Existing law requires that all property subject to tax be assessed at its full value, and includes certain possessory interests among those property interests subject to tax. Existing law defines a taxable possessory interest to be a possession of, claim to, or right to the possession of land or improvements that is independent, durable, and exclusive of rights held by others in the property, except as provided. Existing law authorizes the state or any local public entity of government, when entering into a written contract with a private party whereby a possessory interest subject to property taxation may be created, to include, or cause to be included, in that contract, a statement that the property interest may be subject to property taxation if created, and that the party in whom the possessory interest is vested may be subject to the payment of property taxes levied on the interest.

This bill would provide that, for the purpose of defining possessory interest, a tenancy in a residential unit of a publicly owned housing project by a low-income household leased at affordable rents does not create independent possession or use of land or improvements by the tenant. By expanding the duties of local tax officials, this bill would establish 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.

This bill would take effect immediately as a tax levy.

Existing law requires that all property subject to tax be assessed at its full value, and includes certain possessory interests among those property interests subject to tax. Existing law defines a taxable possessory interest to be a possession of, claim to, or right to the possession of land or improvements that is independent, durable, and exclusive of rights held by others in the property, except as provided. Existing law authorizes the state or any local public entity of government, when entering into a written contract with a private party whereby a possessory interest subject to property taxation may be created, to include, or cause to be included, in that contract, a statement that the property interest may be subject to property taxation if created, and that the party in whom the possessory interest is vested may be subject to the payment of property taxes levied on the interest.

This bill would provide that, for the purpose of defining possessory interest, a tenancy in a residential unit of a publicly owned housing project by a low-income household leased at affordable rents does not create independent possession or use of land or improvements by the tenant. By expanding the duties of local tax officials, this bill would establish 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.

This bill would take effect immediately as a tax levy.

Existing law requires that all property subject to tax be assessed at its full value, and includes certain possessory interests among those property interests subject to tax. Existing law defines a taxable possessory interest to be a possession of, claim to, or right to the possession of land or improvements that is independent, durable, and exclusive of rights held by others in the property, except as provided. Existing law authorizes the state or any local public entity of government, when entering into a written contract with a private party whereby a possessory interest subject to property taxation may be created, to include, or cause to be included, in that contract, a statement that the property interest may be subject to property taxation if created, and that the party in whom the possessory interest is vested may be subject to the payment of property taxes levied on the interest.

Existing law requires that all property subject to tax be assessed at its full value, and includes certain possessory interests among those property interests subject to tax. Existing law defines a taxable possessory interest to be a possession of, claim to, or right to the possession of land or improvements that is independent, durable, and exclusive of rights held by others in the property, except as provided. Existing law authorizes the state or any local public entity of government, when entering into a written contract with a private party whereby a possessory interest subject to property taxation may be created, to include, or cause to be included, in that contract, a statement that the property interest may be subject to property taxation if created, and that the party in whom the possessory interest is vested may be subject to the payment of property taxes levied on the interest.

This bill would state the intent of the Legislature to enact legislation that would clarify existing law related to the taxation of possessory interests held by low-income tenants in a publicly owned housing project.

SENATE THIRD READING

STR Bill Id:SB 734

Author:(Rubio)

As Amended Ver:March 21, 2023

Majority vote. Tax Levy

SUMMARY

Codifies the existing interpretation of the State Board of Equalization (BOE) regarding possessory interests in low-income residential units in a joint powers authority (JPA).

Major Provisions

1. Provides that the possession or use of a tenancy in a residential unit of a publicly owned housing project by a low-income household, as defined, rented at affordable rents, as defined, is not an independent possession or use that would constitute a possessory interest.
2. Requires reimbursement to local agencies and school districts if the Commission on State Mandates determines that this bill contains costs mandated by the state.
3. Takes immediate effect as a tax levy.

COMMENTS

JPAs: Authorized under the Joint Exercise of Powers Act, JPAs often take the form of agreements between two or more cities or counties for purposes that the jurisdictions are jointly pursuing. One such purpose is the issuing of bonds to finance public projects. While JPAs generally issue government bonds to pay for airports and hospitals, several JPAs in the state issue private activity bonds to fund affordable housing.

Possessory interest: A possessory interest is a private interest held in public property and constitutes that portion of a public property which is exclusively, independently, and durably vested in a private entity. The California Constitution provides that property of the state and of local governments are not taxable. A possessory interest in that state or local government property, however, can be considered taxable. In these instances, the portion of the property's value that benefits a private entity is taxed. This case is often referred to as a "taxable possessory interest."

JPAs and housing: Three JPAs in the state are currently engaged in developing, or acquiring and rehabilitating, middle-income housing: the California Community Housing Agency, the California Municipal Finance Authority, and the California Statewide Communities Development Authority. There are numerous additional regional JPAs that have implemented this model. In essence, this model generally starts with a "project administrator," often a private real estate developer, who identifies a multi-family residential property for purchase. The project administrator then approaches the local jurisdiction where the property is sited. If the jurisdiction is interested in pursuing the JPA-financed property, the city council or board of supervisors must vote to form the JPA and enter a contract detailing the powers of the JPA. Subsequently, the project administrator assembles financing, prepares acquisition of the property, and manages the property. The JPA issues the bond financing, purchases the property, and applies affordability restrictions on the units. After a pre-determined period, the local jurisdiction can choose to purchase any outstanding debt on the property and take ownership, allowing the city to realize any appreciated equity in the property. The direct impact to the jurisdiction is a loss of property tax revenue as these JPAs have typically been considered tax-exempt government properties, pursuant to the state Constitution.

Critiques of this model: While the JPA-financed housing model may seem to address a deepening housing affordability crisis in the state, there are concerns regarding whether the benefits this model provides are commensurate with the cost of forgone property tax revenue. A brief published in June 2022 by the Terner Center for Housing at UC Berkeley, "The ABCs of JPAs", outlines five overarching concerns regarding this model. First, these developments may not have affordability restrictions that are sufficiently stringent. The vast majority of affordable housing restricts rents to 30% of the income of the tenant as this is generally considered the threshold for a household to be "rent burdened." Initial JPA-properties applied rents that were 35% of a household's income. Second, the fees imposed by administrators and financing managers may be high. A host of parties are involved in the issuing of bonds and property management, which can cumulatively charge fees ranging up to $5 million. Third, underwriting may be overly aggressive, with some loan-to-value ratios exceeding 100% and debt service coverage ratios equal to or below 1. Given the regulatory agreements governing the affordability restrictions of these projects are often lifted if a foreclosure occurs, greater oversight of these transactions may be required. Fourth, the potential for JPAs to compete on purchasing the same property may be occurring, which artificially inflates the already high cost of financing property acquisition. Finally, there appears to be a lack of a strong affordability enforcement mechanism to ensure ongoing compliance.

Opinion letters from the State BOE: Committee staff is aware of three letters authored by the BOE's counsel providing guidance to counties on the assessment of possessory interests in JPAs: first in 1999, again in 2010, and the last in 2022. In all three instances, the BOE held that low-income units in JPAs should be exempt. The most recent letter, which addressed specifically the JPA model focused on middle-income housing, validated this position. The letter noted that leasehold units in government owned property generally do constitute a taxable possessory interest, but that low-income units should not be taxed.

According to the Author

We have an affordable housing crisis across California and it will take multiple solutions working together to solve the crisis. SB 734 provides one of those solutions by ensuring tax relief for low-income tenants who live in government-owned housing. As many of us know, California law generally exempts government-owned property from property taxes. However, there has recently been legal confusion concerning whether multi-family housing properties owned by joint powers authorities are exempt from property taxes when housing units are leased to tenants. In the absence of legal clarity, different county assessors have come to different conclusions. However, the California State Board of Equalization has had a longstanding legal opinion on this issue that concludes assessors should not assert taxable possessory interests on low-income tenants living in government-owned housing because imposing property taxes on these low-income tenants defeats the purpose of California's property tax welfare exemption. SB 734 codifies that legal opinion to guarantee low-income tenants living in government-owned housing are never surprised with an unexpected property tax bill.

Arguments in Support

The California Apartment Association, writing in support of this bill, states, in part:

Recently, the Board of Equalization issued a legal opinion relying on the definition of "possessory interest" in Section 107 of the Revenue and Taxation Code that indicates that public housing tenancies "create taxable possessory interests" and are required to pay the tax. While the opinion suggests that county assessors refrain from taxing possessory interests held by low-income tenants in public housing projects, based on the board's prior opinions, the opinion has created a legal uncertainty with respect to the taxability of the possessory interests of all tenants in publicly owned affordable housing. SB 734 would codify long-standing California case law that tenancies in publicly owned affordable housing and other publicly owned housing occupied by public beneficiaries are not subject to possessory interest taxation.

Arguments in Opposition

The City of Pasadena, writing in opposition to this bill, unless amended, states, in part:

If SB 734 passes as drafted, 60% of the tenants in these units are eligible to receive possessory interest tax bills, which we do not believe is in the best interest of housing policy in California. The City of Pasadena respectfully asks that SB 734 be amended to include language that protects these middle-income households from receiving property tax bills.

FISCAL COMMENTS

According to the Assembly Appropriations Committee:

1. Annual property tax revenue loss of approximately $3.1 million. BOE assumes 7,700 impacted units (cited from the California Statewide Communities Development Authority website) with rent of $1,500 per month to arrive at this calculation, but notes the revenue impact may be understated because 7,700 units may not reflect the overall population and the figure does not include future developments. The California Constitution requires reimbursement to local governments for property tax revenue loss due to an exemption of property. Thus, this bill creates cost pressures of $3.1 million to the state to appropriate such reimbursement (General Fund (GF)).
2. Costs of approximately $48,000 in the first year and $20,000 annually thereafter to BOE to review Letters to Assessors, hold interested parties meetings, and conduct legal reviews (GF).
3. By revising the responsibilities of county assessors, this bill likely creates a state-mandated local program. If the Commission on State Mandates determines the provisions of this bill create a new program or impose a higher level of service for which the state must reimburse local costs, counties cold claim reimbursement from the state (GF).

VOTES

SENATE FLOOR: 40-0-0

YES: Allen, Alvarado-Gil, Archuleta, Ashby, Atkins, Becker, Blakespear, Bradford, Caballero, Cortese, Dahle, Dodd, Durazo, Eggman, Glazer, Gonzalez, Grove, Hurtado, Jones, Laird, Limón, McGuire, Menjivar, Min, Newman, Nguyen, Niello, Ochoa Bogh, Padilla, Portantino, Roth, Rubio, Seyarto, Skinner, Smallwood-Cuevas, Stern, Umberg, Wahab, Wiener, Wilk

ASM REVENUE AND TAXATION: 10-0-1

YES: Irwin, Wallis, Bains, Grayson, Pacheco, Jim Patterson, Petrie-Norris, Ta, Valencia, Zbur

ABS, ABST OR NV: Luz Rivas

ASM APPROPRIATIONS: 16-0-0

YES: Holden, Megan Dahle, Bryan, Calderon, Wendy Carrillo, Dixon, Mike Fong, Hart, Lowenthal, Mathis, Papan, Pellerin, Sanchez, Soria, Weber, Wilson

UPDATED

VERSION: March 21, 2023

CONSULTANT: Harrison Bowlby / REV. & TAX. / (916) 319-2098 FN: 0001538

Date of Hearing: August 23, 2023

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Chris Holden, Chair

SBPCA Bill Id:SB 734

Author:(Rubio) – As Amended Ver:March 21, 2023

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

SUMMARY:

This bill codifies a State Board of Equalization (BOE) interpretation regarding the application of possessory interest taxes on low-income residential units in publicly owned housing.

Specifically, this bill provides, for the purpose of defining a “possessory interest,” that a tenancy in a publicly owned housing project’s residential unit by a low-income household, leased at affordable rents, does not create independent possession or use of the land or the improvements by the tenant. Thus, such a tenancy does not constitute a taxable possessory interest subject to property tax.

FISCAL EFFECT:

1. Annual property tax revenue loss of approximately $3.1 million. BOE assumes 7,700 impacted units (cited from the California Statewide Communities Development Authority website) with rent of $1,500 per month to arrive at this calculation, but notes the revenue impact may be understated because 7,700 units may not reflect the overall population and the figure does not include future developments. The California Constitution requires reimbursement to local governments for property tax revenue loss due to an exemption of property. Thus, this bill creates cost pressures of $3.1 million to the state to appropriate such reimbursement (General Fund (GF)).
2. Costs of approximately $48,000 in the first year and $20,000 annually thereafter to BOE to review Letters to Assessors, hold interested parties meetings, and conduct legal reviews (GF).
3. By revising the responsibilities of county assessors, this bill likely creates a state-mandated local program. If the Commission on State Mandates determines the provisions of this bill create a new program or impose a higher level of service for which the state must reimburse local costs, counties cold claim reimbursement from the state (GF).

COMMENTS:

1. Purpose. According to the author:

California law generally exempts government-owned property from property taxes. However, there has recently been legal confusion concerning whether multi-family housing projects owned by joint powers authorities are exempt from property taxes when housing units are leased to tenants…However, [BOE] has had a longstanding legal opinion on this issue that concludes assessors should not assert taxable possessory interest on low-income tenants living in government-owned housing because imposing property taxes on these low-income tenants defeats the purpose of California’s property tax welfare exemption. SB 734 codifies that legal opinion to guarantee low-income tenants living in government-owned housing are never surprised with an unexpected property tax bill.

1. Support and Opposition. This bill is supported by BOE and the California Apartment Association, with BOE noting this bill “intends to create additional housing for very low-income Californians.”

This bill is opposed by the cities of Glendale and Pasadena “unless amended to include language to exempt tenants making up to 120% of the [area median income (AMI)]” which “protects these middle-income households from receiving property tax bills.”

1. Background.

Possessory Interest. A possessory interest is a private interest held in public property and constitutes a portion of a public property that is exclusively, independently, and durably vested in a private entity. The California Constitution provides that public property of state and local governments are not subject to property tax. However, a possessory interest in that state or local property can be considered taxable, with the “taxable possessory interest” the portion of the property’s value attributed to benefit the private entity. Examples include concession agreements at public facilities and the rental of government property at airports or convention centers.

Welfare Exemption. The California Constitution authorizes the Legislature to exempt from taxation property used exclusively for religious, hospital, or charitable purposes. This “welfare exemption” extends to low-income housing developments operated by non-profit organizations, if financed with tax-exempt bonds, government loans, grants, or the Low-Income Housing Tax Credit. The benefit is equal to the percentage of the value of the property that is representative of the percentage of units serving lower-income households.

Joint Powers Agreements (JPAs) and BOE Opinion Letters. Many JPAs in California are engaged in developing or acquiring middle-income or low-income housing, which has produced uncertainty about whether a taxable possessory interest exists of these projects. At BOE’s February 22, 2023, hearing, two assessors indicated they had issued possessory interest assessments to operators of nine JPA-owned properties in Orange County and San Diego County. BOE has issued guidance to counties three times on this issue. Each time, in 1999, 2010, and 2022, BOE has opined that assessors should not assert taxable possessory interests on low-income persons residing in publicly owned housing, as such persons similarly qualify private affordable rental housing developers for the welfare exemption. BOE’s 2022 guidance specified it applied only to possessory interests owned by low-income residents (up to 80% AMI) of low-cost housing, as defined in existing law, meeting requisite rental restrictions. This bill codifies such guidance.

1. Related Legislation. AB 1553 (Lowenthal) provides that no possessory interest exists in a unit that is occupied by a “public beneficiary” with income up to 120% AMI (constituting “moderate income”) and part of a “publicly owned housing project.” AB 1553 is pending hearing in the Assembly Revenue and Taxation Committee.

SB 320 (Skinner) is identical to AB 1553. SB 320 is pending hearing in the Senate Governance and Finance Committee.

Analysis Prepared by: Irene Ho / APPR. / (916) 319-2081

Date of Hearing: July 10, 2023

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Jacqui Irwin, Chair

SBPCA Bill Id:SB 734

Author:(Rubio) – As Amended Ver:March 21, 2023

SUSPENSE

Majority vote. Tax levy. Fiscal committee.

SENATE VOTE: 40-0

SUBJECT: Property tax: possessory interests

SUMMARY: Codifies the existing interpretation of the State Board of Equalization (BOE) regarding possessory interests in low-income residential units in a joint powers authority (JPA). Specifically, this bill:

1. Provides that the possession or use of a tenancy in a residential unit of a publicly owned housing project by a low-income household, as defined, rented at affordable rents, as defined, is not an independent possession or use that would constitute a possessory interest.
2. Requires reimbursement to local agencies and school districts if the Commission on State Mandates determines that this bill contains costs mandated by the state.
3. Takes immediate effect as a tax levy.

EXISTING FEDERAL LAW establishes the low income housing tax credit (LIHTC), which provides a credit for the costs of constructing, rehabilitating, or acquiring low-income rental housing. The credit may be claimed over a 10-year period and equals either 70% of the qualified basis for projects that are not federally subsidized or 30% for projects that are federally subsidized. These are commonly referred to as the 9% credit or the 4% credit, respectively, which reflects the annualized credit percentage that a qualified taxpayer may claim over the 10-year period. The 9% credit is subject to an annual, federally determined cap that is based on state population, whereas the 4% cap is subject to a state's private activity bond (PAB) capacity. (Internal Revenue Code Section 42 et seq.).

EXISTING STATE LAW:

1. Provides that all property is taxable, unless otherwise provided by the California Constitution or laws of the United States. (California Constitution, Article XIII, Section 1.)
2. Exempts certain property from taxation, including property owned by the State or a local government, as provided. (California Constitution, Article XIII, Section 3.)
3. Enacts the Personal Income Tax (PIT) Law, which imposes a tax at specified percentages on a taxpayer's taxable income, as defined, and the Corporation Tax (CT) Law, which generally imposes a tax at the rate of 8.84% on the net income of a corporation. (Revenue and Taxation Code (R&TC) Section 17041 et seq. and R&TC Section 23151 et seq.)
4. Imposes a tax on the gross premiums, as specified, of insurers, as defined, at the rate of 2.35%. (California Constitution, Article XIII, Section 28.)
5. Authorizes, under the tax on the gross premiums of insurers, the PIT Law, and the CT Law, a state LIHTC that is calculated in partial conformity with the federal LIHTC and may only be claimed over a period of four years. (R&TC Sections 12206, 17058, and 23610.5.)
6. Authorizes, under the Joint Exercise of Powers Act (JEPA), two or more "public agencies" to enter into an agreement to jointly exercise any power common to the contracting parties. This agreement is referred to as a "joint powers authority" (JPA). (Government Code Section 6502.) A public agency includes the federal government or any federal department or agency, this state, another state or any state department or agency, a county, city, public corporation, public district, regional transportation commission, a federally recognized Indian tribe, or any joint powers authority formed pursuant to the JEPA, among others. (Government Code Section 6500.)
7. Authorizes the Legislature to partially or fully exempt property used for certain purposes, including charitable purposes, owned by a nonprofit organization organized and operated for those certain purposes if no part of the organization's earnings inure to the benefit of any private shareholder or individual. (California Constitution, Article XIII, Section 4.) Existing statute implements this authorization by requiring that eligible property is irrevocably dedicated, and used, for the exempt purpose. This exemption is commonly referred to as the "welfare exemption." (R&TC Section 214(a).)
8. Defines a "possessory interest" as the possession of, claim to, or right to the possession of land or improvements that is "independent", "durable", "and exclusive" of rights held by others in the property, except when coupled with ownership of the land or improvements in the same person. (R&TC Section 107.)
9. Defines "independent" as the ability to exercise authority and exert control over the management or operation of the property or improvements, separate and apart from the policies, statutes, ordinances, rules, and regulations of the public owner of the property or improvements. (R&TC Section 107.)
10. Defines "durable" as a determinable period with a reasonable certainty that the use, possession, or claim with respect to the property or improvements will continue for that period. (R&TC Section 107.)
11. Defines "exclusive" as the enjoyment of a beneficial use of land or improvements, together with the ability to exclude from occupancy by means of legal process others who may interfere with that enjoyment, as specified. (R&TC Section 107.)
12. Defines "affordable rents" as no more than 30% of a tenant's income. (Health and Safety Code Section 50093.)
13. Defines "low-income household" as a household that does not exceed 80% of the area median income (AMI).

FISCAL EFFECT: The BOE estimates an impact to local property tax revenues of approximately $3.1 million. Committee staff notes that, depending on the year, the state may be required to reimburse local jurisdictions for reduced property tax revenues.

COMMENTS:

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

We have an affordable housing crisis across California and it will take multiple solutions working together to solve the crisis. SB 734 provides one of those solutions by ensuring tax relief for low-income tenants who live in government-owned housing. As many of us know, California law generally exempts government-owned property from property taxes. However, there has recently been legal confusion concerning whether multi-family housing properties owned by joint powers authorities are exempt from property taxes when housing units are leased to tenants. In the absence of legal clarity, different county assessors have come to different conclusions. However, the California State Board of Equalization has had a longstanding legal opinion on this issue that concludes assessors should not assert taxable possessory interests on low-income tenants living in government-owned housing because imposing property taxes on these low-income tenants defeats the purpose of California's property tax welfare exemption. SB 734 codifies that legal opinion to guarantee low-income tenants living in government-owned housing are never surprised with an unexpected property tax bill.

1. The California Apartment Association, writing in support of this bill, states, in part:

Recently, the Board of Equalization issued a legal opinion relying on the definition of "possessory interest" in Section 107 of the Revenue and Taxation Code that indicates that public housing tenancies "create taxable possessory interests" and are required to pay the tax. While the opinion suggests that county assessors refrain from taxing possessory interests held by low-income tenants in public housing projects, based on the board's prior opinions, the opinion has created a legal uncertainty with respect to the taxability of the possessory interests of all tenants in publicly owned affordable housing. SB 734 would codify long-standing California case law that tenancies in publicly owned affordable housing and other publicly owned housing occupied by public beneficiaries are not subject to possessory interest taxation.

1. The City of Pasadena, writing in opposition to this bill, unless amended, states, in part:

If SB 734 passes as drafted, 60% of the tenants in these units are eligible to receive possessory interest tax bills, which we do not believe is in the best interest of housing policy in California. The City of Pasadena respectfully asks that SB 734 be amended to include language that protects these middle-income households from receiving property tax bills.

1. Committee Staff Comments:
   1. JPAs: Authorized under the JEPA, JPAs often take the form of agreements between two or more cities or counties for purposes that the jurisdictions are jointly pursuing. One such purpose is the issuing of bonds to finance public projects. While JPAs generally issue government bonds to pay for airports and hospitals, several JPAs in the state issue PABs to fund affordable housing, often in conjunction with 4% LIHTCs. The amount of PABs that can be issued in a state is federally capped, but there is no corresponding cap on the amount of government bonds that can be issued by JPAs.
   2. Possessory interest: A possessory interest is a private interest held in public property and constitutes that portion of a public property which is exclusively, independently, and durably vested in a private entity. The California Constitution provides that property of the state and of local governments are not taxable. However, a possessory interest in that state or local government property can be considered taxable. In these instances, the portion of the property's value that can be attributed to benefit a private entity is taxed. This case is often referred to as a "taxable possessory interest."
   3. JPAs and housing: Three JPAs in the state are currently engaged in developing or acquiring and rehabilitating middle-income housing: the California Community Housing Agency, the California Municipal Finance Authority, and the California Statewide Communities Development Authority. There are additional numerous regional JPAs that have implemented this model. In essence, this model generally starts with a "project administrator," often a private real estate developer, who identifies a multi-family residential property for purchase. The project administrator then approaches the local jurisdiction where the property is cited. If the jurisdiction is interested in pursuing the JPA-financed property, the city council or board of supervisors must vote to form the JPA and enter a contract detailing the powers of the JPA. Subsequently, the project administrator assembles financing, prepares acquisition of the property, and manages the property. The JPA issues the bond financing, purchases the property, and applies affordability restrictions on the units. After a pre-determined period, the local jurisdiction can choose to purchase any outstanding debt on the property and take ownership, allowing the city to realize any appreciated equity in the property. The direct impact to the jurisdiction is a loss of property tax revenue as these JPAs have typically been considered tax-exempt government properties, pursuant to the state Constitution.
   4. Critiques of this model: While the JPA-financed housing model may seem to address a deepening housing affordability crisis in the state, there are concerns regarding whether the benefits this model provides are commensurate with the cost of forgone property tax revenue. A brief published in June 2022 by the Terner Center for Housing at UC Berkeley, "The ABCs of JPAs", outlines five overarching concerns regarding this model. First, these developments may not have affordability restrictions that are sufficiently stringent. The vast majority of affordable housing restricts rents to 30% of the income of the tenant as this is generally considered the threshold for a household to be "rent burdened." Initial JPA-properties applied rents that were 35% of a household's income. Second, the fees imposed by administrators and financing managers may be exorbitant. A host of parties are involved in the issuing of bonds and property management, which can cumulatively charge fees ranging up to $5 million. Additionally, this financing structure includes other types of higher interest financing with riskier position. Third, underwriting may be overly aggressive, with some loan-to-value ratios exceeding 100% and debt service coverage ratios equal to or below 1. Given the regulatory agreements governing the affordability restrictions of these projects are often lifted if a foreclosure occurs, greater oversight of these transactions may be required. Fourth, the potential for JPAs to compete on purchasing the same property may be occurring, which artificially inflates the already high cost of financing property acquisition. Finally, there appears to be a lack of a strong affordability enforcement mechanism to ensure ongoing compliance.
   5. Opinion letters from the State BOE: Committee staff is aware of three letters authored by the BOE's counsel providing guidance to counties on the assessment of possessory interests in JPAs: first in 1999, again in 2010, and the last in 2022. In all three instances, the BOE held that low-income units in JPAs should be exempt. The most recent letter, which addressed specifically the JPA model focused on middle-income housing, validated this position. The letter noted that leasehold units in government owned property generally do constitute a taxable possessory interest, but that low-income units should not be taxed.
   6. BOE Considerations: The BOE raises three considerations in its analysis of this bill. The first is regarding the treatment of a possessory interest by the administrator of a JPA. Existing law provides that private contractors managing certain military housing do not constitute an independent possession or use that would trigger a taxable possessory interest in that property. To benefit from this treatment, however, a private contractor and the property must meet a series of requirements, including that the private contractor not be given the right and ability to exercise any significant authority and control over the management of the military housing, as specified, and that the private contractor is allowed only a predetermined profit or fee for constructing the military housing. These requirements significantly restrict the actions a private contractor may take regarding the property.

The second is regarding the treatment of tenancies that do not qualify as low income. If those non-qualifying units are considered as having a possessory interest and therefore subject to property taxation, a county assessor would be responsible for issuing property tax bills to tenants of those units, which would require an assessor to track those units and create additional workload. Tenants may also receive unexpected bills.

The final is regarding the lack of a provision to backfill local jurisdictions for lost property tax revenues resulting from this bill.

• 1. This bill: As currently drafted, this bill codifies the existing BOE position that a residential unit rented by a tenant in a JPA who would otherwise qualify under the welfare exemption is not assessed a property tax because of that tenant's possessory interest in the unit. While this bill does codify the BOE's existing interpretation, tenants that do not qualify under this bill, but have not previously been subject to property taxation, could be assessed a property tax for their units as the BOE notes^[1]. On the other hand, providing the same exemption for both low-income units and middle-income units would essentially dilute the exemption as there would be no incentive for a developer to build or rehabilitate low-income units rather than middle-income units. This bill would only exempt low-income units from a possessory interest in these JPAs.
  2. Proposition 98: In 1988, voters established a minimum funding requirement for schools and community colleges, commonly referred to as the "minimum guarantee", by approving Proposition 98. The minimum guarantee is calculated through a series of formulas stipulated in the Constitution, and encompasses state General Fund (GF) and local property tax revenues. In any given year, the inputs used to calculate the minimum guarantee may vary. The state determines which inputs to use based on the formulas in the Constitution or "tests". Depending on certain inputs, such as GF revenue and changes in student attendance, the state determines the test that will be operative, and that test sets the minimum guarantee for that year. Thus, the amount of property tax revenue that schools and community colleges receive impacts the minimum guarantee calculation. The extent of that impact, however, varies based on the type of test used. In Test 1 years, the minimum guarantee equals a fixed percentage of state GF revenues, plus any amount of property tax revenues that the schools and community colleges receive in that year. Fluctuations in property tax revenue have a dollar-for-dollar effect on school funding in Test 1 years. In years where the other tests are operative, changes in property tax revenues do not affect the minimum guarantee or overall school funding, but do impact the amount of GF the state must allocate to meet the guarantee^[2]. Thus, depending on the year, reductions in property tax revenues resulting from this bill may require backfill by the state.

1. Narrowing of the property tax base: Residential housing is a core component of the property tax base. Property tax revenues of over $80 billion per year are a primary source of local government funding. A sound property tax structure ensures that the tax base is broad, and that property owners within a community contribute to funding government services since, in turn, every person benefits from those government services. In recent years, to address the housing affordability crisis, legislation has been enacted to limit, exempt, and prohibit certain affordable housing related-property tax revenue.
2. 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 increased financial burdens and costs on governments. 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 affordable rental 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.
3. Related legislation:
   1. AB 1553 (Lowenthal) provides that no possessory interest exists in a unit that is occupied by a "public beneficiary" that has income up to 120% of the AMI and that is part of a "publicly owned housing project." AB 1553 was never heard by this Committee.
   2. SB 320 (Skinner) is identical to AB 1553 (Lowenthal) and was never heard by the Senate Committee on Governance and Finance.
4. Prior legislation: AB 1850 (Ward), of the 2021-22 Legislative Session, would have established a statewide enforcement mechanism for these types of JPAs and specify the terms of their construction, among other provisions. AB 1850 failed passage out of the Senate Committee on Governance and Finance.

REGISTERED SUPPORT / OPPOSITION:

Support

California Apartment Association

California State Board of Equalization

Opposition

City of Pasadena

Analysis Prepared by: Harrison Bowlby / REV. & TAX. / (916) 319-2098

1. Units subject to an assessment would have incomes in excess of 80% of the AMI. ↑

2. LAO, Excess ERAF: A Review of the Calculations Affecting School Funding (2020) <https://lao.ca.gov/Publications/Report/4193> accessed March 2023. ↑

Date of Hearing: June 26, 2023

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Jacqui Irwin, Chair

SBPCA Bill Id:SB 734

Author:(Rubio) – As Amended Ver:March 21, 2023

Majority vote. Tax levy. Fiscal committee.

SENATE VOTE: 40-0

SUBJECT: Property tax: possessory interests

SUMMARY: Codifies the existing interpretation of the State Board of Equalization (BOE) regarding possessory interests in low-income residential units in a joint powers authority (JPA). Specifically, this bill:

1. Provides that the possession or use of a tenancy in a residential unit of a publicly owned housing project by a low-income household, as defined, rented at affordable rents, as defined, is not an independent possession or use that would constitute a possessory interest.
2. Requires reimbursement to local agencies and school districts if the Commission on State Mandates determines that this bill contains costs mandated by the state.
3. Takes immediate effect as a tax levy.

EXISTING FEDERAL LAW establishes the low income housing tax credit (LIHTC), which provides a credit for the costs of constructing, rehabilitating, or acquiring low-income rental housing. The credit may be claimed over a 10-year period and equals either 70% of the qualified basis for projects that are not federally subsidized or 30% for projects that are federally subsidized. These are commonly referred to as the 9% credit or the 4% credit, respectively, which reflects the annualized credit percentage that a qualified taxpayer may claim over the 10-year period. The 9% credit is subject to an annual, federally determined cap that is based on state population, whereas the 4% cap is subject to a state's private activity bond (PAB) capacity. (Internal Revenue Code Section 42 et seq.).

EXISTING STATE LAW:

1. Provides that all property is taxable, unless otherwise provided by the California Constitution or laws of the United States. (California Constitution, Article XIII, Section 1.)
2. Exempts certain property from taxation, including property owned by the State or a local government, as provided. (California Constitution, Article XIII, Section 3.)
3. Enacts the Personal Income Tax (PIT) Law, which imposes a tax at specified percentages on a taxpayer's taxable income, as defined, and the Corporation Tax (CT) Law, which generally imposes a tax at the rate of 8.84% on the net income of a corporation. (Revenue and Taxation Code (R&TC) Section 17041 et seq. and R&TC Section 23151 et seq.)
4. Imposes a tax on the gross premiums, as specified, of insurers, as defined, at the rate of 2.35%. (California Constitution, Article XIII, Section 28.)
5. Authorizes, under the tax on the gross premiums of insurers, the PIT Law, and the CT Law, a state LIHTC that is calculated in partial conformity with the federal LIHTC and may only be claimed over a period of four years. (R&TC Sections 12206, 17058, and 23610.5.)
6. Authorizes, under the Joint Exercise of Powers Act (JEPA), two or more "public agencies" to enter into an agreement to jointly exercise any power common to the contracting parties. This agreement is referred to as a "joint powers authority" (JPA). (Government Code Section 6502.) A public agency includes the federal government or any federal department or agency, this state, another state or any state department or agency, a county, city, public corporation, public district, regional transportation commission, a federally recognized Indian tribe, or any joint powers authority formed pursuant to the JEPA, among others. (Government Code Section 6500.)
7. Authorizes the Legislature to partially or fully exempt property used for certain purposes, including charitable purposes, owned by a nonprofit organization organized and operated for those certain purposes if no part of the organization's earnings inure to the benefit of any private shareholder or individual. (California Constitution, Article XIII, Section 4.) Existing statute implements this authorization by requiring that eligible property is irrevocably dedicated, and used, for the exempt purpose. This exemption is commonly referred to as the "welfare exemption." (R&TC Section 214(a).)
8. Defines a "possessory interest" as the possession of, claim to, or right to the possession of land or improvements that is "independent", "durable", "and exclusive" of rights held by others in the property, except when coupled with ownership of the land or improvements in the same person. (R&TC Section 107.)
9. Defines "independent" as the ability to exercise authority and exert control over the management or operation of the property or improvements, separate and apart from the policies, statutes, ordinances, rules, and regulations of the public owner of the property or improvements. (R&TC Section 107.)
10. Defines "durable" as a determinable period with a reasonable certainty that the use, possession, or claim with respect to the property or improvements will continue for that period. (R&TC Section 107.)
11. Defines "exclusive" as the enjoyment of a beneficial use of land or improvements, together with the ability to exclude from occupancy by means of legal process others who may interfere with that enjoyment, as specified. (R&TC Section 107.)
12. Defines "affordable rents" as no more than 30% of a tenant's income. (Health and Safety Code Section 50093.)
13. Defines "low-income household" as a household that does not exceed 80% of the area median income (AMI).

FISCAL EFFECT: The BOE estimates an impact to local property tax revenues of approximately $3.1 million. Committee staff notes that, depending on the year, the state may be required to reimburse local jurisdictions for reduced property tax revenues.

COMMENTS:

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

We have an affordable housing crisis across California and it will take multiple solutions working together to solve the crisis. SB 734 provides one of those solutions by ensuring tax relief for low-income tenants who live in government-owned housing. As many of us know, California law generally exempts government-owned property from property taxes. However, there has recently been legal confusion concerning whether multi-family housing properties owned by joint powers authorities are exempt from property taxes when housing units are leased to tenants. In the absence of legal clarity, different county assessors have come to different conclusions. However, the California State Board of Equalization has had a longstanding legal opinion on this issue that concludes assessors should not assert taxable possessory interests on low-income tenants living in government-owned housing because imposing property taxes on these low-income tenants defeats the purpose of California's property tax welfare exemption. SB 734 codifies that legal opinion to guarantee low-income tenants living in government-owned housing are never surprised with an unexpected property tax bill.

1. The California Apartment Association, writing in support of this bill, states, in part:

Recently, the Board of Equalization issued a legal opinion relying on the definition of "possessory interest" in Section 107 of the Revenue and Taxation Code that indicates that public housing tenancies "create taxable possessory interests" and are required to pay the tax. While the opinion suggests that county assessors refrain from taxing possessory interests held by low-income tenants in public housing projects, based on the board's prior opinions, the opinion has created a legal uncertainty with respect to the taxability of the possessory interests of all tenants in publicly owned affordable housing. SB 734 would codify long-standing California case law that tenancies in publicly owned affordable housing and other publicly owned housing occupied by public beneficiaries are not subject to possessory interest taxation.

1. The City of Pasadena, writing in opposition to this bill, unless amended, states, in part:

If SB 734 passes as drafted, 60% of the tenants in these units are eligible to receive possessory interest tax bills, which we do not believe is in the best interest of housing policy in California. The City of Pasadena respectfully asks that SB 734 be amended to include language that protects these middle-income households from receiving property tax bills.

1. Committee Staff Comments:
   1. JPAs: Authorized under the JEPA, JPAs often take the form of agreements between two or more cities or counties for purposes that the jurisdictions are jointly pursuing. One such purpose is the issuing of bonds to finance public projects. While JPAs generally issue government bonds to pay for airports and hospitals, several JPAs in the state issue PABs to fund affordable housing, often in conjunction with 4% LIHTCs. The amount of PABs that can be issued in a state is federally capped, but there is no corresponding cap on the amount of government bonds that can be issued by JPAs.
   2. Possessory interest: A possessory interest is a private interest held in public property and constitutes that portion of a public property which is exclusively, independently, and durably vested in a private entity. The California Constitution provides that property of the state and of local governments are not taxable. However, a possessory interest in that state or local government property can be considered taxable. In these instances, the portion of the property's value that can be attributed to benefit a private entity is taxed. This case is often referred to as a "taxable possessory interest."
   3. JPAs and housing: Three JPAs in the state are currently engaged in developing or acquiring and rehabilitating middle-income housing: the California Community Housing Agency, the California Municipal Finance Authority, and the California Statewide Communities Development Authority. There are additional numerous regional JPAs that have implemented this model. In essence, this model generally starts with a "project administrator," often a private real estate developer, who identifies a multi-family residential property for purchase. The project administrator then approaches the local jurisdiction where the property is cited. If the jurisdiction is interested in pursuing the JPA-financed property, the city council or board of supervisors must vote to form the JPA and enter a contract detailing the powers of the JPA. Subsequently, the project administrator assembles financing, prepares acquisition of the property, and manages the property. The JPA issues the bond financing, purchases the property, and applies affordability restrictions on the units. After a pre-determined period, the local jurisdiction can choose to purchase any outstanding debt on the property and take ownership, allowing the city to realize any appreciated equity in the property. The direct impact to the jurisdiction is a loss of property tax revenue as these JPAs have typically been considered tax-exempt government properties, pursuant to the state Constitution.
   4. Critiques of this model: While the JPA-financed housing model may seem to address a deepening housing affordability crisis in the state, there are concerns regarding whether the benefits this model provides are commensurate with the cost of forgone property tax revenue. A brief published in June 2022 by the Terner Center for Housing at UC Berkeley, "The ABCs of JPAs", outlines five overarching concerns regarding this model. First, these developments may not have affordability restrictions that are sufficiently stringent. The vast majority of affordable housing restricts rents to 30% of the income of the tenant as this is generally considered the threshold for a household to be "rent burdened." Initial JPA-properties applied rents that were 35% of a household's income. Second, the fees imposed by administrators and financing managers may be exorbitant. A host of parties are involved in the issuing of bonds and property management, which can cumulatively charge fees ranging up to $5 million. Additionally, this financing structure includes other types of higher interest financing with riskier position. Third, underwriting may be overly aggressive, with some loan-to-value ratios exceeding 100% and debt service coverage ratios equal to or below 1. Given the regulatory agreements governing the affordability restrictions of these projects are often lifted if a foreclosure occurs, greater oversight of these transactions may be required. Fourth, the potential for JPAs to compete on purchasing the same property may be occurring, which artificially inflates the already high cost of financing property acquisition. Finally, there appears to be a lack of a strong affordability enforcement mechanism to ensure ongoing compliance.
   5. Opinion letters from the State BOE: Committee staff is aware of three letters authored by the BOE's counsel providing guidance to counties on the assessment of possessory interests in JPAs: first in 1999, again in 2010, and the last in 2022. In all three instances, the BOE held that low-income units in JPAs should be exempt. The most recent letter, which addressed specifically the JPA model focused on middle-income housing, validated this position. The letter noted that leasehold units in government owned property generally do constitute a taxable possessory interest, but that low-income units should not be taxed.
   6. BOE Considerations: The BOE raises three considerations in its analysis of this bill. The first is regarding the treatment of a possessory interest by the administrator of a JPA. Existing law provides that private contractors managing certain military housing do not constitute an independent possession or use that would trigger a taxable possessory interest in that property. To benefit from this treatment, however, a private contractor and the property must meet a series of requirements, including that the private contractor not be given the right and ability to exercise any significant authority and control over the management of the military housing, as specified, and that the private contractor is allowed only a predetermined profit or fee for constructing the military housing. These requirements significantly restrict the actions a private contractor may take regarding the property.

The second is regarding the treatment of tenancies that do not qualify as low income. If those non-qualifying units are considered as having a possessory interest and therefore subject to property taxation, a county assessor would be responsible for issuing property tax bills to tenants of those units, which would require an assessor to track those units and create additional workload. Tenants may also receive unexpected bills.

The final is regarding the lack of a provision to backfill local jurisdictions for lost property tax revenues resulting from this bill.

• 1. This bill: As currently drafted, this bill codifies the existing BOE position that a residential unit rented by a tenant in a JPA who would otherwise qualify under the welfare exemption is not assessed a property tax because of that tenant's possessory interest in the unit. While this bill does codify the BOE's existing interpretation, tenants that do not qualify under this bill, but have not previously been subject to property taxation, could be assessed a property tax for their units as the BOE notes^[1]. On the other hand, providing the same exemption for both low-income units and middle-income units would essentially dilute the exemption as there would be no incentive for a developer to build or rehabilitate low-income units rather than middle-income units. This bill would only exempt low-income units from a possessory interest in these JPAs.
  2. Proposition 98: In 1988, voters established a minimum funding requirement for schools and community colleges, commonly referred to as the "minimum guarantee", by approving Proposition 98. The minimum guarantee is calculated through a series of formulas stipulated in the Constitution, and encompasses state General Fund (GF) and local property tax revenues. In any given year, the inputs used to calculate the minimum guarantee may vary. The state determines which inputs to use based on the formulas in the Constitution or "tests". Depending on certain inputs, such as GF revenue and changes in student attendance, the state determines the test that will be operative, and that test sets the minimum guarantee for that year. Thus, the amount of property tax revenue that schools and community colleges receive impacts the minimum guarantee calculation. The extent of that impact, however, varies based on the type of test used. In Test 1 years, the minimum guarantee equals a fixed percentage of state GF revenues, plus any amount of property tax revenues that the schools and community colleges receive in that year. Fluctuations in property tax revenue have a dollar-for-dollar effect on school funding in Test 1 years. In years where the other tests are operative, changes in property tax revenues do not affect the minimum guarantee or overall school funding, but do impact the amount of GF the state must allocate to meet the guarantee^[2]. Thus, depending on the year, reductions in property tax revenues resulting from this bill may require backfill by the state.

1. Narrowing of the property tax base: Residential housing is a core component of the property tax base. Property tax revenues of over $80 billion per year are a primary source of local government funding. A sound property tax structure ensures that the tax base is broad, and that property owners within a community contribute to funding government services since, in turn, every person benefits from those government services. In recent years, to address the housing affordability crisis, legislation has been enacted to limit, exempt, and prohibit certain affordable housing related-property tax revenue.
2. 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 increased financial burdens and costs on governments. 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 affordable rental 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.
3. Related legislation:
   1. AB 1553 (Lowenthal) provides that no possessory interest exists in a unit that is occupied by a "public beneficiary" that has income up to 120% of the AMI and that is part of a "publicly owned housing project." AB 1553 was never heard by this Committee.
   2. SB 320 (Skinner) is identical to AB 1553 (Lowenthal) and was never heard by the Senate Committee on Governance and Finance.
4. Prior legislation: AB 1850 (Ward), of the 2021-22 Legislative Session, would have established a statewide enforcement mechanism for these types of JPAs and specify the terms of their construction, among other provisions. AB 1850 failed passage out of the Senate Committee on Governance and Finance.

REGISTERED SUPPORT / OPPOSITION:

Support

California Apartment Association

California State Board of Equalization

Opposition

City of Pasadena

Analysis Prepared by: Harrison Bowlby / REV. & TAX. / (916) 319-2098

1. Units subject to an assessment would have incomes in excess of 80% of the AMI. ↑

2. LAO, Excess ERAF: A Review of the Calculations Affecting School Funding (2020) <https://lao.ca.gov/Publications/Report/4193> accessed March 2023. ↑

 THIRD READING  

Bill No: SB 734

Author: Rubio (D)

Amended: 3/21/23

Vote: 21- Urgency

SENATE GOVERNANCE & FIN. COMMITTEE: 7-0, 5/3/23

AYES: Caballero, Seyarto, Dahle, Durazo, Glazer, Skinner, Wiener

NO VOTE RECORDED: Blakespear

SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/18/23

AYES: Portantino, Jones, Ashby, Bradford, Seyarto, Wahab, Wiener

SUBJECT: Property tax: possessory interests

SOURCE: Author

DIGEST:

This bill states that for purposes of the possessory interest tax, there is no independent possession or use of land or improvements if that possession or use is a tenancy in a residential unit of a publicly owned housing project by a low-income household rented at affordable rents.

ANALYSIS:

Existing law:

1. Enacts the Joint Exercise of Powers Act, which allows two or more public agencies to use their powers in common if they sign a joint powers agreement.
2. Allows credits against the Personal Income Tax, Corporation Tax, and Gross Premiums Tax to subsidize investors who provide project capital to affordable rental housing projects, known as state Low-Income Housing Tax Credits (LIHTCs).
3. Provides that all property is taxable unless explicitly exempted by the Constitution or federal law (California Constitution, Article XIII, Section One), but generally exempts property owned by the State or property owned by a local government (California Constitution, Article XIII, Section Three).
4. Defines a “possessory interest” to include the possession of, claim to, or right to the possession of land or improvements that is independent, durable, and exclusive of rights held by others in the property, except when coupled with ownership of the land or improvements in the same person.
5. Defines “independent,” “exclusive,” and “durable” for purposes of taxing possessory interests on public land.

This bill:

1. States that for purposes of the possessory interest tax, there is no independent possession or use of land or improvements if that possession or use is a tenancy in a residential unit of a publicly owned housing project by a low-income household rented at affordable rents.
2. Defines “low-income household” and “affordable rents” by reference to the Health and Safety Code.

Background

JPA model for middle-income housing. In addition to traditional bonding approaches, JPAs have recently begun to partner with private entities to purchase existing multi-family housing. One of the biggest challenges to increasing the supply of affordable housing is the shortage of available public subsidies, and this new model has enabled developers to acquire and preserve units’ affordability to middle-income households.

There are currently a handful of JPAs that use this model. They include the California Community Housing Agency (CalCHA), the California Municipal Finance Agency (CMFA), and the California Statewide Communities Development Authority (CSCDA) Community Improvement Authority. Some regional entities have also begun to emerge, including the Housing Endowment and Regional Trust of San Mateo County. The governance structure of these JPAs vary. For example, CalCHA’s board is the Kings County Board of Supervisors, but the JPA has member cities throughout the state where CalCHA can finance projects.

According to recent reports, since 2019, over 40 JPA acquisition deals totaling nearly 14,000 units have been approved in California. The process works as follows:

• A private entity, or project administrator, identifies a property, places a deposit on the property and then approaches a JPA about purchasing the property;
• If the project is located in a city or county that is not a member of the JPA, the city or county must join the JPA and approve a public benefit agreement outlining how the financing will work in their jurisdiction. In some cases the project benefit agreement includes host fees charged to the JPA to compensate the public entity for foregone property tax revenue;
• The project administrator facilitates the acquisition of the property, assembles the financing and the development plan, and oversees the long-term asset and property management;
• The JPA issues bonds secured by the rents the property receives and purchases the property. The JPA places regulatory restrictions on the resulting units to make them affordable over an extended period. These regulatory restrictions generally require the project administrator to make their best effort to house families that meet certain income thresholds in these units;
• The project administrator receives revenue in the form of acquisition fees, subordinate bond proceeds, and other compensation;
• After 15 years, unless otherwise specified in the public benefit agreement, the city or county has the option to pay off the project’s outstanding debt and take ownership of the property; and
• The city or county is the beneficiary of equity developed during the JPA’s ownership. After bonds are repaid, it can decide to sell the property, continue to maintain the property, or transfer it to a third party.

Possessory Interest Taxes. While real property owned by state or local governments is not subject to property tax, a private leasehold or other private interest in such property may be taxable as a “possessory interest.” Examples of taxable possessory interests include concession agreements at public facilities, rental of government property at airports or convention centers, leasehold interests in mountain cabins on public land, and the rental of governmental property.

Possessory interest taxes backstop the property tax when taxpayers enjoy use of public property for his or her economic benefit, ensuring that these taxpayers are not unfairly advantaged relative to taxpayers who own their own property. The tax applies to the interest, not the land. Possessory interest taxpayers may end up paying less than their property tax paying counterparts because the base of the possessory interest tax is the limited rights the private user enjoys on public land, and are often considered less valuable than the exclusive rights property taxpayers enjoy on their own land. Assessors value interest based on income derived, comparable sales, or by subtracting accrued depreciation from replacement cost.

Asserting Possessory Interests on JPA-owned housing. The recent evolution of the JPA housing model raises questions regarding whether a taxable possessory interest exists for these projects, and if so, whether assessors should assert a possessory interest on the project administrators or tenants. At the Board of Equalization’s (BOE’s) February 22, 2023, hearing, Orange County Assessor Claude Parrish stated that he has issued possessory interest assessments to operators of nine of ten JPA-owned properties in Orange County based on the net income each derived from the property. At the meeting, Parrish stated that it was impractical to send assessments to tenants because the limited term of their lease means that any taxable possessory interest is minimal. San Diego County Assessor Jordan Marks indicated he has sent similar assessments to administrators of JPA-owned properties in that county as well. Other counties may soon send similar assessments.

First in 1995, again in 2010, and once more last year, the BOE has opined that assessors should not assert taxable possessory interests on low-income persons residing in publicly-owned housing, noting that courts have generally not found taxable interests in the leaseholds of residents in property that is used for low-income housing and other exempt purposes. BOE states that asserting taxes on these households would defeat the purpose to provide affordable low-cost housing to the same beneficiaries who qualify owners for the welfare exemption for affordable rental housing. BOE’s opinion does not mention any other tenants other than low-income ones, and its opinion last year additionally stated that its guidance was applicable only to possessory interests owned by low-income residents of low-cost housing, as defined by California law meeting any rental restrictions required under California law, and neither it nor any of its other guidance may be read to extend to all types of affordable housing.

While no assessor has asserted a taxable possessory interest on a low-income tenant in a JPA -owned rental housing property, BOE’s opinion last year states that it is uncertain a court would uphold its guidance because of a lack of a clear statutory exemption granted by the Legislature. SB 734 codifies this opinion.

Related/Prior Legislation

AB 1850 (Ward, 2022) would have prohibited public entities from acquiring unrestricted multifamily housing unless the development meets specified conditions. The measure died in the Senate Governance and Finance Committee.

AB 1178 (Torres, 2010) (SB 734 is largely identical to an earlier version of AB 1178), introduced in response to the Los Angeles County Assessor asserting a possessory interest tax on tenants of low-income housing. The measure was amended to a different subject matter.

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

According to the Senate Appropriations Committee:

• The Board of Equalization (BOE) estimates that, relative to current law, this bill could result in annual property tax revenue losses of $3.1 million. 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).
• BOE would incur first-year costs of $48,100, and $20,000 annually thereafter, to implement its provisions of the bill (General Fund). Workload drivers would include reviewing Letters To Assessors, conducting interested parties meetings, and legal reviews.
• By adding to the duties of local tax officials, this bill creates 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). The magnitude is unknown.

SUPPORT: (Verified 5/19/23)

California Apartment Association
State Board of Equalization

OPPOSITION: (Verified 5/19/23)

None received

ARGUMENTS IN SUPPORT: According to the author, “We have an affordable housing crisis across the state. The high cost of housing and the low production of units affects all areas of California, even formerly affordable communities. It will take multiple solutions working together to meaningfully address this crisis. One solution is supporting public housing projects owned and operated by local government entities that offer housing units at affordable rents to low-income tenants. These units may be offered at affordable rents because the California Constitution exempts government-owned property from property taxes. However, existing law is ambiguous whether that exemption applies when there is a tenant-interest in government-owned property, such as when a renter lives in a housing unit within a public housing project. The California Board of Equalization has issued numerous legal opinions stating that despite this ambiguity, the imposition of a possessory interest tax on low-income tenants is contrary to the state’s interest in providing affordable public housing. The Board of Equalization has provided consistent advice to county assessors that these low-income tenants residing in public housing projects should not be considered to hold a taxable possessory interest. SB 734 codifies this long-standing legal opinion by the Board of Equalization to provide statutory clarity so that public housing projects owned and operated by local governments can continue to be part of the solution in addressing California’s housing crisis.”

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

5/20/23 13:05:40

**** END ****

SENATE COMMITTEE ON

Senator Anthony Portantino, Chair

2023 - 2024 Regular Session

SB 734 (Rubio) - Property tax: possessory interests

Bill Summary:

SB 734 would codify application of possessory interest taxes on low-income households in publicly-owned housing.

Fiscal Impact:

• The Board of Equalization (BOE) estimates that, relative to current law, this bill could result in annual property tax revenue losses of $3.1 million. 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).
• BOE would incur first-year costs of $48,100, and $20,000 annually thereafter, to implement its provisions of the bill (General Fund). Workload drivers would include reviewing Letters To Assessors, conducting interested parties meetings, and legal reviews.
• By adding to the duties of local tax officials, this bill creates 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). The magnitude is unknown.

Background:

Under the Constitution, all property is taxable unless explicitly exempted. Such exemptions include property owned by the State itself or a local government; however, a private leasehold or other private interest in such property may be taxable as a “possessory interest.” Under current law, a taxable possessory interest in real property exists when a private party has the independent, exclusive, and durable right to the beneficial use of real property owned by a public entity. Examples include concession agreements at public facilities, rental of government property at airports or convention centers, leasehold interests in mountain cabins on public land, and the rental of governmental property. Possessory interest taxes backstop the property tax when taxpayers enjoy use of public property for his or her economic benefit, ensuring that these taxpayers are not unfairly advantaged relative to taxpayers who own their own property.

Joint Powers Agreements (JPA) housing arrangements have produced uncertainty regarding (1) whether a taxable possessory interest exists for these projects, and if so, (2) whether assessors should assert a possessory interest on the project administrators, or tenants. At BOE’s February 22, 2023, hearing, two assessors indicated that they had issued possessory interest assessments to operators of nine of certain JPA-owned properties in Orange County and San Diego County.

Three times, including in 2022, BOE has opined that assessors should not assert taxable possessory interests on low-income persons residing in publicly-owned housing. BOE states that asserting taxes on these households would defeat the purpose to provide affordable low-cost housing to the same beneficiaries who qualify owners for the welfare exemption for affordable rental housing. BOE’s opinion does not mention any other tenants other than low-income ones, and its opinion last year additionally stated that its guidance was applicable only to possessory interests owned by low-income residents of low-cost housing, as defined by California law meeting any rental restrictions required under California law, and neither it nor any of its other guidance may be read to extend to all types of affordable housing.

No county assessor has yet asserted a taxable possessory interest on a low-income tenant in a JPA -owned rental housing property.

Proposed Law:

This bill would provide that, for purposes of the possessory interest tax, there is no independent possession or use of land or improvements if that possession or use is a tenancy in a residential unit of a publicly owned housing project by a low-income household (as defined) rented at affordable rents (also as defined).

Staff Comments:

Using data from the California Statewide Communities Development Authority (CSCDA), BOE determined that more than 7,700 units have been acquired and converted for low- and middle-income tenants. BOE estimates that the typical possessory interest value totals $40,000. Under these figures, and assuming all of them were subject to tax by counties assessors absent the bill, then the total exemption would be $308 million annually, resulting (at the 1 percent basic property tax rate) in annual revenue losses of $3.1 million. BOE notes that its revenue estimate may be understated because (1) it does not reflect potential future developments, and (2) the 7,700 units it was able to initially identify may understate the current figure.

-- END --

SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Anna M. Caballero, Chair

2023 - 2024 Regular

Property tax: possessory interests

Codifies application of possessory interest taxes on low-income households in publicly-owned housing.

Background

Joint exercise of powers. The Joint Exercise of Powers Act (Act) allows two or more public agencies to use their powers in common if they sign a joint powers agreement. Sometimes, an agreement creates a new, separate government called a joint powers agency or joint powers authority (JPA). Agencies that can exercise joint powers include federal agencies, state departments, counties, cities, special districts, school districts, federally recognized Indian tribes, and even other JPAs. The Act allows a JPA to specify its own mission, structure, governing board, each member’s financial obligations, and provisions for members to enter and exit the JPA, among other items. This structure allows multiple agencies to collaborate on addressing public needs, such as financing public infrastructure, forming insurance pools, and enhancing planning and regulation.

Traditional affordable housing finance model. Current state law allows credits against the Personal Income Tax, Corporation Tax, and Gross Premiums Tax to subsidize investors who provide project capital to affordable rental housing projects. State Low-Income Housing Tax Credits (LIHTCs) are calculated in partial conformity with federal LIHTCs, and complement federal credits in the hopes of providing capital necessary to pay costs to construct affordable housing. Federal tax credits can equal either 70% of the qualified basis—generally equal to the costs of construction—for projects that are not federally subsidized (known as 9% credits), or 30% for those that are federally subsidized (known as 4% credits). Taxpayers claim the credit over a variable period after the building is placed in service. Tax-exempt bonds are generally the source of any qualifying federal subsidy.

JPA model for middle-income housing. In addition to traditional bonding approaches, JPAs have recently begun to partner with private entities to purchase existing multi-family housing. One of the biggest challenges to increasing the supply of affordable housing is the shortage of available public subsidies, and this new model has enabled developers to acquire and preserve units’ affordability to middle-income households.

There are currently a handful of JPAs that use this model. They include the California Community Housing Agency (CalCHA), the California Municipal Finance Agency (CMFA), and the California Statewide Communities Development Authority (CSCDA) Community Improvement Authority. Some regional entities have also begun to emerge, including the Housing Endowment and Regional Trust of San Mateo County. The governance structure of these JPAs vary. For example, CalCHA’s board is the Kings County Board of Supervisors, but the JPA has member cities throughout the state where CalCHA can finance projects.

According to recent reports, since 2019, over 40 JPA acquisition deals totaling nearly 14,000 units have been approved in California. The process works as follows:

• A private entity, or project administrator, identifies a property, places a deposit on the property and then approaches a JPA about purchasing the property;
• If the project is located in a city or county that is not a member of the JPA, the city or county must join the JPA and approve a public benefit agreement outlining how the financing will work in their jurisdiction. In some cases the project benefit agreement includes host fees charged to the JPA to compensate the public entity for foregone property tax revenue;
• The project administrator facilitates the acquisition of the property, assembles the financing and the development plan, and oversees the long-term asset and property management;
• The JPA issues bonds secured by the rents the property receives and purchases the property. The JPA places regulatory restrictions on the resulting units to make them affordable over an extended period. These regulatory restrictions generally require the project administrator to make their best effort to house families that meet certain income thresholds in these units;
• The project administrator receives revenue in the form of acquisition fees, subordinate bond proceeds, and other compensation;
• After 15 years, unless otherwise specified in the public benefit agreement, the city or county has the option to pay off the project’s outstanding debt and take ownership of the property; and
• The city or county is the beneficiary of equity developed during the JPA’s ownership. After bonds are repaid, it can decide to sell the property, continue to maintain the property, or transfer it to a third party.

Property taxation. The California Constitution provides that all property is taxable unless explicitly exempted by the Constitution or federal law, but generally exempts property owned by the State or property owned by a local government. While real property owned by state or local governments is not subject to property tax, a private leasehold or other private interest in such property may be taxable as a “possessory interest.” Under state law, a taxable possessory interest in real property exists when a private party has the independent, exclusive, and durable right to the beneficial use of real property owned by a public entity. Examples of taxable possessory interests include concession agreements at public facilities, rental of government property at airports or convention centers, leasehold interests in mountain cabins on public land, and the rental of governmental property.

Possessory interest taxes backstop the property tax when taxpayers enjoy use of public property for his or her economic benefit, ensuring that these taxpayers are not unfairly advantaged relative to taxpayers who own their own property. The tax applies to the interest, not the land. Possessory interest taxpayers may end up paying less than their property tax paying counterparts because the base of the possessory interest tax is the limited rights the private user enjoys on public land, and are often considered less valuable than the exclusive rights property taxpayers enjoy on their own land. Assessors value interest based on income derived, comparable sales, or by subtracting accrued depreciation from replacement cost.

The recent evolution of the JPA housing model raises questions regarding whether a taxable possessory interest exists for these projects, and if so, whether assessors should assert a possessory interest on the project administrators or tenants. At the Board of Equalization’s (BOE’s) February 22, 2023, hearing, Orange County Assessor Claude Parrish stated that he has issued possessory interest assessments to operators of nine of ten JPA-owned properties in Orange County based on the net income each derived from the property. At the meeting, Parrish stated that it was impractical to send assessments to tenants because the limited term of their lease means that any taxable possessory interest is minimal. San Diego County Assessor Jordan Marks indicated he has sent similar assessments to administrators of JPA-owned properties in that county as well. Other counties may soon send similar assessments.

First in 1995, again in 2010, and once more last year, the BOE has opined that assessors should not assert taxable possessory interests on low-income persons residing in publicly-owned housing, noting that courts have generally not found taxable interests in the leaseholds of residents in property that is used for low-income housing and other exempt purposes. BOE states that asserting taxes on these households would defeat the purpose to provide affordable low-cost housing to the same beneficiaries who qualify owners for the welfare exemption for affordable rental housing. BOE’s opinion does not mention any other tenants other than low-income ones, and its opinion last year additionally stated that its guidance was applicable only to possessory interests owned by low-income residents of low-cost housing, as defined by California law meeting any rental restrictions required under California law, and neither it nor any of its other guidance may be read to extend to all types of affordable housing.

While no assessor has asserted a taxable possessory interest on a low-income tenant in a JPA -owned rental housing property, BOE’s opinion last year states that it is uncertain a court would uphold its guidance because of a lack of a clear statutory exemption granted by the Legislature. The author wants to codify the BOE’s guidance.

Proposed Law

Senate Bill 734 states that for purposes of the possessory interest tax, there is no independent possession or use of land or improvements if that possession or use is a tenancy in a residential unit of a publicly owned housing project by a low-income household rented at affordable rents. The bill defines “low-income household” and “affordable rents” by reference to the Health and Safety Code.

State Revenue Impact

Pending.

Comments

1. Purpose of the bill. According to the author, “We have an affordable housing crisis across the state. The high cost of housing and the low production of units affects all areas of California, even formerly affordable communities. It will take multiple solutions working together to meaningfully address this crisis. One solution is supporting public housing projects owned and operated by local government entities that offer housing units at affordable rents to low-income tenants. These units may be offered at affordable rents because the California Constitution exempts government-owned property from property taxes. However, existing law is ambiguous whether that exemption applies when there is a tenant-interest in government-owned property, such as when a renter lives in a housing unit within a public housing project. The California Board of Equalization has issued numerous legal opinions stating that despite this ambiguity, the imposition of a possessory interest tax on low-income tenants is contrary to the state’s interest in providing affordable public housing. The Board of Equalization has provided consistent advice to county assessors that these low-income tenants residing in public housing projects should not be considered to hold a taxable possessory interest. SB 734 codifies this long-standing legal opinion by the Board of Equalization to provide statutory clarity so that public housing projects owned and operated by local governments can continue to be part of the solution in addressing California’s housing crisis.”

2. Trouble ahead. Assessors assert and tax possessory interests all the time, but the recent evolution of the JPA housing model poses a conundrum. When a public agency purchases a privately owned building, it is removed from the secured property tax roll, resulting in property tax revenue losses to cities, counties, and special districts. Agencies losing revenue contact assessors to inquire regarding the cause. Assessors agree that a taxable possessory interest exists in JPA-owned housing, but don’t yet have a consensus regarding whether to send bills to administrators or tenants, having thus far only sent assessments to administrators in Orange and San Diego County. Administrators dispute the existence of a possessory interest, and argue that assessors’ asserting one frustrates state housing goals that they serve by operating housing with rent-restricted units affordable to persons of moderate income. While courts may weigh in if administrators appeal the assessments, SB 734 simply provides statutory certainty for low-income tenants by codifying BOE’s long-standing guidance.

3. Who will tell the Assessor? Assessors have fairly broad powers to compel information from property owners to ensure they are assessing value correctly. Specifically, every person must make available for examination information or records regarding their property or any other personal property located on premises they own or control, including rental income, and other data relevant to the determination of an estimate of value. Assessors can also use the Public Records Act to discover more about publicly-owned housing. Based on the assessments in Orange and San Diego Counties, assessors have income information necessary to issue an assessment on the operator of JPA-owned housing. Collecting information to determine whether a tenant has a taxable possessory interest will be difficult, and valuing the interest doubly so. Unlike the welfare exemption for property tax for affordable rental housing, administrators are not currently required to furnish information about the incomes and lease terms of their tenants. Without that information, assessors cannot easily apply an exemption or determine the value of an interest. Additionally, valuing the possessory interest of a tenant, where rents and lease terms can vary from unit to unit, will be difficult because any tax applies to their specific interest, not the value of land.

4. Related legislation. SB 734 is largely identical to an earlier version of AB 1178 (Torres, 2010), introduced in response to the Los Angeles County Assessor asserting a possessory interest tax on tenants of low-income housing. The measure was amended to a different subject matter.

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 734 reduces the scope of the possessory interest tax, Legislative Counsel states 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. .

Support and Opposition

(4/28/23)

Support: None received.

Opposition: None received.

-- END --