rents charged are 10% less than fair market rent for that county. AB 3152 was held on the Assembly Appropriations' Committee Suspense File.
      2. AB 2818 (Chiu), Chapter 701, Statutes of 2015, included provisions to exempt properties providing moderate-income housing relating to community land trusts. These provisions were deleted prior to enactment.
      3. AB 1193 (Gloria), Chapter 756, Statutes of 2017, extended the welfare exemption to units occupied by persons up to 140% of AMI if they were initially income qualified (80% of AMI) when they moved in, so long as rent restrictions remain in effect.
      4. SB 2 (Atkins), Chapter 364, Statutes of 2017, in part, created a funding stream for affordable housing that included a component for moderate-income housing through additional fees charged when certain documents are recorded.

REGISTERED SUPPORT / OPPOSITION:

Support

City of San Diego (Sponsor)

California Apartment Association

California Council for Affordable Housing

California Housing Consortium

Opposition

California Assessors' Association

Santa Clara County Assessor

Analysis Prepared by: Rose Marie Kinnee / REV. & TAX. / (916) 319-2098

1. California Constitution, Article XIII, Section (4)(b) adopted by the voters on November 7, 1944. Proposition 4 (1944) via ACA 17 from 1943. (Formerly Article XIII, Section 1(c).) ↑

2. AB 2144 (Filante), Chapter 1469, Statutes of 1987, added R&TC Section 214(g) to allow the welfare exemption apply in a limited partnership beginning with the 1988-89 fiscal year. ↑

3. AB 3073 (Committee on Revenue & Taxation), Chapter 354 of the Statues of 2004, allowed eligible LLCs to qualify for the welfare exemption and allowed eligible LLCs to be a managing general partner. ↑

4. AB 1559 (Wiggins), Chapter 927, Statutes of 1999. Subsequent legislation has relaxed some of the initial constraints and controls enacted by AB 1559. ↑

5. SB 1203 (Jackson), Chapter 693, Statutes of 2014, and AB 1760 (Chau and Bocanegra), Chapter 671, Statutes of 2014. ↑

6. LAO Report, The 2019-18 Budget Considerations for the Governor's Housing Plan, February 20, 2019. ↑