The California Constitution generally limits ad valorem taxes on real property to 1% of the full cash value of that property. For purposes of this limitation, the California Constitution defines full cash value as the assessors fair market value valuation of real property as shown on the 197576 tax bill under full cash value or, thereafter, the appraised value of that real property when purchased, newly constructed, or a change in ownership has occurred. Existing property tax law generally defines this full cash value of property as the propertys fair market value and defines these terms to mean the amount of cash or its equivalent that property would bring if exposed for sale in the open market under conditions in which neither buyer nor seller could take advantage of the exigencies of the other, and both the buyer and the seller have knowledge of all of the uses and purposes to which the property is adapted and for which it is capable of being used, and of the enforceable restrictions upon those uses and purposes. Existing property tax law requires the assessor to consider the effect of certain enforceable restrictions, including, among others, a contract that is a 99-year ground lease between a community land trust, as defined, and the qualified owner, as defined, of an owner-occupied single-family dwelling or an owner-occupied unit in a multifamily dwelling, that subjects a single-family dwelling or unit in a multifamily dwelling and the leased land on which the dwelling or unit is situated to affordability restrictions, as defined.

This bill would require, when valuing property subject to the enforceable restriction described above, that the sale or resale price of the dwelling or unit be rebuttably presumed to include both the dwelling or unit and the leased land on which the dwelling or unit is situated, and would authorize this presumption to be overcome if the assessor establishes by a preponderance of the evidence that all or a portion of the value of the leased land is not reflected in the sale or resale price of the dwelling or unit. The bill would require corrections of base year values and declines in value owing to the restrictions on properties assessed pursuant to these provisions to apply to all lien dates occurring after September 27, 2016. The bill would also make findings and declarations regarding the public purpose served by the bill.

Existing property tax law, in accordance with the California Constitution, provides for a welfare exemption for property used exclusively for religious, hospital, scientific, or charitable purposes and that is owned or operated by certain types of nonprofit entities, if certain qualifying criteria are met.

This bill would provide that property is within the welfare exemption if that property is owned by a community land trust, as defined, otherwise qualifying for the welfare exemption, and specified conditions are met, including that the property is being or will be developed or rehabilitated as housing, as specified. The bill would require this exemption to apply for 5 lien dates, as provided. The bill would prohibit this exemption from being denied on the basis that the subject property does not currently contain specified property that is in the course of construction. The bill would require the community land trust to be liable for property tax for the years for which the property was exempt under these provisions if the property was not developed or rehabilitated, or if the development or rehabilitation is not in the course of construction, by January 1, 2025, in the case of property acquired by the community land trust before January 1, 2020, or within 5 years of the lien date following the acquisition of the property in the case of property acquired by the community land trust on and after January 1, 2020, and before January 1, 2025, and would require the community land trust to notify the assessor if property owned by the community land trust is not in the course of construction by these dates. The bill, in the case where property that is owned by a community land trust becomes subject to taxation as so described, would require any assessment made, as provided, to be made within 5 years of the lien date following the date on which the property becomes subject to taxation.

By imposing new duties upon local government officials with respect to the exemption provided by this bill, this bill would impose a state-mandated local program.

The California Constitution requires the state to reimburse local agencies and school districts for certain costs mandated by the state. Statutory provisions establish procedures for making that reimbursement.

This bill would provide that, if the Commission on State Mandates determines that the bill contains costs mandated by the state, reimbursement for those costs shall be made pursuant to the statutory provisions noted above.

Existing law requires the state to reimburse local agencies annually for certain property tax revenues lost as a result of any exemption or classification of property for purposes of ad valorem property taxation.

This bill would provide that, notwithstanding those provisions, no appropriation is made and the state shall not reimburse local agencies for property tax revenues lost by them pursuant to the bill.

 THIRD READING  

Bill No: SB 196

Author: Beall (D), et al.

Amended: 9/3/19

Vote: 21

SENATE GOVERNANCE & FIN. COMMITTEE: 7-0, 5/1/19

AYES: McGuire, Moorlach, Beall, Hertzberg, Hurtado, Nielsen, Wiener

SENATE APPROPRIATIONS COMMITTEE: 6-0, 5/16/19

AYES: Portantino, Bates, Bradford, Hill, Jones, Wieckowski

SENATE FLOOR: 38-0, 5/23/19

AYES: Allen, Archuleta, Atkins, Bates, Beall, Borgeas, Bradford, Caballero, Chang, Dodd, Durazo, Galgiani, Glazer, Grove, Hertzberg, Hill, Hueso, Hurtado, Jackson, Jones, Leyva, McGuire, Mitchell, Monning, Moorlach, Morrell, Nielsen, Pan, Portantino, Roth, Rubio, Skinner, Stern, Stone, Umberg, Wieckowski, Wiener, Wilk

ASSEMBLY FLOOR: 79-0, 9/10/19 - See last page for vote

SUBJECT: Property taxes: community land trust

SOURCE: Irvine Community Land Trust

DIGEST:

This bill enacts a new welfare exemption from property tax for property owned by a Community Land Trust (CLT), and makes other changes regarding property tax assessments of property subject to contracts with CLTs.

Assembly Amendments (1) establish a rebuttable presumption that the sale or resale price of the dwelling or unit subject to an enforceable restriction under a contract with a CLT includes both the building and the land leased from the CLT; (2) allow the assessor to rebut that presumption; (3) provide that any corrections of base year values or declines in value resulting from the application of this rebuttable presumption apply to all lien dates occurring after September 25, 2016; (4) make legislative findings and declarations that base year value correction does not constitute a gift of public funds; (5) extend the exemption through the construction phase until the homes are sold; and (6) apply its exemption to lien dates occurring on or after January 1, 2020, sunset for lien dates after January, 2025, but continue the five-year exemption for any qualifying property acquired between those dates.

ANALYSIS:

Existing law:

1. Provides that all property is taxable unless explicitly exempted by the Constitution or federal law (California Constitution, Article XIII).
2. Allows the Legislature to exempt property used for charitable purposes, and owned by non-profit entities organized and operated for charitable purposes, such as universities, hospitals, and libraries (California Constitution, Article XIII, Sections Four and Five). The Legislature enacted this exemption, commonly known as the “welfare exemption.”
3. Exempts from taxation buildings under construction, land required for its convenient use, and equipment in the building if its intended use qualifies for the exemption, for several Constitutional exempt purposes, including the welfare exemption.
4. Limits the maximum amount of any ad valorem tax on real property at 1% of full cash value, and directs assessors to only reappraise property when newly constructed, or when ownership changes (California Constitution, Article XIIIA, as added by Proposition 13, 1978).
5. Allows the welfare exemption for rental housing when the housing is financed by tax-exempt mortgage revenue bonds; general obligation bonds; federal, state, or local grants; or federal low-income housing tax credits, pursuant to specific requirements. Non-publicly financed affordable housing, up to $20 million in value statewide, can be exempt under specified circumstances.
6. Applies the exemption to facilities in the course of construction together with the land on which the facilities are located as may be required for their convenient use and occupation. As long as construction has started, state law can consider the property exempt, unless construction is subsequently abandoned.
7. Allows the “Habitat for Humanity” welfare exemption, which allows the welfare exemption to be applied to property (AB 1559, Wiggins, Chapter 927, Statutes of 1999):
   1. Owned and operated by a nonprofit corporation, which is organized and operated for the specific and primary purpose of building and rehabilitating single or multifamily residences for sale at cost to low-income families, and
   2. The sale is financed by a zero interest rate loan and without regard to religion, race, national origin, or the sex of the head of household.
8. Provides that the Habitat for Humanity exemption applies during the period of time after the qualifying nonprofit acquires the property and before constructing and selling it to a qualifying family, at which time it becomes taxable again.
9. Directs assessors to consider contracts with specified affordability restrictions when determining the value of land, including contracts with CLTs, as defined.
10. Sets a property’s value as its price when purchased or when ownership changed, plus an annual inflation factor.

This bill:

1. Enacts a new welfare exemption from property tax for property owned by a CLT that otherwise qualifies as a nonprofit for purposes of the welfare exemption. Property is eligible for the exemption if:
   1. The property is being or will be developed or rehabilitated as an owner-occupied single-family dwelling, owner-occupied unit in a multifamily dwelling, member-occupied unit in a limited equity housing cooperative, or as a rental housing development,
   2. Improvements on the property will be available for use and ownership or for rent by income-qualified persons, and
   3. A deed restriction, or other instrument serving as an enforceable restriction, on the sale or resale value of the owner-occupied units or on the affordability of rental units is recorded on or before the lien date following the acquisition of the property by the CLT. The contract, as defined, must be provided to the assessor.
2. Provides that the exemption cannot be denied to a property because it currently does not contain a single-family dwelling, a unit in a multifamily dwelling, a unit in a limited equity housing cooperative, or rental housing development that is in the course of construction, as defined.
3. Extends the exemption through the construction phase until the homes are sold.
4. States that any CLT is liable for property tax if the property was not developed or rehabilitated, or not in the course of construction within five years of the lien date following its acquisition of the property, for any years for which the exemption is applied.
5. Requires CLTs to notify the assessor if the property was granted an exemption under the bill, but is not in the course of construction within the five-year period.
6. Establishes a rebuttable presumption that the sale or resale price of the dwelling or unit includes both the dwelling or unit and the land leased from a CLT on which the dwelling or unit is situated, but allows the assessor to rebut this presumption, by a preponderance of the evidence that the leased land's value is not reflected in the sale or resale price of the dwelling unit.
7. Provides that any corrections of base year values or declines in value resulting from the application of this rebuttable presumption apply to all lien dates occurring after September 27, 2016, and makes legislative findings and declarations that this change does not constitute a gift of public funds.
8. Makes conforming changes to sections of law providing for supplemental and escape assessments to clarify that any such assessment must be made within five years of the lien date on which the property becomes taxable.
9. Applies to lien dates occurring on or after January 1, 2020, sunsets for lien dates after January, 2025, but continues the five-year exemption for any qualifying property acquired between those dates.
10. States legislative intent to comply with the requirements of Section 41 of the Revenue and Taxation Code.
11. Defines several of its terms.
12. Makes legislative findings and declarations supporting its purposes.

Background

Formed by local agencies, employers, nonprofits, or grassroots organizations, CLTs are typically non-profit organizations that seek to promote affordable housing by acquiring and retaining ownership of real property in a specific geographic area using capital or land from private donations or public sources. While the first CLTs were formed in rural areas in the 1970s, nearly 200 exist nationwide today, with approximately 20 in California. CLTs mostly operate in higher-income urban and suburban areas, and under federal law, must:

• Not be sponsored by a for-profit organization;
• Be established to acquire parcels of land, held in perpetuity, primarily for conveyance under long-term ground leases; transfer ownership of any structural improvements located on such leased parcels to the lessees; and retain a preemptive option to purchase any such structural improvement at a price determined by formula that is designed to ensure that the improvement remains affordable to low- and moderate-income families in perpetuity; and
• Have corporate membership that is open to any adult resident of a particular geographic area specified in the bylaws of the organization; and whose board of directors must be equally comprised of leaseholders, community representatives, and other individuals representing the public interest.

In addition to operating rental units, CLTs use a creative ownership model to fund affordable housing sales. First, the CLT divides the underlying land, which it owns in perpetuity, from the home, which is sold to the qualifying resident. The CLT leases the land to the resident via a 99-year ground lease. Only residents considered low- to moderate-income in that area can buy the home, which is subject to resale price restrictions contained in the ground lease that stipulate the resale price formula that provides for a fair, but below-market, return on the resident’s investment. Additionally, restrictions only allow sales to other low-to-moderate income individuals. The CLT maintains the option to repurchase any structure on its land. When the CLT owns the land, it pays property taxes, but residents are assessed after purchasing the property from the CLT. CLTs want the Legislature to add a similar exemption for property that they acquire upon which they subsequently construct housing.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: Yes

According to the Assembly Appropriations Committee:

1. An unknown reduction in local property tax revenues as a result of additional properties qualifying for the welfare exemption, resulting in increased General Fund Proposition 98 spending by up to roughly half of those revenue losses.
2. Unknown, and potentially reimbursable, costs to local assessors for making changes on how property is valued for property tax purposes.
3. Minor and absorbable costs to BOE to update forms and to collect data.

SUPPORT: (Verified 9/10/19)

Irvine Community Land Trust (source)

Bay Area Community Land Trust

Beverly-Vermont Community Land Trust

California YIMBY

East Bay Housing Organizations

Grounded Solutions Network

Habitat for Humanity Greater Fresno Area

Irvine Community Land Trust

Northern California Community Land Trust

Oakland Community Land Trust

San Diego Community Land Trust

San Francisco Community Land Trust

Silicon Valley At Home (Sv@Home)

T.R.U.S.T. South LA

OPPOSITION: (Verified 9/10/19)

None received

ARGUMENTS IN SUPPORT: According to the author, “Addressing California’s housing crisis will require increasing access to affordable housing. Community land trusts (CLT) can be part of the solution and provide permanently affordable housing and home ownership opportunities for low income and moderate-income families. SB 196 will grant CLTs the welfare tax exemption, which is currently granted to similar non-profit housing organizations, from the point of acquisition of property to the point of sale of affordable homes. This

exemption will help CLTs complete their developments and support more disadvantaged families.”

ASSEMBLY FLOOR: 79-0, 9/10/19

AYES: Aguiar-Curry, Arambula, Bauer-Kahan, Berman, Bigelow, Bloom, Boerner Horvath, Bonta, Brough, Burke, Calderon, Carrillo, Cervantes, Chau, Chen, Chiu, Choi, Chu, Cooley, Cooper, Cunningham, Daly, Diep, Eggman, Flora, Fong, Frazier, Friedman, Gabriel, Gallagher, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gonzalez, Gray, Grayson, Holden, Irwin, Jones-Sawyer, Kalra, Kamlager-Dove, Kiley, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, McCarty, Medina, Melendez, Mullin, Muratsuchi, Nazarian, Obernolte, O'Donnell, Patterson, Petrie-Norris, Quirk, Quirk-Silva, Ramos, Reyes, Luz Rivas, Robert Rivas, Rodriguez, Blanca Rubio, Salas, Santiago, Smith, Mark Stone, Ting, Voepel, Waldron, Weber, Wicks, Wood, Rendon

Prepared by: Colin Grinnell / GOV. & F. / (916) 651-4119

9/10/19 22:08:25

**** END ****

SENATE THIRD READING

STR Bill Id:SB 196

Author:(Beall)

As Amended Ver:September 3, 2019

Majority vote

SUMMARY:

Creates a property tax exemption for community land trust (CLT)-owned property that will be developed into housing for income-qualified households.

Major Provisions

1. Creates a property tax exemption under the welfare exemption for CLT-owned property intended to be developed into homes to be sold to low- or moderate-income households with a 99-year land lease or rental housing available to low-income households.
2. Recaptures the property taxes if the CLT does not commence housing construction on the property within five years.
3. Creates a rebuttable presumption that the sales price of a home sold by a CLT to a buyer includes both the home and the underlying leased land.
4. Retroactively allows assessors to reduce homebuyers' assessments to reflect the rebuttable presumption.

COMMENTS:

1. What are Community Land Trusts? CLTs use an affordability housing model that generally use ground leases to retain ownership of land upon which housing is constructed. About 25 CLTs operate in California. This bill has several components related to CLT's:
   1. Homes for sale: First, this bill allows CLTs to obtain a property tax exemption on property they own (generally land) if the intended use of the property is to develop housing that will be sold to low- or moderate-income persons. Additionally, this bill extends the exemption through the construction phase until the homes are sold. Existing law does not allow any exemption.
   2. Rental housing developments: Second, this bill allows CLTs to obtain a property tax exemption on property they own (generally land in the pre-development stage) if the intended use is a rental housing development for low- or moderate-income persons and the units will be available for rental by low-income persons. Existing law allows a pro-rata exemption for low-income rental housing, but only after construction on the site starts.
   3. Five-year clawback: Third, this bill requires CLTs to pay back the property taxes resulting from the above exemptions if the CLT does not start the housing construction within five years.
   4. The homebuyers: Finally, this bill allows homebuyers who purchase homes on leased land from a CLT to pay property taxes based on the price they paid, subject to a rebuttable presumption.
2. Nonprofit organizations and undeveloped properties: Nonprofit organizations seeking to obtain a property tax exemption on undeveloped properties is well-trodden territory before the Legislature. Many nonprofit organizations own and pay taxes on such land (churches, hospitals, private universities). The courts have taken the view that constitutional provisions granting exemptions are to be construed strictly, but reasonably. In this regard, the constitution explicitly states that the welfare exemption applies in the case of "intended use" of otherwise welfare-exemption-eligible property only after the buildings are "under construction". Setting this precedent may prompt other nonprofit organizations to seek similar exemptions on their land holdings.

According to the Author:

California is in the middle of an unprecedented housing crisis, most deeply affecting low- and moderate-income families. More than 2.2 million extremely low-income and very low-income renter households are competing for only 664,000 affordable rental homes leaving around 1.54 million of California's lowest income households without access to housing and at risk of becoming homeless. In order to address this crisis, more affordable housing is needed. CLTs play a valuable role by providing permanently affordable housing and home ownership opportunities for low-income families. SB 196 will create a property tax exemption for CLTs from the point of acquisition to the point of sale of affordable homes, similar to existing exemptions for other community-based non-profits. This will better enable CLTs to provide more families the opportunity to own a home and place down roots in their communities without undue financial burden.

Arguments in Support:

The Irvine Community Land Trust states that California finds itself in the middle of a housing crisis. With sky rocking rents and a shortage of affordable housing, California's low- and moderate-income families have been left to bear the majority of the burden. CLTs can help alleviate this crisis by offering permanently affordable housing and opportunities for home ownership to California's low-income families.

Arguments in Opposition:

None

FISCAL COMMENTS:

1. An unknown reduction in local property tax revenues as a result of additional properties qualifying for the welfare exemption, resulting in increased General Fund Proposition 98 spending by up to roughly half of those revenue losses.
2. Unknown, and potentially reimbursable, costs to local assessors for making changes on how property is valued for property tax purposes.
3. Minor and absorbable costs to BOE to update forms and to collect data.

VOTES:

SENATE FLOOR: 38-0-0

YES: Allen, Archuleta, Atkins, Bates, Beall, Borgeas, Bradford, Caballero, Chang, Dodd, Durazo, Galgiani, Glazer, Grove, Hertzberg, Hill, Hueso, Hurtado, Jackson, Jones, Leyva, McGuire, Mitchell, Monning, Moorlach, Morrell, Nielsen, Pan, Portantino, Roth, Rubio, Skinner, Stern, Stone, Umberg, Wieckowski, Wiener, Wilk

ASM REVENUE AND TAXATION: 10-0-1

YES: Burke, Brough, Chu, Gray, Mayes, Mullin, Petrie-Norris, Quirk, McCarty, Ting

ABS, ABST OR NV: Melendez

ASM APPROPRIATIONS: 18-0-0

YES: Gonzalez, Bigelow, Bloom, Bonta, Brough, Calderon, Carrillo, Chau, Diep, Eggman, Fong, Gabriel, Eduardo Garcia, Maienschein, Obernolte, Petrie-Norris, Quirk, Robert Rivas

UPDATED:

VERSION: September 3, 2019

CONSULTANT: Rose Marie Kinnee / REV. & TAX. / (916) 319-2098 FN: 0001799

Date of Hearing: August 14, 2019

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez, Chair

SBPCA Bill Id:SB 196

Author:(Beall) – As Amended Ver:July 3, 2019

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

SUMMARY:

This bill creates a new property tax exemption for certain undeveloped land owned by a community land trust (CLT). Specifically, this bill:

1. Allows for a welfare exemption for CLT-owned property that will be developed or rehabilitated as owner-occupied housing available to low- or moderate-income households.
2. Allows for a welfare exemption for CLT-owned property that will be developed or rehabilitated as rental housing development for low-income households.
3. Makes CLT liable for property tax for the years the property was exempt from taxation if within five years of the lien date the property is not developed or rehabilitated or not in the course of construction.
4. Creates a rebuttable presumption that the sale or resale price of a home located on CLT-owned land includes both the dwelling and underlying leased land unless the assessor establishes by the preponderance of evidence that all or a portion of the leased land is not reflected in the sale or resale price.

FISCAL EFFECT:

1. An unknown reduction in local property tax revenues as a result of additional properties qualifying for the welfare exemption, resulting in increased General Fund Proposition 98 spending by up to roughly half of those revenue losses.
2. Unknown, and potentially reimbursable, costs to local assessors for making changes on how property is valued for property tax purposes.
3. Minor and absorbable costs to BOE to update forms and to collect data.

COMMENTS:

1. Background. A CLT is a nonprofit corporation that owns and develops land for housing or other community uses. When a CLT offers for-sale affordable housing, it generally retains ownership of the underlying land and leases it to the homeowner for a nominal fee, and the homeowner purchases only the building. When the homeowner sells the property, they are eligible for a smaller share of the home’s appreciated value. Additionally, a CLT may also have rental portfolios restricted for low- and moderate-income households.
2. CLT property taxes and undeveloped property. Under current law, the property acquired by a CLT is subject to property taxes unless it qualifies for the welfare exemption available to certain nonprofit-owned affordable rental housing. However, the property is only eligible for that welfare exemption only when construction begins on that project. Thus, the CLT pays property taxes on the land in the period between when the land is purchased and when construction begins.
3. The Habitat for Humanity model. There is one exception to the general rule around the availability of the welfare exemption for undeveloped property. The welfare exemption is available for undeveloped land acquired under the “Habitat for Humanity model,” which is when a nonprofit organized for certain defined purposes builds and sells housing at cost to low-income families with zero percent financing. This provision of law was enacted after a chapter of Habitat for Humanity had to decline subdivision lot donations because of its inability to carry the associated property tax liability.
4. Purpose. According to the author, CLTs can be part of the solution to California’s housing crisis and SB 196 will help CLTs complete their affordable housing developments. The bill does this by expanding the property tax welfare exemption for certain undeveloped CLT-owned properties that are intended to be developed into either for-sale affordable housing for low- and moderate-income households or affordable rental housing for low-income households.
5. Rebuttable presumption. This bill contains provisions that are a follow-up to AB 2818 (Chiu), Chapter 701, Statutes of 2016, which began requiring assessors to consider the value impact of CLT-imposed enforceable restrictions. This bill's rebuttable presumption provisions concerning sales prices reflect the consensus of a working group as a follow up to AB 2818. The BOE has held a series of Interested Parties meetings with assessors and CLTs on this issue for several years.
6. Recent legislation. SB 1056 (Beall), of the 2016 -17 Legislative Session, was similar to this bill and was held on this committee’s Suspense File.

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

Date of Hearing: July 8, 2019

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn Burke, Chair

SBPCA Bill Id:SB 196

Author:(Beall) – As Amended Ver:July 3, 2019

FOR VOE ONLY

Majority vote. Fiscal committee.

SENATE VOTE: 38-0

SUBJECT: Property taxes: community land trust

SUMMARY: Creates a new property tax exemption under the welfare exemption for community land trust-owned property that will be developed into (1) homes sold to low or moderate income households and (2) rental housing available to low income households. Additionally, this bill creates a rebuttable presumption that the sales price of a home sold by a community land trust includes both the home and the underlying leased land. Specifically, this bill:

1. Specifies that "community land trust" (CLT) owned property is within the exemption authorized by the California Constitution for property used for charitable purposes^[1] and for charitable-exemption-eligible facilities in the course of construction^[2] if the CLT otherwise qualifies for the welfare exemption under Revenue and Taxation Code (R&TC) Section 214, and both of the following conditions are met:
   1. The property will be (or is being) developed or rehabilitated as any of the following:
      1. An owner-occupied single-family dwelling;
      2. An owner-occupied unit in a multifamily dwelling;
      3. A member-occupied unit in a "limited equity housing cooperative"; or,
      4. A rental housing development; and
   2. Improvements on the property will be (or are) available for either:
      1. Ownership by "qualified persons" (low or moderate income households); or,
      2. Rental by "qualified persons" (low-income households).
2. Requires the recording of a deed restriction or other instrument on or before the lien date (January 1) following the CLT's property acquisition that requires either:
   1. In the case of homes offered for sale, a contract or contracts serving as an enforceable restriction on the dwelling's sale or resale value of owner-occupied units; or,
   2. In the case of rental housing developments, a contract or contracts serving as an enforceable restriction on the affordability of rental units.
3. Prohibits the assessor from denying the exemption to a CLT-owned property on the basis that the property currently does not contain a single-family dwelling, a multi-family dwelling, or rental housing that is in the course of construction, subject to a five-year claw back provision to recapture property taxes, as specified.
4. Deems that once property that is a rental housing development is in the course of construction the property is deemed to qualify for the exemption provided under R&TC Section 214 and on subsequent lien dates the property shall qualify for exemption pursuant to Section 214.
5. Makes the CLT liable for property tax for the years the exemption was granted for the years for which the property was exempt from taxation if the property was not developed or rehabilitated or, if the development or rehabilitation is not in the course of construction as follows:
   1. In the case of property acquired by the CLT before January 1, 2020, by January 1, 2025.
   2. In the case of property acquired by the CLT on and after January 1, 2020, and before January 1, 2025, within five years of the lien date following the acquisition of the property by the CLT.
6. Defines a "contract or contracts serving as an enforceable restriction on the sale or resale value of owner-occupied units or on the affordability of rental units" by cross-reference to a law that requires the assessor to consider the value impact on land of CLT-imposed enforceable restrictions where the contract is a renewable 99-year ground lease between the CLT and the homebuyer.^[3]
7. Creates a rebuttable presumption, that the sale or resale price of a home subject to the above 99-year ground lease contract, includes both the dwelling or unit and the leased land on which the dwelling or unit is situated.
8. Allows the assessor to rebut this presumption, by a preponderance of the evidence that the leased land's value is not reflected in the sale or resale price of the dwelling unit.
9. Makes the above rebuttable presumption apply to all lien dates occurring after September 27, 2016.^[4]
10. Allows the assessor to correct the base year value and process a lien-date-based (January 1) decline in value for homes sold by a CLT to facilitate the application of the rebuttable presumption for the homebuyer.
11. Requires the CLT to provide the assessor with a copy of the deed restriction or other instrument.
12. Makes conforming changes to supplemental assessment^[5] and escape assessment^[6] provisions to facilitate the property tax recapture exemption provision, as specified.
13. Defines "community land trust" by cross-reference to its definition in law related to a CLT-enforceable restriction. ^[7]
14. Defines "course of construction" by cross reference to the term "facilities in the course of construction" as defined in R&TC Sections 214.1 and 214.2.
15. Defines "limited equity housing cooperative" (Co-ops) by cross-reference to its definition in Civil Code (CC) Section 817.
16. Defines "qualified persons" as the following:
    1. In the case of property developed for owner-occupied housing, including Co-ops, persons and families of low or moderate income; and,
    2. In the case of property developed for rental housing, as persons and families of low income.
17. Defines "persons and families of low income" by cross reference to the term "lower income households" as defined in Health and Safety Code (H&SC) Section 50079.5.
18. Defines "persons and families of low or moderate income" by cross-reference to the definition in H&SC Section 50093 (Up to 120% of AMI).
19. Includes as "qualified persons" persons and families of low or moderate income that own a dwelling or unit collectively as member occupants or resident shareholders of a limited equity-housing cooperative.
20. Defines "rental housing development" as a development in which all of the residential units, other than units provided to property managers, are required to be rented to, and occupied by, persons and families of low or moderate income, at rents that do not exceed an affordable rent as described in H&SC Section 50053.
21. Makes findings and declarations related to the housing crisis and CLTs efforts to provide an affordable housing option for low and moderate-income households.
22. Finds and declares, with regard to the exemption this bill creates, that the exempt activities of CLTs and Co-ops that are working with CLTs qualitatively differ from the exempt activities of other nonprofit entity housing providers, in that the land is held in perpetuity for persons and families of low and moderate income. Declares that the holding of real property by CLTs and Co-ops is central to those entities' exempt purposes and activities. Thus, owning property constitutes the exclusive use of that property for a charitable purpose, within the meaning of Constitutional provision^[8] that authorizes the Legislature to exempt, in whole or in part, property used exclusively for a charitable purpose.
23. Extends the exemption to eligible property as follows:
    1. In the case of CLT property acquired before January 1, 2020, for lien dates occurring on and after January 1, 2020, and before January 1, 2025.
    2. In the case of CLT property acquired on and after January 1, 2020, and before January 1, 2025, for the first five lien dates following the CLT's property acquisition. Provides that the property remains eligible for exemption for the first five lien dates regardless of this section's repeal date of January 1, 2025.
24. Repeals this bill's CLT exemption provisions on January 1, 2025.
25. Requires the State Board of Equalization (BOE), county assessors, and community land trusts to annually collect and provide data, as specified, to assist the Legislature, in accord with the intent of R&TC Section 41, as to whether the exemption this bill provides fulfills its specified goals of increasing additional housing.
26. Makes this bill's rebuttable presumption provisions retroactive to all lien dates commencing on or after September 27, 2016.
27. Provides that the state will not reimburse any local agency for any resulting property tax revenue loss.

EXISTING LAW:

1. Provides that all property is taxable, unless otherwise provided by the California Constitution or federal laws.
   
2. Authorizes the Legislature to exempt from property taxation, in whole or in part, property used exclusively for religious, hospital, or charitable purposes and owned or held in trust by corporations or other entities: (a) that are organized and operating for those purposes, (b) that are nonprofit, and (c) no part of whose net earnings insures to the benefit of any private shareholder or individual.^[9] Also extends the exemption to buildings under construction and the required land, if the intended use would qualify the property for exemption.^[10]
   
3. Implements the authorized exemption, commonly known as the "welfare exemption" in R&TC Section 214 and the extension to buildings in the "course of construction" in R&TC Sections 214.1 and 214.2.
4. Includes within the "course of construction" definition the following:
   1. Building demolition or razing with the intent to replace; or,
   2. Definite onsite physical activity connected with constructing or rehabilitation of a new or existing building that results in changes visible to any person inspecting the site.
5. Exempts, under the welfare exemption, low-income rental housing owned and operated by nonprofit organizations, including limited partnerships in which the managing general partner is an eligible nonprofit corporation, as specified.^[11] Allows this exemption on a pro-rata basis, generally based upon the number of units occupied by low-income households, as specified.
6. Defines "low-income" by cross-reference to H&SC Section 50079.5, which defines low income as households at 80% of area median income (AMI) adjusted for family size.^[12]
7. Provides that property owned and operated by a nonprofit organization that is organized and operated for the specific and primary purpose of building housing for sale at cost to low-income families with a 0% loan and without regard to religion, race, national origin, or sex of the head of household is within the welfare exemption.^[13]
   1. Declares that the above nonprofit's activities qualitatively differ from the exempt activities of other nonprofit entities that provide housing in that such a nonprofit's exempt purpose is not to own and operate a housing project on an ongoing basis.
   2. Finds that holding real property for future construction of homes to be sold to low income persons is central to that nonprofit's exempt purposes and activities and constitutes the exclusive use of that property for a charitable purpose within Article XIII, Section 4(b).
8. Requires the assessor, in the assessment of land, to consider the value effect of any enforceable restrictions to which the use of the land may be subjected.
9. Defines "community land trust" as a nonprofit corporation organized pursuant to Section 501(c)(3) of the Internal Revenue Code that satisfies all of the following:
   1. Has as its primary purposes the creation and maintenance of permanently affordable single-family or multifamily residences;
   2. All dwellings and units located on the land owned by the nonprofit corporation are sold to a qualified owner to be occupied as the qualified owner's primary residence or rented to persons and families of low or moderate income; and,
   3. The land owned by the nonprofit corporation, on which a dwelling or unit sold to a qualified owner is situated, is leased by the nonprofit corporation to the qualified owner for the convenient occupation and use of that dwelling or unit for a renewable term of 99 years.^[14]
10. Limits the assessor from issuing escape assessments for previously escaped or underassessed property to the last four tax years, as specified.

FISCAL EFFECT: According to the State Board of Equalization, the property tax revenue loss is indeterminable.

COMMENTS:

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

California is in the middle of an unprecedented housing crisis, most deeply affecting low and moderate income-families. More than 2.2 million extremely low-income and very low-income renter households are competing for only 664,000 affordable rental homes leaving around 1.54 million of California's lowest-income households without access to housing and at risk of becoming homeless. In order to address this crisis, more affordable housing is needed. Community land trusts play a valuable role by providing permanently affordable housing and home ownership opportunities for low-income families. SB 196 will create a property tax exemption for Community Land Trusts from the point of acquisition to the point of sale of affordable homes, similar to existing exemptions for other community-based non-profits. This will better enable Community Land Trusts to provide more families the opportunity to own a home and place down roots in their communities without undue financial burden.

1. The Irvine Community Land Trust, in support of this bill, states the following:

SB 196 will provide more permanent affordable housing for low- and moderate-income families by providing Community Land Trusts with a property tax exemption from the point of acquisition of property to the point of sale of affordable homes.

California finds itself in the middle of a housing crisis. With sky rocking rents and a shortage of affordable housing, California's low and moderate-income families have been left to bear the majority of the burden. Community land trusts can help alleviate this crisis by offering permanently affordable housing and opportunities for home ownership to California's low-income families.

1. Committee Staff Comments:
   1. What does this bill do? This bill has several components:
      1. Homes for sale: First, this bill allows CLTs to obtain a property tax exemption on property they own (generally land) if the intended use of the property is to develop housing that will be sold to low- or moderate-income persons. Additionally, this bill extends the exemption through the construction phase until the homes are sold. Existing law does not allow any exemption.
      2. Rental housing developments: Second, this bill allows CLTs to obtain a property tax exemption on property they own (generally land in the pre-development stage) if the intended use is a rental housing development for low- or moderate-income persons and the improvements (the rental units) will be available for rental by low-income persons. Existing law allows a pro-rata exemption^[15] for low-income rental housing, but only after construction on the site starts.
      3. Five-year clawback: Third, this bill requires CLTs to pay back the property taxes resulting from the above exemptions if the CLT does not start the housing construction within five years of acquiring the property.
      4. The homebuyers: Finally, this bill allows homebuyers who purchase homes from a CLT to pay property taxes based on the price they paid, subject to a rebuttable presumption.
   2. What are Community Land Trusts? CLTs use an affordability housing model that generally use ground leases to retain ownership of land upon which housing is constructed. About 25 CLTs operate in California, including one that is municipally backed by the City of Irvine. This model for creating affordable housing differs from others in that the affordability restrictions are permanent. For example, rental housing developed with low-income housing tax credits (LIHTCs) generally have affordability restrictions that expire. Thereafter, the rental housing can be converted to market-rate housing. The CLTs operating in California have home-buying programs or rental housing programs. However, some CLTs, including the Irvine Community Land Trust, operate both.
   3. CLT homeownership programs: The CLT acquires and develops properties for sale to income-qualified households, but retains ownership of the underlying land and leases the land to the homebuyer for a nominal fee ($50 a month) through a long-term ground lease (usually a 99-year term). The home is, therefore, more affordable because the homeowner is only buying the building and leasing the land underneath. If the homeowner decides to sell the property, the home must be resold to another income-qualified household, and the resale price restriction limits the owner's share of the home's appreciated value. Additionally, since the CLT owns the land, it is a party to all future sales and is able to enforce the resale restrictions. This model allows CLTs to provide affordable housing to low- and moderate-income households otherwise unable to afford to buy a home.
   4. Property tax assessments on homes sold by CLTs: In 2016, AB 2818 (Chiu), Chapter 701, Statutes of 2016, began requiring assessors to consider the value impact of CLT-imposed enforceable restrictions. This bill's rebuttable presumption provisions concerning sales prices reflect the consensus of a working group as a follow up to AB 2818. The BOE has held a series of Interested Parties meetings with assessors and CLTs on this issue for several years.
   5. Nonprofit organizations and undeveloped properties: Nonprofit organizations seeking legislation to exempt their undeveloped properties from property tax is well-trodden territory before the Legislature.^[16] Many nonprofit organizations own and pay taxes on such land (churches, hospitals, private universities). The courts have taken the view that constitutional provisions granting exemptions are to be construed strictly, but reasonably. In this regard, the constitution explicitly states in Article XIII, Section 5 that the welfare exemption applies in the case of "intended use" of otherwise welfare-exemption-eligible property only after the buildings are "under construction".
   6. Exempting undeveloped land for affordable rental housing: Nonprofit organizations that own and operate (or act as a general manager in a limited partnership) affordable rental housing do not receive a pre-development exemption. The exemption starts once construction starts. Setting this precedent may prompt other affordable housing developers to seek similar property tax relief. The Committee may wish to consider the consequences of setting this precedent.
   7. The existing land-banking "use" exception for homes sold to low-income households: The law allows one exception, enacted after a chapter of Habitat for Humanity had to decline subdivision lot donations because of its inability to carry the associated property tax liability. In providing special treatment for this affordable housing model for low-income persons, the Legislature codified findings proclaiming that its exempt activities are distinct from other affordable housing providers because its exempt purpose is not to own and operate a housing project on an ongoing basis, but to make housing and the land reasonably necessary for the use of that housing available for prompt sale to low-income residents. In other words, the Legislature found that acquiring real property for the future construction of housing on that property is central to the affordable housing model's exempt purposes and activities, and therefore constitutes "use."
   8. This bill creates another land-banking "use" exception designed for CLTs. This bill creates a similar exception that fits the CLT model for homes offered for sale. However, this exception substantively differs by allowing it to apply to land that will be developed into homes sold to moderate-income families (120% of AMI), expanding the scope of the existing charitable "use" exception. This bill includes noncodified findings that the exempt activities of CLTs and Co-ops that are working with CLTs qualitatively differ from the exempt activities of other nonprofit entity housing providers, in that the land is held in perpetuity for persons and families of low and moderate income. In addition, it finds that the holding of real property by CLTs and Co-ops is central to those entities' exempt purposes and activities. Thus, owning property constitutes the exclusive use of that property for a charitable purpose. Once the homes are developed and sold to qualifying homebuyers, they become taxable again. This bill's property tax recapture provision if construction of homes does not commence during the stated period of time serves to prevent any long-term land banking.
   9. What role should the welfare exemption have in private homeownership? This bill raises the policy question of broadening the charitable aspect of the welfare exemption to benefit private homeownership. The state's housing and homelessness crisis is well documented. Affordability for persons seeking to become homebuyers is a challenge for persons at most income levels. Increasing the production of new housing is seen as a key solution to the housing affordability crisis for all Californians. The Committee may wish to weigh whether or not providing home buying opportunities to moderate-income households who are selected by a nonprofit entity to buy a private home at an affordable cost through the laudable efforts of CLTs is within the "charitable" aspect of the welfare exemption.
   10. Narrowing of the property tax base: Residential housing is a core component of the property tax base. Property tax revenues of over $60 billion per year are a primary source of local government funding. The tax revenue loss associated with the welfare exemption is $3 billion per year. A sound property tax structure ensures that the tax base is broad and that the property owners within a community contribute to funding government services since, in turn, every person benefits from those government services. In recent years, in the property tax arena, to address the housing affordability crisis, legislation has been enacted to limit, exempt, and prohibit certain affordable housing related-revenue.
   11. Shifting of the tax burden: The multi-prong impact of more housing, combined with reduced revenues, 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, the homelessness crisis is placing additional financial burdens and costs on governments including public health threats. Cumulatively, property tax reductions for some property owners shift the burden of tax unto other property owners, and indirectly to other renters, who are unable, ineligible, or not selected to access the limited availability of for-rent or for-ownership affordability programs. The waiting lists for rental affordable housing are long and, in some instances, closed. The opportunity to buy a home at an affordable price from a non-profit or governmental sponsored housing program is often won by lottery.
   12. Transition rental housing development to general welfare exemption once construction starts In the case of a rental housing development, this bill creates a seamless transition from the new pre-development exemption this bill provides to the pre-existing welfare exemption immediately upon the commencement of construction. For the following lien date after construction starts, the CLT would instead claim the general welfare exemption (R&TC Section 214). The general welfare exemption also allows an exemption to apply to property intended for an exempt use as soon as construction starts. This provision addresses several issues. First, given the risk of property tax recapture, CLTs seeking financing to develop rental housing on land it owns need added exemption status certainty. In this regard, the general welfare exemption (R&TC Section 214) allows for a pro-rata exemption in the case of any rental housing development that ultimately includes moderate-income households. Second, the general welfare exemption provides additionally flexibility in ownership structure should the project be awarded any LIHTCs.
   13. 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 creating an exemption such as this bill proposes, comply with R&TC Section 41's intent. 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. Additionally, this policy requires a five-year sunset provision. Without a sunset, tax expenditures are created with a majority vote, but require a 2/3rds vote to rescind. This bill includes legislative findings as to its goals and intent and it includes data collection provisions. Additionally, this bill complies with this Committee's policy on sunset dates. The sunset provisions are crafted to provide CLTs a longer horizon of tax exemption availability consistent with this bill's tax recapture provision if construction does not start within five years. Additionally, these sunset provisions have been crafted to enhance tax-status certainty as CLTs seek project financing.
   14. Previous legislation:
       1. SB 1056 (Beall), of the 2016 -17 Legislative Session, was similar to this bill except that it also applied to moderate income rental housing and did not include the rebuttable presumption provisions. SB 1056 was held on the Assembly Committee on Appropriations' Suspense File.
       2. AB 3152 (Chiu), of the 2016 -17 Legislative Session, would create a new property tax exemption under the welfare 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 Committee on Appropriations' Suspense File.
       3. AB 2818 (Chiu), Chapter 701, Statutes of 2016, would have exempted CLT-owned land under the welfare exemption similar to this bill. Those provisions were amended out of AB 2818 on May 31, 2016 in the Assembly Appropriations Committee.
       4. AB 1559 (Wiggins), Chapter 927, Statutes of 1999, created the property tax exemption for land for future construction of homes to be sold to low-income persons at cost, and at 0% interest (Habitat for Humanity exemption).

Support

Irvine Community Land Trust

Opposition

None on file

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

1. California Constitution Article XIII, Section 4(b). ↑

2. California Constitution Article XIII, Section 5. ↑

3. R&TC Section 402.1(a)(11). ↑

4. Note: this mirrors the date assessors were first required to consider the value impact of CLT-imposed enforceable restrictions. ↑

5. R&TC Section 75.11. ↑

6. R&TC Section 532. ↑

7. R&TC Section 402.1(a)(11)(C)(ii). ↑

8. California Constitution Article XIII, Section 4(b). ↑

9. California Constitution Article XIII, Section 4(b). ↑

10. California Constitution Article XIII, Section 5. ↑

11. R&TC Section 214(g). ↑

12. R&TC Section 214(g)(2)(C)(i). ↑

13. R&TC Section 214.15. This reflects a Habitat for Humanity affordability housing model in use when this law was created. ↑

14. R&TC Section 402.1. ↑

15. R&TC Section 214(g). ↑

16. For example, see AB 2662 (2001-02); AB 783 (2003-04); AB 3074 (2003-04); AB 722 (2005-06); AB 1788 (2011-12) and AB 2818 (2015-16). ↑

Date of Hearing: July 1, 2019

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn Burke, Chair

SBPCA Bill Id:SB 196

Author:(Beall) – As Amended Ver:June 19, 2019

FOR TESTIMONY ONLY

SENATE VOTE: 38-0

SUBJECT: Property taxes: community land trust

SUMMARY: Creates a new property tax exemption under the welfare exemption for community land trust-owned property that will be developed into (1) homes sold to low or moderate income households and (2) rental housing available to low income households. Additionally, this bill creates a rebuttable presumption that the sales price of a home sold by a community land trust includes both the home and the underlying leased land. Specifically, this bill:

1. Specifies that "community land trust" (CLT) owned property is within the exemption authorized by the California Constitution for property used for charitable purposes^[1] and for charitable-exemption-eligible facilities in the course of construction^[2] if the CLT otherwise qualifies for the welfare exemption under Revenue and Taxation Code (R&TC) Section 214, and both of the following conditions are met:
   1. The property will be (or is being) developed or rehabilitated as any of the following:
      1. An owner-occupied single-family dwelling;
      2. An owner-occupied unit in a multifamily dwelling;
      3. A member-occupied unit in a "limited equity housing cooperative"; or,
      4. A rental housing development; and
   2. Improvements on the property will be (or are) available for either:
      1. Ownership by "qualified persons" (low or moderate income households); or,
      2. Rental by "qualified persons" (low-income households).
2. Requires the recording of a deed restriction or other instrument on or before the lien date (January 1) following the CLT's property acquisition that requires either:
   1. In the case of homes offered for sale, a contract or contracts serving as an enforceable restriction on the dwelling's sale or resale value of owner-occupied units; or,
   2. In the case of rental housing developments, a contract or contracts serving as an enforceable restriction on the affordability of rental units.
3. Prohibits the assessor from denying the exemption to a CLT-owned property on the basis that the property currently does not contain a single-family dwelling, a multi-family dwelling, or rental housing that is in the course of construction, subject to a five-year claw back provision to recapture property taxes, as specified.
4. Makes the CLT liable for property tax for the years the exemption was granted, if, within five years of the lien date (January 1) after acquiring the property either:
   1. The property was not developed or rehabilitated; or,
   2. The development or rehabilitation is not in the course of construction.
5. Defines a "contract or contracts serving as an enforceable restriction on the sale or resale value of owner-occupied units or on the affordability of rental units" by cross-reference to a law that requires the assessor to consider the value impact on land of CLT-imposed enforceable restrictions where the contract is a renewable 99-year ground lease between the CLT and the homebuyer.^[3]
6. Creates a rebuttable presumption, that the sale or resale price of a home subject to the above 99-year ground lease contract, includes both the dwelling or unit and the leased land on which the dwelling or unit is situated.
7. Allows the assessor to rebut this presumption, by a preponderance of the evidence that the leased land's value is not reflected in the sale or resale price of the dwelling unit.
8. Makes the above rebuttable presumption apply to all lien dates occurring after September 25, 2016.^[4]
9. Allows the assessor to correct the base year value and process a lien-date-based (January 1) decline in value for homes sold by a CLT to facilitate the application of the rebuttable presumption for the homebuyer.
10. Requires the CLT to provide the assessor with a copy of the deed restriction or other instrument.
11. Makes conforming changes to supplemental assessment^[5] and escape assessment^[6] provisions to facilitate the property tax recapture exemption provision, as specified.
12. Defines "community land trust" by cross-reference to its definition in law related to a CLT-enforceable restriction. ^[7]
13. Defines "course of construction" by cross reference to the term "facilities in the course of construction" as defined in R&TC Sections 214.1 and 214.2.
14. Defines "limited equity housing cooperative" (Co-ops) by cross-reference to its definition in Civil Code (CC) Section 817.
15. Defines "qualified persons" as the following:
    1. In the case of property developed for owner-occupied housing, including Co-ops, persons and families of low or moderate income; and,
    2. In the case of property developed for rental housing, as persons and families of low income.
16. Defines "persons and families of low income" by cross reference to the term "lower income households" as defined in Health and Safety Code (H&SC) Section 50079.5.
17. Defines "persons and families of low or moderate income" by cross-reference to the definition in H&SC Section 50093 (Up to 120% of AMI).
18. Includes as "qualified persons" persons and families of low or moderate income that own a dwelling or unit collectively as member occupants or resident shareholders of a limited equity-housing cooperative.
19. Defines "rental housing development" as a development in which all of the residential units, other than units provided to property managers, are required to be rented to, and occupied by, persons and families of low or moderate income, at rents that do not exceed an affordable rent as described in H&SC Section 50053.
20. Makes findings and declarations related to the housing crisis and CLTs efforts to provide an affordable housing option for low and moderate-income households.
21. Finds and declares, with regard to the exemption this bill creates, that the exempt activities of CLTs and Co-ops that are working with CLTs qualitatively differ from the exempt activities of other nonprofit entity housing providers, in that the land is held in perpetuity for persons and families of low and moderate income. Declares that the holding of real property by CLTs and Co-ops is central to those entities' exempt purposes and activities. Thus, owning property constitutes the exclusive use of that property for a charitable purpose, within the meaning of Constitutional provision^[8] that authorizes the Legislature to exempt, in whole or in part, property used exclusively for a charitable purpose.
22. Provides that the state will not reimburse any local agency for any resulting property tax revenue loss.
23. Takes immediate effect, but this bill's exemption provisions apply beginning with lien dates (January 1) occurring on and after January 1, 2020 and this bill's rebuttable presumption provisions are retroactive to all lien dates commencing on or after September 25, 2016.

EXISTING LAW:

1. Provides that all property is taxable, unless otherwise provided by the California Constitution or federal laws.
   
2. Authorizes the Legislature to exempt from property taxation, in whole or in part, property used exclusively for religious, hospital, or charitable purposes and owned or held in trust by corporations or other entities: (a) that are organized and operating for those purposes, (b) that are nonprofit, and (c) no part of whose net earnings insures to the benefit of any private shareholder or individual.^[9] Also extends the exemption to buildings under construction and the required land, if the intended use would qualify the property for exemption.^[10]
   
3. Implements the authorized exemption, commonly known as the "welfare exemption" in R&TC Section 214 and the extension to buildings in the "course of construction" in R&TC Sections 214.1 and 214.2.
4. Includes within the "course of construction" definition the following:
   1. Building demolition or razing with the intent to replace; or,
   2. Definite onsite physical activity connected with constructing or rehabilitation of a new or existing building that results in changes visible to any person inspecting the site.
5. Exempts, under the welfare exemption, low-income rental housing owned and operated by nonprofit organizations, including limited partnerships in which the managing general partner is an eligible nonprofit corporation, as specified.^[11] Allows this exemption on a pro-rata basis, generally based upon the number of units occupied by low-income households, as specified.
6. Defines "low-income" by cross-reference to H&SC Section 50079.5, which defines low income as households at 80% of area median income (AMI) adjusted for family size.^[12]
7. Provides that property owned and operated by a nonprofit organization that is organized and operated for the specific and primary purpose of building housing for sale at cost to low-income families with a 0% loan and without regard to religion, race, national origin, or sex of the head of household is within the welfare exemption.^[13]
   1. Declares that the above nonprofit's activities qualitatively differ from the exempt activities of other nonprofit entities that provide housing in that such a nonprofit's exempt purpose is not to own and operate a housing project on an ongoing basis.
   2. Finds that holding real property for future construction of homes to be sold to low income persons is central to that nonprofit's exempt purposes and activities and constitutes the exclusive use of that property for a charitable purpose within Article XIII, Section 4(b).
8. Requires the assessor, in the assessment of land, to consider the value effect of any enforceable restrictions to which the use of the land may be subjected.
9. Defines "community land trust" as a nonprofit corporation organized pursuant to Section 501(c)(3) of the Internal Revenue Code that satisfies all of the following:
   1. Has as its primary purposes the creation and maintenance of permanently affordable single-family or multifamily residences;
   2. All dwellings and units located on the land owned by the nonprofit corporation are sold to a qualified owner to be occupied as the qualified owner's primary residence or rented to persons and families of low or moderate income; and,
   3. The land owned by the nonprofit corporation, on which a dwelling or unit sold to a qualified owner is situated, is leased by the nonprofit corporation to the qualified owner for the convenient occupation and use of that dwelling or unit for a renewable term of 99 years.^[14]
10. Limits the assessor from issuing escape assessments for previously escaped or underassessed property to the last four tax years, as specified.

FISCAL EFFECT: According to the State Board of Equalization, the property tax revenue loss is indeterminable.

COMMENTS:

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

California is in the middle of an unprecedented housing crisis, most deeply affecting low and moderate income-families. More than 2.2 million extremely low-income and very low-income renter households are competing for only 664,000 affordable rental homes leaving around 1.54 million of California's lowest-income households without access to housing and at risk of becoming homeless. In order to address this crisis, more affordable housing is needed. Community land trusts play a valuable role by providing permanently affordable housing and home ownership opportunities for low-income families. SB 196 will create a property tax exemption for Community Land Trusts from the point of acquisition to the point of sale of affordable homes, similar to existing exemptions for other community-based non-profits. This will better enable Community Land Trusts to provide more families the opportunity to own a home and place down roots in their communities without undue financial burden.

1. The Irvine Community Land Trust, in support of this bill, states the following:

SB 196 will provide more permanent affordable housing for low- and moderate-income families by providing Community Land Trusts with a property tax exemption from the point of acquisition of property to the point of sale of affordable homes.

California finds itself in the middle of a housing crisis. With sky rocking rents and a shortage of affordable housing, California's low and moderate-income families have been left to bear the majority of the burden. Community land trusts can help alleviate this crisis by offering permanently affordable housing and opportunities for home ownership to California's low-income families.

1. Committee Staff Comments:
   1. What does this bill do? This bill has several components:
      1. Homes for sale: First, this bill allows CLTs to obtain a property tax exemption on property they own (generally land) if the intended use of the property is to develop housing that will be sold to low- or moderate-income persons. Additionally, this bill extends the exemption through the construction phase until the homes are sold. Existing law does not allow any exemption.
      2. Rental housing developments: Second, this bill allows CLTs to obtain a property tax exemption on property they own (generally land in the pre-development stage) if the intended use is a rental housing development for low- or moderate-income persons and the improvements (the rental units) will be available for rental by low-income persons. Existing law allows a pro-rata exemption^[15] for low-income rental housing, but only after construction on the site starts.
      3. Five-year clawback: Third, this bill requires CLTs to pay back the property taxes resulting from the above exemptions if the CLT does not start the housing construction within five years of acquiring the property.
      4. The homebuyers: Finally, this bill allows homebuyers who purchase homes from a CLT to pay property taxes based on the price they paid, subject to rebuttable presumption.
   2. What are Community Land Trusts? CLTs use an affordability housing model that generally use ground leases to retain ownership of land upon which housing is constructed. About 25 CLTs operate in California, including one that is municipally backed by the City of Irvine. This model for creating affordable housing differs from others in that the affordability restrictions are permanent. For example, rental housing developed with low-income housing tax credits (LIHTCs) generally have affordability restrictions that expire. Thereafter, the rental housing can be converted to market-rate housing. The CLTs operating in California have home-buying programs or rental housing programs. However, some CLTs, including the Irvine Community Land Trust, operate both.
   3. CLT homeownership programs: The CLT acquires and develops properties for sale to income-qualified households, but retains ownership of the underlying land and leases the land to the homeowner for a nominal fee ($50 a month) through a long-term ground lease (usually a 99-year term). The home is, therefore, more affordable because the homeowner is only buying the building and leasing the land underneath. If the homeowner decides to sell the property, the home must be resold to another income-qualified household, and the resale price restriction limits the owner's share of the home's appreciated value. Additionally, since the CLT owns the land, it is a party to all future sales and is able to enforce the resale restrictions. This model allows CLTs to provide affordable housing to low- and moderate-income households otherwise unable to afford to buy a home.
   4. Property tax assessments on homes sold by CLTs: In 2016, AB 2818 (Chiu), Chapter 701, Statutes of 2016, began requiring assessors to consider the value impact of CLT-imposed enforceable restrictions. This bill's rebuttable presumption provisions concerning sales prices reflect the consensus of a working group. The BOE has held a series of Interested Parties meetings with assessors and CLTs on this issue for several years.
   5. Nonprofit organizations and undeveloped properties: Nonprofit organizations seeking legislation to exempt their undeveloped properties from property tax is well-trodden territory before the Legislature.^[16] Many nonprofit organizations own and pay taxes on such land (churches, hospitals, private universities). The courts have taken the view that constitutional provisions granting exemptions are to be construed strictly, but reasonably. In this regard, the constitution explicitly states in Article XIII, Section 5 that the welfare exemption applies in the case of "intended use" of otherwise welfare-exemption-eligible property only after the buildings are "under construction".
   6. Exempting undeveloped land for affordable rental housing: Nonprofit organizations that own and operate (or act as a general manager in a limited partnership) affordable rental housing do not receive a pre-development exemption. The exemption starts once construction starts. Setting this precedent may prompt other affordable housing developers to seek similar property tax relief. The Committee may wish to consider the consequences of setting this precedent.
   7. The existing land-banking "use" exception for homes sold to low-income households: The law allows one exception, enacted after a chapter of Habitat for Humanity had to decline subdivision lot donations because of its inability to carry the associated property tax liability. In providing special treatment for this affordable housing model for low-income persons, the Legislature codified findings proclaiming that its exempt activities are distinct from other affordable housing providers because its exempt purpose is not to own and operate a housing project on an ongoing basis, but to make housing and the land reasonably necessary for the use of that housing available for prompt sale to low-income residents. In other words, the Legislature found that acquiring real property for the future construction of housing on that property is central to the affordable housing model's exempt purposes and activities, and therefore constitutes "use."
   8. This bill creates another land-banking "use" exception designed for CLTs. This bill creates a similar exception that fits the CLT model for homes offered for sale. However, this exception substantively differs by allowing it to apply to land that will be developed into homes sold to moderate-income families (120% of AMI), expanding the scope of the existing charitable "use" exception. This bill includes noncodified findings that the exempt activities of CLTs and Co-ops that are working with CLTs qualitatively differ from the exempt activities of other nonprofit entity housing providers, in that the land is held in perpetuity for persons and families of low and moderate income. In addition, it finds that the holding of real property by CLTs and Co-ops is central to those entities' exempt purposes and activities. Thus, owning property constitutes the exclusive use of that property for a charitable purpose. Once the homes are developed and sold to qualifying homebuyers, they become taxable again. This bill's property tax recapture provision if construction of homes does not commence during the stated period of time serves to prevent any long-term land banking.
   9. What role should the welfare exemption have in private homeownership? This bill raises the policy question of broadening the charitable aspect of the welfare exemption to benefit private homeownership. The state's housing and homelessness crisis is well documented. Affordability for persons seeking to become homebuyers is a challenge for persons at most income levels. Increasing the production of new housing is seen as a key solution to the housing affordability crisis for all Californians. The Committee may wish to weigh whether or not providing home buying opportunities to moderate-income households who are selected by a nonprofit entity to buy a private home at an affordable cost through the laudable efforts of CLTs is within the "charitable" aspect of the welfare exemption.
   10. Narrowing of the property tax base: Residential housing is a core component of the property tax base. Property tax revenues of $60 billion per year are a primary source of local government funding. The tax revenue loss associated with the welfare exemption is $3 billion per year. A sound property tax structure ensures that the tax base is broad and that the property owners within a community contribute to funding government services since, in turn, every person benefits from those government services. In recent years, in the property tax arena, to address the housing affordability crisis, legislation has been enacted to limit, exempt, and prohibit certain affordable housing related-revenue.
   11. Shifting of the tax burden: The multi-prong impact of more housing, combined with reduced revenues, 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, the homelessness crisis is placing additional financial burdens and costs on governments including public health threats. Cumulatively, reduced property tax reductions shift the burden of tax unto other property owners, and indirectly to other renters, who are unable, ineligible, or not selected to access the limited availability of for-rent or for-ownership affordability programs. The waiting lists for rental affordable housing are long and, in some instances, closed. The opportunity to buy a home at an affordable price from a non-profit or governmental sponsored housing program is often won by lottery.
   12. Suggested amendments: Committee staff recommends that, in the case of a rental housing development, this bill be amended to create a seamless transition from the pre-development exemption this bill provides to the pre-existing welfare exemption immediately upon the commencement of construction. Committee staff recommends this for several reasons. Given the risk of property tax recapture, CLTs seeking financing to develop rental housing on land it owns need added exemption status certainty. In this regard, the general welfare exemption (R&TC Section 214) allows for a pro-rata exemption in the case of any rental housing development that ultimately includes moderate-income households. The exemption also provides additionally flexibility should the project be awarded any LIHTCs.

With respect to this Committee's tax expenditure policy on five-year sunset dates, as discussed below, Committee staff recommends that both rental development property and property developed for owner-occupation continues to receive this bill's proposed exemption for the full term otherwise provided (i.e., a rolling five-year exemption sunset). Specifically, in the case of a new acquisition, within five years of the lien date following the acquisition of the property; and, in the case of property currently owned by a CLT for the January 1 lien date, and the next five lien dates. This would provide CLTs a longer horizon of tax exemption availability consistent with this bill's tax recapture provision if construction does not start within five years. Additionally, this enhances tax-status certainty as CLTs seek project financing.

• 1. 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 creating an exemption such as this bill proposes, comply with R&TC Section 41's intent. 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. Additionally, this policy requires a five-year sunset provision. Without a sunset, tax expenditures are created with a majority vote, but require a 2/3rds vote to rescind. This bill includes legislative findings as to its goals and intent, but it does not include data collection provisions. Additionally, this bill does not comply with the Committee's policy on sunset dates. According to the policy, a tax expenditure bill will not be eligible for a Committee vote unless it has complied with these requirements. The author has agreed to amend this bill in accordance with Committee policy.
  2. Previous legislation:
     1. SB 1056 (Beall), of the 2016 -17 Legislative Session, was similar to this bill except that it also applied to moderate income rental housing and did not include the rebuttable presumption provisions. SB 1056 was held on the Assembly Committee on Appropriations' Suspense File.
     2. AB 3152 (Chiu), of the 2016 -17 Legislative Session, would create a new property tax exemption under the welfare 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 Committee on Appropriations' Suspense File.
     3. AB 2818 (Chiu), Chapter 701, Statutes of 2016, would have exempted CLT-owned land under the welfare exemption similar to this bill. Those provisions were amended out of AB 2818 on May 31, 2016 in the Assembly Appropriations Committee.
     4. AB 1559 (Wiggins), Chapter 927, Statutes of 1999, created the property tax exemption for land for future construction of homes to be sold to low-income persons at cost, and at 0% interest (Habitat for Humanity exemption).

REGISTERED SUPPORT / OPPOSITION:

Support

Beverly-Vermont Community Land Trust

Bolinas Community Land Trust

San Diego Community Land Trust

The Irvine Community Land Trust

Opposition

None on file

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

1. California Constitution Article XIII, Section 4(b). ↑

2. California Constitution Article XIII, Section 5. ↑

3. R&TC Section 402.1(a)(11). ↑

4. Note, this intends to mirror the date assessors were first required to consider the value impact of CLT-imposed enforceable restrictions, which was September 27, 2016. ↑

5. R&TC Section 75.11. ↑

6. R&TC Section 532. ↑

7. R&TC Section 402.1(a)(11)(C)(ii). ↑

8. California Constitution Article XIII, Section 4(b). ↑

9. California Constitution Article XIII, Section 4(b). ↑

10. California Constitution Article XIII, Section 5. ↑

11. R&TC Section 214(g). ↑

12. R&TC Section 214(g)(2)(C)(i). ↑

13. R&TC Section 214.15. This reflects a Habitat for Humanity affordability housing model used, when this law was created. ↑

14. R&TC Section 402.1. ↑

15. R&TC Section 214(g). ↑

16. For example, see AB 2662 (2001-02); AB 783 (2003-04); AB 3074 (2003-04); AB 722 (2005-06); AB 1788 (2011-12) and AB 2818 (2015-16). ↑

Date of Hearing: June 24, 2019

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Autumn Burke, Chair

SBPCA Bill Id:SB 196

Author:(Beall) – As Amended Ver:June 19, 2019

FOR TESTIMONY ONLY

SENATE VOTE: 38-0

SUBJECT: Property taxes: community land trust

SUMMARY: Creates a new property tax exemption under the welfare exemption for community land trust-owned property that will be developed into (1) homes sold to low or moderate income households and (2) rental housing available to low income households. Additionally, this bill creates a rebuttable presumption that the sales price of a home sold by a community land trust includes both the home and the underlying leased land. Specifically, this bill:

1. Specifies that "community land trust" (CLT) owned property is within the exemption authorized by the California Constitution for property used for charitable purposes^[1] and for charitable-exemption-eligible facilities in the course of construction^[2] if the CLT otherwise qualifies for the welfare exemption under Revenue and Taxation Code (R&TC) Section 214, and both of the following conditions are met:
   1. The property will be (or is being) developed or rehabilitated as any of the following:
      1. An owner-occupied single-family dwelling;
      2. An owner-occupied unit in a multifamily dwelling;
      3. A member-occupied unit in a "limited equity housing cooperative"; or,
      4. A rental housing development; and
   2. Improvements on the property will be (or are) available for either:
      1. Ownership by "qualified persons" (low or moderate income households); or,
      2. Rental by "qualified persons" (low-income households).
2. Requires the recording of a deed restriction or other instrument on or before the lien date (January 1) following the CLT's property acquisition that requires either:
   1. In the case of homes offered for sale, a contract or contracts serving as an enforceable restriction on the dwelling's sale or resale value of owner-occupied units; or,
   2. In the case of rental housing developments, a contract or contracts serving as an enforceable restriction on the affordability of rental units.
3. Prohibits the assessor from denying the exemption to a CLT-owned property on the basis that the property currently does not contain a single-family dwelling, a multi-family dwelling, or rental housing that is in the course of construction, subject to a five-year claw back provision to recapture property taxes, as specified.
4. Makes the CLT liable for property tax for the years the exemption was granted, if, within five years of the lien date (January 1) after acquiring the property either:
   1. The property was not developed or rehabilitated; or,
   2. The development or rehabilitation is not in the course of construction.
5. Defines a "contract or contracts serving as an enforceable restriction on the sale or resale value of owner-occupied units or on the affordability of rental units" by cross-reference to a law that requires the assessor to consider the value impact on land of CLT-imposed enforceable restrictions where the contract is a renewable 99-year ground lease between the CLT and the homebuyer.^[3]
6. Creates a rebuttable presumption, that the sale or resale price of a home subject to the above 99-year ground lease contract, includes both the dwelling or unit and the leased land on which the dwelling or unit is situated.
7. Allows the assessor to rebut this presumption, by a preponderance of the evidence that the leased land's value is not reflected in the sale or resale price of the dwelling unit.
8. Makes the above rebuttable presumption apply to all lien dates occurring after September 25, 2016.^[4]
9. Allows the assessor to correct the base year value and process a lien-date-based (January 1) decline in value for homes sold by a CLT to facilitate the application of the rebuttable presumption for the homebuyer.
10. Requires the CLT to provide the assessor with a copy of the deed restriction or other instrument.
11. Makes conforming changes to supplemental assessment^[5] and escape assessment^[6] provisions to facilitate the property tax recapture exemption provision, as specified.
12. Defines "community land trust" by cross-reference to its definition in law related to a CLT-enforceable restriction. ^[7]
13. Defines "course of construction" by cross reference to the term "facilities in the course of construction" as defined in R&TC Sections 214.1 and 214.2.
14. Defines "limited equity housing cooperative" (Co-ops) by cross-reference to its definition in Civil Code (CC) Section 817.
15. Defines "qualified persons" as the following:
    1. In the case of property developed for owner-occupied housing, including Co-ops, persons and families of low or moderate income; and,
    2. In the case of property developed for rental housing, as persons and families of low income.
16. Defines "persons and families of low income" by cross reference to the term "lower income households" as defined in Health and Safety Code (H&SC) Section 50079.5.
17. Defines "persons and families of low or moderate income" by cross-reference to the definition in H&SC Section 50093 (Up to 120% of AMI).
18. Includes as "qualified persons" persons and families of low or moderate income that own a dwelling or unit collectively as member occupants or resident shareholders of a limited equity-housing cooperative.
19. Defines "rental housing development" as a development in which all of the residential units, other than units provided to property managers, are required to be rented to, and occupied by, persons and families of low or moderate income, at rents that do not exceed an affordable rent as described in H&SC Section 50053.
20. Makes findings and declarations related to the housing crisis and CLTs efforts to provide an affordable housing option for low and moderate-income households.
21. Finds and declares, with regard to the exemption this bill creates, that the exempt activities of CLTs and Co-ops that are working with CLTs qualitatively differ from the exempt activities of other nonprofit entity housing providers, in that the land is held in perpetuity for persons and families of low and moderate income. Declares that the holding of real property by CLTs and Co-ops is central to those entities' exempt purposes and activities. Thus, owning property constitutes the exclusive use of that property for a charitable purpose, within the meaning of Constitutional provision^[8] that authorizes the Legislature to exempt, in whole or in part, property used exclusively for a charitable purpose.
22. Provides that the state will not reimburse any local agency for any resulting property tax revenue loss.
23. Takes immediate effect, but this bill's exemption provisions apply beginning with lien dates (January 1) occurring on and after January 1, 2020 and this bill's rebuttable presumption provisions are retroactive to all lien dates commencing on or after September 25, 2016.

EXISTING LAW:

1. Provides that all property is taxable, unless otherwise provided by the California Constitution or federal laws.
   
2. Authorizes the Legislature to exempt from property taxation, in whole or in part, property used exclusively for religious, hospital, or charitable purposes and owned or held in trust by corporations or other entities: (a) that are organized and operating for those purposes, (b) that are nonprofit, and (c) no part of whose net earnings insures to the benefit of any private shareholder or individual.^[9] Also extends the exemption to buildings under construction and the required land, if the intended use would qualify the property for exemption.^[10]
   
3. Implements the authorized exemption, commonly known as the "welfare exemption" in R&TC Section 214 and the extension to buildings in the "course of construction" in R&TC Sections 214.1 and 214.2.
4. Includes within the "course of construction" definition the following:
   1. Building demolition or razing with the intent to replace; or,
   2. Definite onsite physical activity connected with constructing or rehabilitation of a new or existing building that results in changes visible to any person inspecting the site.
5. Exempts, under the welfare exemption, low-income rental housing owned and operated by nonprofit organizations, including limited partnerships in which the managing general partner is an eligible nonprofit corporation, as specified.^[11] Allows this exemption on a pro-rata basis, generally based upon the number of units occupied by low-income households, as specified.
6. Defines "low-income" by cross-reference to H&SC Section 50079.5, which defines low income as households at 80% of area median income (AMI) adjusted for family size.^[12]
7. Provides that property owned and operated by a nonprofit organization that is organized and operated for the specific and primary purpose of building housing for sale at cost to low-income families with a 0% loan and without regard to religion, race, national origin, or sex of the head of household is within the welfare exemption.^[13]
   1. Declares that the above nonprofit's activities qualitatively differ from the exempt activities of other nonprofit entities that provide housing in that such a nonprofit's exempt purpose is not to own and operate a housing project on an ongoing basis.
   2. Finds that holding real property for future construction of homes to be sold to low income persons is central to that nonprofit's exempt purposes and activities and constitutes the exclusive use of that property for a charitable purpose within Article XIII, Section 4(b).
8. Requires the assessor, in the assessment of land, to consider the value effect of any enforceable restrictions to which the use of the land may be subjected.
9. Defines "community land trust" as a nonprofit corporation organized pursuant to Section 501(c)(3) of the Internal Revenue Code that satisfies all of the following:
   1. Has as its primary purposes the creation and maintenance of permanently affordable single-family or multifamily residences;
   2. All dwellings and units located on the land owned by the nonprofit corporation are sold to a qualified owner to be occupied as the qualified owner's primary residence or rented to persons and families of low or moderate income; and,
   3. The land owned by the nonprofit corporation, on which a dwelling or unit sold to a qualified owner is situated, is leased by the nonprofit corporation to the qualified owner for the convenient occupation and use of that dwelling or unit for a renewable term of 99 years.^[14]
10. Limits the assessor from issuing escape assessments for previously escaped or underassessed property to the last four tax years, as specified.

FISCAL EFFECT: According to the State Board of Equalization, the property tax revenue loss is indeterminable.

COMMENTS:

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

California is in the middle of an unprecedented housing crisis, most deeply affecting low and moderate income-families. More than 2.2 million extremely low-income and very low-income renter households are competing for only 664,000 affordable rental homes leaving around 1.54 million of California's lowest-income households without access to housing and at risk of becoming homeless. In order to address this crisis, more affordable housing is needed. Community land trusts play a valuable role by providing permanently affordable housing and home ownership opportunities for low-income families. SB 196 will create a property tax exemption for Community Land Trusts from the point of acquisition to the point of sale of affordable homes, similar to existing exemptions for other community-based non-profits. This will better enable Community Land Trusts to provide more families the opportunity to own a home and place down roots in their communities without undue financial burden.

1. The Irvine Community Land Trust, in support of this bill, states the following:

SB 196 will provide more permanent affordable housing for low- and moderate-income families by providing Community Land Trusts with a property tax exemption from the point of acquisition of property to the point of sale of affordable homes.

California finds itself in the middle of a housing crisis. With sky rocking rents and a shortage of affordable housing, California's low and moderate-income families have been left to bear the majority of the burden. Community land trusts can help alleviate this crisis by offering permanently affordable housing and opportunities for home ownership to California's low-income families.

1. Committee Staff Comments:
   1. What does this bill do? This bill has several components:
      1. Homes for sale: First, this bill allows CLTs to obtain a property tax exemption on property they own (generally land) if the intended use of the property is to develop housing that will be sold to low- or moderate-income persons. Additionally, this bill extends the exemption through the construction phase until the homes are sold. Existing law does not allow any exemption.
      2. Rental housing developments: Second, this bill allows CLTs to obtain a property tax exemption on property they own (generally land in the pre-development stage) if the intended use is a rental housing development for low- or moderate-income persons and the improvements (the rental units) will be available for rental by low-income persons. Existing law allows a pro-rata exemption^[15] for low-income rental housing, but only after construction on the site starts.
      3. Five-year clawback: Third, this bill requires CLTs to pay back the property taxes resulting from the above exemptions if the CLT does not start the housing construction within five years of acquiring the property.
      4. The homebuyers: Finally, this bill allows homebuyers who purchase homes from a CLT to pay property taxes based on the price they paid, subject to rebuttable presumption.
   2. What are Community Land Trusts? CLTs use an affordability housing model that generally use ground leases to retain ownership of land upon which housing is constructed. About 25 CLTs operate in California, including one that is municipally backed by the City of Irvine. This model for creating affordable housing differs from others in that the affordability restrictions are permanent. For example, rental housing developed with low-income housing tax credits (LIHTCs) generally have affordability restrictions that expire. Thereafter, the rental housing can be converted to market-rate housing. The CLTs operating in California have home-buying programs or rental housing programs. However, some CLTs, including the Irvine Community Land Trust, operate both.
   3. CLT homeownership programs: The CLT acquires and develops properties for sale to income-qualified households, but retains ownership of the underlying land and leases the land to the homeowner for a nominal fee ($50 a month) through a long-term ground lease (usually a 99-year term). The home is, therefore, more affordable because the homeowner is only buying the building and leasing the land underneath. If the homeowner decides to sell the property, the home must be resold to another income-qualified household, and the resale price restriction limits the owner's share of the home's appreciated value. Additionally, since the CLT owns the land, it is a party to all future sales and is able to enforce the resale restrictions. This model allows CLTs to provide affordable housing to low- and moderate-income households otherwise unable to afford to buy a home.
   4. Property tax assessments on homes sold by CLTs: In 2016, AB 2818 (Chiu), Chapter 701, Statutes of 2016, began requiring assessors to consider the value impact of CLT-imposed enforceable restrictions. This bill's rebuttable presumption provisions concerning sales prices reflect the consensus of a working group. The BOE has held a series of Interested Parties meetings with assessors and CLTs on this issue for several years.
   5. Nonprofit organizations and undeveloped properties: Nonprofit organizations seeking legislation to exempt their undeveloped properties from property tax is well-trodden territory before the Legislature.^[16] Many nonprofit organizations own and pay taxes on such land (churches, hospitals, private universities). The courts have taken the view that constitutional provisions granting exemptions are to be construed strictly, but reasonably. In this regard, the constitution explicitly states in Article XIII, Section 5 that the welfare exemption applies in the case of "intended use" of otherwise welfare-exemption-eligible property only after the buildings are "under construction".
   6. Exempting undeveloped land for affordable rental housing: Nonprofit organizations that own and operate (or act as a general manager in a limited partnership) affordable rental housing do not receive a pre-development exemption. The exemption starts once construction starts. Setting this precedent may prompt other affordable housing developers to seek similar property tax relief. The Committee may wish to consider the consequences of setting this precedent.
   7. The existing land-banking "use" exception for homes sold to low-income households: The law allows one exception, enacted after a chapter of Habitat for Humanity had to decline subdivision lot donations because of its inability to carry the associated property tax liability. In providing special treatment for this affordable housing model for low-income persons, the Legislature codified findings proclaiming that its exempt activities are distinct from other affordable housing providers because its exempt purpose is not to own and operate a housing project on an ongoing basis, but to make housing and the land reasonably necessary for the use of that housing available for prompt sale to low-income residents. In other words, the Legislature found that acquiring real property for the future construction of housing on that property is central to the affordable housing model's exempt purposes and activities, and therefore constitutes "use."
   8. This bill creates another land-banking "use" exception designed for CLTs. This bill creates a similar exception that fits the CLT model for homes offered for sale. However, this exception substantively differs by allowing it to apply to land that will be developed into homes sold to moderate-income families (120% of AMI), expanding the scope of the existing charitable "use" exception. This bill includes noncodified findings that the exempt activities of CLTs and Co-ops that are working with CLTs qualitatively differ from the exempt activities of other nonprofit entity housing providers, in that the land is held in perpetuity for persons and families of low and moderate income. In addition, it finds that the holding of real property by CLTs and Co-ops is central to those entities' exempt purposes and activities. Thus, owning property constitutes the exclusive use of that property for a charitable purpose. Once the homes are developed and sold to qualifying homebuyers, they become taxable again. This bill's property tax recapture provision if construction of homes does not commence during the stated period of time serves to prevent any long-term land banking.
   9. What role should the welfare exemption have in private homeownership? This bill raises the policy question of broadening the charitable aspect of the welfare exemption to benefit private homeownership. The state's housing and homelessness crisis is well documented. Affordability for persons seeking to become homebuyers is a challenge for persons at most income levels. Increasing the production of new housing is seen as a key solution to the housing affordability crisis for all Californians. The Committee may wish to weigh whether or not providing home buying opportunities to moderate-income households who are selected by a nonprofit entity to buy a private home at an affordable cost through the laudable efforts of CLTs is within the "charitable" aspect of the welfare exemption.
   10. Narrowing of the property tax base: Residential housing is a core component of the property tax base. Property tax revenues of $60 billion per year are a primary source of local government funding. The tax revenue loss associated with the welfare exemption is $3 billion per year. A sound property tax structure ensures that the tax base is broad and that the property owners within a community contribute to funding government services since, in turn, every person benefits from those government services. In recent years, in the property tax arena, to address the housing affordability crisis, legislation has been enacted to limit, exempt, and prohibit certain affordable housing related-revenue.
   11. Shifting of the tax burden: The multi-prong impact of more housing, combined with reduced revenues, 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, the homelessness crisis is placing additional financial burdens and costs on governments including public health threats. Cumulatively, reduced property tax reductions shift the burden of tax unto other property owners, and indirectly to other renters, who are unable, ineligible, or not selected to access the limited availability of for-rent or for-ownership affordability programs. The waiting lists for rental affordable housing are long and, in some instances, closed. The opportunity to buy a home at an affordable price from a non-profit or governmental sponsored housing program is often won by lottery.
   12. Suggested amendments: Committee staff recommends that, in the case of a rental housing development, this bill be amended to create a seamless transition from the pre-development exemption this bill provides to the pre-existing welfare exemption immediately upon the commencement of construction. Committee staff recommends this for several reasons. Given the risk of property tax recapture, CLTs seeking financing to develop rental housing on land it owns need added exemption status certainty. In this regard, the general welfare exemption (R&TC Section 214) allows for a pro-rata exemption in the case of any rental housing development that ultimately includes moderate-income households. The exemption also provides additionally flexibility should the project be awarded any LIHTCs.

With respect to this Committee's tax expenditure policy on five-year sunset dates, as discussed below, Committee staff recommends that both rental development property and property developed for owner-occupation continues to receive this bill's proposed exemption for the full term otherwise provided (i.e., a rolling five-year exemption sunset). Specifically, in the case of a new acquisition, within five years of the lien date following the acquisition of the property; and, in the case of property currently owned by a CLT for the January 1 lien date, and the next five lien dates. This would provide CLTs a longer horizon of tax exemption availability consistent with this bill's tax recapture provision if construction does not start within five years. Additionally, this enhances tax-status certainty as CLTs seek project financing.

• 1. 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 creating an exemption such as this bill proposes, comply with R&TC Section 41's intent. 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. Additionally, this policy requires a five-year sunset provision. Without a sunset, tax expenditures are created with a majority vote, but require a 2/3rds vote to rescind. This bill includes legislative findings as to its goals and intent, but it does not include data collection provisions. Additionally, this bill does not comply with the Committee's policy on sunset dates. According to the policy, a tax expenditure bill will not be eligible for a Committee vote unless it has complied with these requirements. The author has agreed to amend this bill in accordance with Committee policy.
  2. Previous legislation:
     1. SB 1056 (Beall), of the 2016 -17 Legislative Session, was similar to this bill except that it also applied to moderate income rental housing and did not include the rebuttable presumption provisions. SB 1056 was held on the Assembly Committee on Appropriations' Suspense File.
     2. AB 3152 (Chiu), of the 2016 -17 Legislative Session, would create a new property tax exemption under the welfare 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 Committee on Appropriations' Suspense file.
     3. AB 2818 (Chiu), Chapter 701, Statutes of 2016, would have exempted CLT-owned land under the welfare exemption similar to this bill. Those provisions were amended out of AB 2818 on May 31, 2016 in the Assembly Appropriations Committee.
     4. AB 1559 (Wiggins), Chapter 927, Statutes of 1999, created the property tax exemption for land for future construction of homes to be sold to low-income persons at cost, and at 0% interest (Habitat for Humanity exemption).

REGISTERED SUPPORT / OPPOSITION:

Support

Beverly-Vermont Community Land Trust

Bolinas Community Land Trust

San Diego Community Land Trust

The Irvine Community Land Trust

Opposition

None on file

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

1. California Constitution Article XIII, Section 4(b). ↑

2. California Constitution Article XIII, Section 5. ↑

3. R&TC Section 402.1(a)(11). ↑

4. Note, this intends to mirror the date assessors were first required to consider the value impact of CLT-imposed enforceable restrictions, which was September 27, 2016. ↑

5. R&TC Section 75.11. ↑

6. R&TC Section 532. ↑

7. R&TC Section 402.1(a)(11)(C)(ii). ↑

8. California Constitution Article XIII, Section 4(b). ↑

9. California Constitution Article XIII, Section 4(b). ↑

10. California Constitution Article XIII, Section 5. ↑

11. R&TC Section 214(g). ↑

12. R&TC Section 214(g)(2)(C)(i). ↑

13. R&TC Section 214.15. This reflects a Habitat for Humanity affordability housing model used, when this law was created. ↑

14. R&TC Section 402.1. ↑

15. R&TC Section 214(g). ↑

16. For example, see AB 2662 (2001-02); AB 783 (2003-04); AB 3074 (2003-04); AB 722 (2005-06); AB 1788 (2011-12) and AB 2818 (2015-16). ↑

 THIRD READING  

Bill No: SB 196

Author: Beall (D), et al.

Amended: 5/7/19

Vote: 21

SENATE GOVERNANCE & FIN. COMMITTEE: 7-0, 5/1/19

AYES: McGuire, Moorlach, Beall, Hertzberg, Hurtado, Nielsen, Wiener

SENATE APPROPRIATIONS COMMITTEE: 6-0, 5/16/19

AYES: Portantino, Bates, Bradford, Hill, Jones, Wieckowski

SUBJECT: Property taxes: welfare exemption: community land trust

SOURCE: Irvine Community Land Trust

DIGEST:

This bill enacts a new welfare exemption from property tax for property owned by a community land trust.

ANALYSIS:

Existing law:

1. Provides that all property is taxable unless explicitly exempted by the Constitution or federal law (California Constitution, Article XIII).
2. Allows the Legislature to exempt property used for charitable purposes, and owned by non-profit entities organized and operated for charitable purposes, such as universities, hospitals, and libraries (California Constitution, Article XIII, Sections Four and Five). The Legislature enacted this exemption, commonly known as the “welfare exemption.”
3. Exempts from taxation buildings under construction, land required for its convenient use, and equipment in the building if its intended use qualifies for the exemption, for several Constitutional exempt purposes, including the welfare exemption.
4. Limits the maximum amount of any ad valorem tax on real property at 1% of full cash value, and directs assessors to only reappraise property when newly constructed, or when ownership changes (California Constitution, Article XIIIA, as added by Proposition 13, 1978).
5. Allows the welfare exemption for rental housing when the housing is financed by tax-exempt mortgage revenue bonds; general obligation bonds; federal, state, or local grants; or federal low-income housing tax credits, pursuant to specific requirements. Non-publicly financed affordable housing, up to $10 million in value statewide, can be exempt under specified circumstances.
6. Applies the exemption to facilities in the course of construction together with the land on which the facilities are located as may be required for their convenient use and occupation. As long as construction has started, state law can consider the property exempt, unless construction is subsequently abandoned; reasonable delays in construction are usually not considered abandonment.
7. Allows the “Habitat for Humanity” welfare exemption, which allows the welfare exemption to be applied to property (AB 1559, Wiggins, Chapter 927, Statutes of 1999):
   1. Owned and operated by a nonprofit corporation, which is organized and operated for the specific and primary purpose of building and rehabilitating single or multifamily residences for sale at cost to low-income families, and
   2. The sale is financed by a zero interest rate loan and without regard to religion, race, national origin, or the sex of the head of household.
8. Provides that the Habitat for Humanity exemption applies during the period of time after the qualifying nonprofit acquires the property and before constructing and selling it to a qualifying family, at which time it becomes taxable again.

This bill:

1. Enacts a new welfare exemption from property tax for property owned by a CLT that otherwise qualifies as a nonprofit for purposes of the welfare exemption. Property is eligible for the exemption if:
   1. The property is being or will be developed or rehabilitated as an owner-occupied single-family dwelling, owner-occupied unit in a multifamily dwelling, member-occupied unit in a limited equity housing cooperative, or as a rental housing development,
   2. Improvements on the property will be available for use and ownership or for rent by income-qualified persons, and
   3. A deed restriction, or other instrument serving as an enforceable restriction, on the sale or resale value of the owner-occupied units or on the affordability of rental units is recorded on or before the lien date following the acquisition of the property by the CLT. The contract, as defined, must be provided to the assessor.
2. Provides that the exemption cannot be denied to a property because it currently does not contain a single-family dwelling, a unit in a multifamily dwelling, a unit in a limited equity housing cooperative, or rental housing development that is in the course of construction, as defined.
3. States that any CLT is liable for property tax if the property was not developed or rehabilitated, or not in the course of construction within five years of the lien date following its acquisition of the property, for any years for which the exemption is applied.
4. Makes conforming changes to sections of law providing for supplemental and escape assessments to clarify that any such assessment must be made within five years of the lien date on which the property becomes taxable.
5. Applies to lien dates occurring on or after January 1, 2020.
6. Defines several of its terms.
7. Makes legislative findings and declarations supporting its purposes.

Background

Formed by local agencies, employers, nonprofits, or grassroots organizations, Community Land Trusts (CLTs) are typically non-profit organizations that seek to promote affordable housing by acquiring and retaining ownership of real property in a specific geographic area using capital or land from private donations or public sources. While the first CLTs were formed in rural areas in the 1970s, nearly 200 exist nationwide today, with approximately 20 in California. CLTs mostly operate in higher-income urban and suburban areas, and under federal law, must:

• Not be sponsored by a for-profit organization;
• Be established to acquire parcels of land, held in perpetuity, primarily for conveyance under long-term ground leases; transfer ownership of any structural improvements located on such leased parcels to the lessees; and retain a preemptive option to purchase any such structural improvement at a price determined by formula that is designed to ensure that the improvement remains affordable to low- and moderate-income families in perpetuity; and
• Have corporate membership that is open to any adult resident of a particular geographic area specified in the bylaws of the organization; and whose board of directors must be equally comprised of leaseholders, community representatives, and other individuals representing the public interest.

In addition to operating rental units, CLTs use a creative ownership model to fund affordable housing sales. First, the CLT divides the underlying land, which it owns in perpetuity, from the home, which is sold to the qualifying resident. The CLT leases the land to the resident via a 99-year ground lease. Only residents considered low- to moderate-income in that area can buy the home, which is subject to resale price restrictions contained in the ground lease that stipulate the resale price formula that provides for a fair, but below-market, return on the resident’s investment. Additionally, restrictions only allow sales to other low-to-moderate income individuals. The CLT maintains the option to repurchase any structure on its land. When the CLT owns the land, it pays property taxes, but residents are assessed after purchasing the property from the CLT. CLTs want the Legislature to add a similar exemption for property that they acquire upon which they subsequently construct housing.

FISCAL EFFECT: Appropriation: No Fiscal Com.: Yes Local: Yes

According to the Senate Appropriations Committee, “By expanding the welfare exemption, this bill would result in a property tax revenue loss, as currently taxable land would be exempt in the future. Reductions in local property tax revenues, in turn, increase General Fund Proposition 98 spending by up to roughly 50 percent (the exact amount depends on the specific amount of the annual Proposition 98 guarantee, which in turns depends upon a variety of economic, demographic and budgetary factors). However, a portion of the projects would be developed on tax-exempt land owned by public agencies. In these instances, property ultimately would be converted from untaxed to taxed, resulting in increased property tax revenues relative to current law. In these instances, the Proposition 98 impact would be the opposite of that described above. The Board of Equalization (BOE) indicates that the net impact of the bill to revenues would be indeterminable. Additionally, BOE would incur absorbable costs to inform local county assessors, the public, and staff of the law change. Additionally, by requiring county assessors to make specified changes to how real property is valued for property tax purposes, this bill would create a state-mandated local program. To the extent the Commission on State Mandates determines that the provisions of this bill create a new program or impose a higher level of service on local agencies, local agencies could claim reimbursement of those costs (General Fund).”

SUPPORT: (Verified 5/16/19)

Irvine Community Land Trust (source)

Bay Area Community Land Trust
Beverly-Vermont Community Land Trust
California Yimby
East Bay Housing Organizations
Grounded Solutions Network
Habitat for Humanity Greater Fresno Area
Irvine Community Land Trust
Northern California Community Land Trust
Oakland Community Land Trust
San Diego Community Land Trust
San Francisco Community Land Trust
Silicon Valley At Home (Sv@Home)
South Bay YIMBY
SV@Home
T.R.U.S.T. South LA

OPPOSITION: (Verified 5/16/19)

None received

ARGUMENTS IN SUPPORT: According to the author, “Addressing California’s housing crisis will require increasing access to affordable housing. Community land trusts (CLT) can be part of the solution and provide permanently affordable housing and home ownership opportunities for low income and moderate-income families. SB 196 will grant CLTs the welfare tax exemption, which is currently granted to similar non-profit housing organizations, from the point of acquisition of property to the point of sale of affordable homes. This

exemption will help CLTs complete their developments and support more disadvantaged families.”

Prepared by: Colin Grinnell / GOV. & F. / (916) 651-4119

5/18/19 10:35:21

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SENATE COMMITTEE ON APPROPRIATIONS

Senator Anthony Portantino, Chair

2019 - 2020 Regular Session

SB 196 (Beall) - Property taxes: welfare exemption: community land trust

Bill Summary:

SB 196 would enact a new welfare exemption from property tax for property owned by a community land trust.

Fiscal Impact:

By expanding the welfare exemption, this bill would result in a property tax revenue loss, as currently taxable land would be exempt in the future. Reductions in local property tax revenues, in turn, increase General Fund Proposition 98 spending by up to roughly 50 percent (the exact amount depends on the specific amount of the annual Proposition 98 guarantee, which in turns depends upon a variety of economic, demographic and budgetary factors).

However, a portion of the projects would be developed on tax-exempt land owned by public agencies. In these instances, property ultimately would be converted from untaxed to taxed, resulting in increased property tax revenues relative to current law. In these instances, the Proposition 98 impact would be the opposite of that described above.

The Board of Equalization (BOE) indicates that the net impact of the bill to revenues would be indeterminable. Additionally, BOE would incur absorbable costs to inform local county assessors, the public, and staff of the law change.

Additionally, by requiring county assessors to make specified changes to how real property is valued for property tax purposes, this bill would create a state-mandated local program. To the extent the Commission on State Mandates determines that the provisions of this bill create a new program or impose a higher level of service on local agencies, local agencies could claim reimbursement of those costs (General Fund).

Background:

The California Constitution provides that all property is taxable unless explicitly exempted by the Constitution or federal law. The Constitution (1) limits the maximum amount of any ad valorem tax on real property at 1 percent of full cash value, plus any locally-authorized bonded indebtedness, and (2) provides that assessors can only reappraise property whenever it is purchased, newly constructed, or when ownership changes (Proposition 13, 1978). Proposition 13 also limits on the inflationary growth of real property value to 2 percent per year.

Community Land Trusts (CLTs) are generally non-profit organizations that seek to promote affordable housing by acquiring and retaining ownership of real property in a specific geographic area using capital or land from private donations or public sources. They can be formed by local agencies, employers, nonprofits, or grassroots organizations. Nearly 200 exist nationwide today; roughly 20 of those are in California. CLTs mostly operate in higher-income urban and suburban areas, and under federal law, must meet specified criteria.

In addition to operating rental units, CLTs use a creative ownership model to fund affordable housing sales. First, the CLT bifurcates the underlying land, which it owns in perpetuity, from the home, which is sold to the qualifying resident. The CLT leases the land to the resident via a 99-year ground lease. Only residents considered low- to moderate-income in that area can buy the home, which is subject to resale price restrictions contained in the ground lease that stipulate the resale price formula that provides for a fair, but below-market, return on the resident’s investment. Additionally, restrictions only allow sales to other low-to-moderate income individuals. The CLT maintains the option to repurchase any structure on its land. When the CLT owns the land, it pays property taxes, but residents are assessed after purchasing the property from the CLT.

The California Constitution allows the Legislature to exempt property used for charitable purposes, and owned by non-profit entities organized and operated for charitable purposes, such as universities, hospitals, and libraries. This is commonly known as the “welfare exemption,” and it has a similar policy origin as non-profit status for charitable groups: revenues paid in tax to the government divert needed resources away from the organization’s good works. Local agencies statewide forego $3 billion annually in property tax revenues from welfare exempt properties.

The welfare exemption includes property used exclusively for rental housing, if:

• The housing is financed by tax-exempt mortgage revenue bonds; general obligation bonds; federal, state, or local grants; or federal low-income housing tax credits. Non-publicly financed affordable housing, up to $10 million in value statewide, can be exempt in certain instances.
• The property is enforceably restricted for low-income housing, and rents do not exceed those prescribed in deed restrictions.
• The property owner certifies that funds that would have been used to pay property taxes are used to maintain the affordability of the units or reduce rents.

State law also provides that the welfare exemption applies to facilities in the course of construction together with the land on which the facilities are located as may be required for their convenient use and occupation. Additionally, the Legislature enacted the “Habitat for Humanity” exemption to allow the welfare exemption to also apply to property (1) owned and operated by a nonprofit corporation, which is organized and operated for the specific and primary purpose of building and rehabilitating single or multifamily residences for sale at cost to low-income families, and (2) the sale is financed by a zero interest rate loan and without regard to religion, race, national origin, or the sex of the head of household.

Thus, qualifying organizations receive an exemption from property tax for the period of time after acquiring a property and before constructing and selling it to a qualifying family, at which time it becomes taxable again.

Proposed Law:

This bill would, for lien dates beginning January 1, 2020, enact a new welfare exemption from property tax for property owned by a CLT that otherwise qualifies as a nonprofit for purposes of the welfare exemption. Property is eligible for the exemption if (1) it is being or will be developed or rehabilitated as an owner-occupied single-family dwelling, owner-occupied unit in a multifamily dwelling, member-occupied unit in a limited equity housing cooperative, or as a rental housing development, (2) improvements on the property will be available for use and ownership or for rent by income-qualified persons, and (3) a deed restriction, or other instrument serving as an enforceable restriction, on the value of the owner-occupied units or on the affordability of rental units is recorded on or before the lien date following the acquisition of the property by the CLT. The contract, as defined, must be provided to the assessor.

The bill provides that the exemption cannot be denied to a property because it currently does not contain a single-family dwelling, a unit in a multifamily dwelling, a unit in a limited equity housing cooperative, or rental housing development that is in the course of construction, as defined. Under the bill, any CLT would be liable for property tax if the property was not developed or rehabilitated, or not in the course of construction within five years of the lien date following its acquisition of the property, for any years for which the exemption is applied. The measure makes a conforming change to sections of law providing for escape assessments to clarify that any such assessment must be made within five years of the lien date on which the property becomes taxable.

Related Legislation:

SB 1056 (Beall, 2018) was very similar to this bill and was held under submission on the Suspense File of the Assembly Appropriations Committee.

Staff Comments:

According to BOE, CLTs anticipate developing and selling 1,600 to 2,500 homes in the State. The resulting revenue impact of this bill would depend on (1) the number of properties owned by CLTs now and in the future, and (2) the differential, if any, between the restricted price and the assessor-determined fair market value after considering the use and resale restrictions and the limited applicability of comparable market sales. BOE concludes that, based on these unknown factors, the cumulative revenue impact is indeterminable.

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SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2019 - 2020 Regular

Property taxes: welfare exemption: community land trust

Enacts a new welfare exemption from property tax for property owned by a community land trust.

Background

Article XIII of the California Constitution provides that all property is taxable unless explicitly exempted by the Constitution or federal law. The Constitution limits the maximum amount of any ad valorem tax on real property at 1% of full cash value and directs assessors to only reappraise property when newly constructed, or when ownership changes (Proposition 13, 1978).

Community Land Trusts. Formed by local agencies, employers, nonprofits, or grassroots organizations, Community Land Trusts (CLTs) are typically non-profit organizations that seek to promote affordable housing by acquiring and retaining ownership of real property in a specific geographic area using capital or land from private donations or public sources. While the first CLTs were formed in rural areas in the 1970s, nearly 200 exist nationwide today, with approximately 20 in California. CLTs mostly operate in higher-income urban and suburban areas, and under federal law, must:

• Not be sponsored by a for-profit organization;
• Be established to acquire parcels of land, held in perpetuity, primarily for conveyance under long-term ground leases; transfer ownership of any structural improvements located on such leased parcels to the lessees; and retain a preemptive option to purchase any such structural improvement at a price determined by formula that is designed to ensure that the improvement remains affordable to low- and moderate-income families in perpetuity; and
• Have corporate membership that is open to any adult resident of a particular geographic area specified in the bylaws of the organization; and whose board of directors must be equally comprised of leaseholders, community representatives, and other individuals representing the public interest.

In addition to operating rental units, CLTs use a creative ownership model to fund affordable housing sales. First, the CLT divides the underlying land, which it owns in perpetuity, from the home, which is sold to the qualifying resident. The CLT leases the land to the resident via a 99-

year ground lease. Only residents considered low- to moderate-income in that area can buy the home, which is subject to resale price restrictions contained in the ground lease that stipulate the resale price formula that provides for a fair, but below-market, return on the resident’s investment. Additionally, restrictions only allow sales to other low-to-moderate income individuals. The CLT maintains the option to repurchase any structure on its land. When the CLT owns the land, it pays property taxes, but residents are assessed after purchasing the property from the CLT.

Welfare exemption. The California Constitution provides that all property is taxable unless explicitly exempted by the Constitution or federal law, but also allows the Legislature to exempt property that is used for charitable purposes, and owned by non-profit entities organized and operated for charitable purposes, such as universities, hospitals, and libraries. The Legislature enacted this exemption, commonly known as the “welfare exemption.” The welfare exemption has a similar policy genesis as non-profit status for charitable groups: revenues paid in tax to the government divert needed resources away from the organization’s good works. According to the Legislative Analyst’s Office, local agencies statewide forego $3 billion annually in property tax revenues from welfare exempt properties.

The welfare exemption includes property used for rental housing, if:

• Tax-exempt mortgage revenue bonds; general obligation bonds; federal, state, or local grants; or federal low-income housing tax credits finance the housing,
• The property is enforceably restricted for low-income housing, and rents do not exceed those prescribed in deed restrictions, and
• The property owner certifies that funds that would have been used to pay property taxes are used to maintain the affordability of the units or reduce rents.

Additionally, qualified charities can apply a full welfare exemption for non-publicly financed rental housing property, subject to several requirements.

The Constitution also exempts from taxation buildings under construction, land required for its convenient use, and equipment in the building if its intended use qualifies for the exemption, for several Constitutional exempt purposes, including the welfare exemption. State law implements this Constitutional provision to apply the exemption to facilities in the course of construction together with the land on which the facilities are located as may be required for their convenient use and occupation. As long as construction has started, state law can consider the property exempt, unless construction is subsequently abandoned; reasonable delays in construction are usually not considered abandonment.

Additionally, the Legislature enacted a specific “Habitat for Humanity” exemption to allow the welfare exemption to also apply to property (AB 1559, Wiggins, 1999):

• Owned and operated by a nonprofit corporation, which is organized and operated for the specific and primary purpose of building and rehabilitating single or multifamily residences for sale at cost to low-income families, and
• The sale of which is financed by a zero interest rate loan and without regard to religion, race, national origin, or the sex of the head of household.

This exemption allowed qualifying organizations an exemption from property tax for the period of time after acquiring a property and before constructing and selling it to a qualifying family, at which time it becomes taxable again. CLTs want the Legislature to add a similar exemption for property that they acquire upon which they subsequently construct housing.

Proposed Law

Senate Bill 196 enacts a new welfare exemption from property tax for property owned by a CLT that otherwise qualifies as a nonprofit for purposes of the welfare exemption. Property is eligible for the exemption if:

• The property is being or will be developed or rehabilitated as an owner-occupied single-family dwelling, owner-occupied unit in a multifamily dwelling, member-occupied unit in a limited equity housing cooperative, or as a rental housing development,
• Improvements on the property will be available for use and ownership or for rent by income-qualified persons, and
• A deed restriction, or other instrument serving as an enforceable restriction, on the value of the owner-occupied units or on the affordability of rental units is recorded on or before the lien date following the acquisition of the property by the CLT. The contract, as defined, must be provided to the assessor.

The bill provides that the exemption cannot be denied to a property because it currently does not contain a single-family dwelling, a unit in a multifamily dwelling, a unit in a limited equity housing cooperative, or rental housing development that is in the course of construction, as defined. SB 196 states that any CLT is liable for property tax if the property was not developed or rehabilitated, or not in the course of construction within five years of the lien date following its acquisition of the property, for any years for which the exemption is applied. The measure makes a conforming change to sections of law providing for escape assessments to clarify that any such assessment must be made within five years of the lien date on which the property becomes taxable.

SB 196 applies to lien dates occurring on or after January 1, 2020. The measure defines several of its terms, and makes legislative findings and declarations supporting its purposes.

State Revenue Impact

According to the Board of Equalization, SB 196’s revenue impact is indeterminable.

Comments

1. Purpose of the bill. According to the author, “Addressing California’s housing crisis will require increasing access to affordable housing. Community land trusts (CLT) can be part of the solution and provide permanently affordable housing and home ownership opportunities for low income and moderate-income families. SB 196 will grant CLTs the welfare tax exemption, which is currently granted to similar non-profit housing organizations, from the point of acquisition of property to the point of sale of affordable homes. This exemption will help CLTs complete their developments and support more disadvantaged families.”

2. Revenue loss. SB 196 expands the current welfare exemption, resulting in property tax revenue losses as currently taxable lands would be exempt in the future. As a result, the state and local agencies will have to reduce spending or increase taxes to match the foregone revenue. The Committee may wish to consider whether the bill is worth the tradeoff of spending cuts or raising taxes, or both.

3. Community benefit? The Constitution’s requirements for the welfare exemption are simple: the property must be owned by a nonprofit entity organized and operated for a charitable purpose, none of whose net earnings inure to the benefit of any private shareholder or individual, and that the property must be exclusively used for the charitable purpose. The Legislature has applied this exemption in statute in several ways, including to affordable housing under specified circumstances, and to unimproved land owned by nonprofit organizations who then build housing that is subsequently sold to income-eligible individuals. Case law generally requires that welfare exempt property must provide a community benefit, meaning that the facts and circumstances demonstrate that the charitable activities performed by the nonprofit organization confer some meaningful, important, or significant benefit to persons within the geographic boundaries of the State of California. However, it is unclear whether vacant land provides a community benefit, especially when many other nonprofit agencies pay tax on their vacant land holdings. However, constructing affordable housing isn’t simple, especially for nonprofit organizations, who must marshal capital to purchase land, obtain entitlements and land use approvals, and hire contractors to construct the project. As such, property tax savings may make the difference for whether a project can be successfully completed. The Committee may wish to consider whether SB 196’s welfare exemption provides a community benefit.

4. Enforceable restrictions. To determine value for property tax purposes, the law effectively presumes that a property’s purchase price in the transaction is its full cash or fair market value. The law further defines the purchase price to include the total consideration provided by the purchaser, or on the purchaser’s behalf, valued in money, paid in money or otherwise. However, assessors must consider enforceable restrictions, such as zoning and environmental restrictions, as well as recorded contracts with government entities when valuing land. In 2016, the Legislature added to the list of enforceable restrictions that the assessor must consider recorded instruments where the following apply (AB 2818, Chiu):

• The contract is a renewable 99-year ground lease between a CLT and the qualified owner of an owner-occupied single-family dwelling or an owner-occupied unit in a multifamily dwelling.
• The contract subjects a single-family dwelling or a unit in a multifamily dwelling, and the land on which the dwelling or unit is situated that is leased to the qualified owner by a CLT for the convenient occupation and use of that dwelling or unit, to affordability restrictions.
• The county counsel, the director of a county housing department, the city attorney, the director of a city housing department, makes a finding that the affordability restriction in the contract serves the public interest to create and preserve the affordability of residential housing.
• The recorded instrument is provided to the assessor.

The measure defines several terms, including “affordability restrictions” to mean that all of the following must be met:

• The property can only be sold or resold to qualified owners, defined as persons and families of low- to moderate-income, to be occupied as a principal place of residence.
• The sale or resale price of the property is determined by a formula that ensures that its purchase price is affordable to qualified owners.
• The CLT has a purchase option on the property intended to preserve the dwelling or unit as affordable to qualified owners.
• The property remains affordable to persons and families of low or moderate-income by recorded deed, deed restriction, ground lease, covenant, memorandum, or other recorded instrument.

If the Legislature enacts SB 196, then the land the CLT purchases for development into housing would be exempt during its holding period, and when sold, assessed to its purchaser at less than fair market value to reflect its enforceable restrictions.

5. Mandate. The California Constitution requires the state to reimburse local governments for the costs of new or expanded state mandated local programs. Because SB 196 changes the manner in which assessors value real property, Legislative Counsel says that it imposes a new state mandate. The measure states that should the Commission on State Mandates determine that the bill imposes a reimbursable mandate, reimbursement must be made pursuant to existing statutory provisions. Additionally, the bill provides that the state shall not reimburse local agencies for any property tax revenue losses resulting from its expanded welfare exemption.

6. Technicals. BOE suggests the following technical amendments:

• Clarify that the enforceable restriction on value in the contract applies to its resale value, not its property tax value.
• Adding an exception to Revenue and Taxation Code §75.11(d) relative to supplemental assessments to mirror the bill’s change regarding escape assessments.

Support and Opposition

(4/26/19)

Support: Bay Area Community Land Trust; Beverly-Vermont Community Land Trust; California Yimby; Grounded Solutions Network; Habitat for Humanity Greater Fresno Area; Oakland Community Land Trust; San Diego Community Land Trust; Silicon Valley At Home (SV@Home); South Bay YIMBY; T.R.U.S.T. South LA

Opposition: Unknown.

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