BILL ANALYSIS Ó
AB 668
Page 1
Date of Hearing: April 27, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 668
(Gomez) - As Amended March 26, 2015
Majority vote. Fiscal committee.
SUBJECT: Property taxation: assessment: affordable housing
SUMMARY: Requires the county assessor to consider, when valuing
real property for property taxation purposes, a recorded
contract that restricts the use of the land for at least 30
years to affordable housing, as specified, with a nonprofit
corporation whose primary purpose is the advancement of
affordable housing, as specified. Specifically, this bill:
1)Requires the county assessor, when valuing real property for
property taxation purposes, to consider a recorded contract
with a nonprofit corporation.
2)Provides that the recorded contract must restrict the use of
the land for at least 30 years to housing available at
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affordable housing cost or affordable rent, as defined under
the Zenovich-Moscone-Chacon Housing and Home Finance Act.
3)Provides that the recorded contract must be with a nonprofit
corporation, organized pursuant to Internal Revenue Code (IRC)
Section 501(c)(3), that has a primary purpose of advancing
affordable housing and provides funding or land for affordable
housing.
EXISTING LAW:
1)Limits the maximum amount of any ad valorem tax on real
property at 1% of full cash value (California Constitution
Section One of Article XIII).
2)Requires property to be reassessed to current fair market
value whenever it is purchased, newly constructed, or when
ownership changes, with specified exceptions, and provides a
rebuttable presumption that the fair market value is the
purchase price.
3)Defines "purchase price" as the total consideration provided
by the purchaser or on the purchaser's behalf, valued in
money, whether paid in money or otherwise.
4)Requires county assessors, when determining assessed
valuation, to consider the effect on property of the value of
any enforceable restrictions against the use of the land, such
as zoning, easements, environmental restrictions, and recorded
contracts with government agencies [Revenue and Taxation Code
(R&TC) Section 402.1].
FISCAL EFFECT: According to the Board of Equalization (BOE)
"[i]t is not possible to determine the revenue impact of this
measure with any degree of certainty due to the number of
variables. Each assessor must exercise his or her judgment to
determine whether the value of the property at that particular
location is equal to, or more or less than, the purchase price
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as a result of the impact of the enforceable restriction placed
by the nonprofit organization."
COMMENTS:
1)Author's Statement : The author has provided the following
statement in support of this bill:
It is in our best interest as a State to promote affordable
housing and create opportunities for affordable
homeownership. AB 668 will allow a county assessor to
consider certain affordable housing deed restrictions when
valuing a property for property tax purposes. Currently,
there is a wide variance between jurisdictions with regard
to assessing the value of affordable homes. While some
assessors consider the recorded contracts and deed
restrictions between a low-income homeowner and a
non-profit organization, others choose not to and instead,
assess these homes at the "fair market value". This is
especially burdensome for a low-income household that is
restricted from spending more than 30 percent of its income
on its monthly mortgage, which includes property taxes. AB
668 provides a simple remedy to this discrepancy and
creates equity for low-income homeowners by encouraging
consistency among local property tax assessors. Under my
bill, assessors would consider affordability restrictions
of at least 30 years when determining the value of a house
for property tax purposes. I will continue working closely
with the California Assessors' Association and others to
address any outstanding concerns with the bill.
2)Arguments in Support : According to California Housing
Consortium, "[a]ffordable housing rental and ownership units
typically have rent restrictions tied to the property for a
minimum of 15 years, with some lasting for 55 years or longer.
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However, under current law, a county assessor does not have
the authority to consider these deed restrictions when valuing
property for property tax purposes. AB 668 would allow a
county assessor to consider a restriction that requires
housing to be available at affordable cost or affordable rent
for at least 30 years when assessing the land."
3)Arguments in Opposition : According to the California
Assessor's Association, "Section 402.1 of the [R&TC] requires
the assessors to take into consideration the effect of
'enforceable governmental' restrictions on a property's full
cash value to substantially reduce the assessed value of the
property. This bill would specifically require a county
assessor to consider a recorded contract with a non-profit
entity that restricts the use of the land for at least 30
years for affordable housing or affordable rent, when valuing
real property for property taxation purposes." The California
Assessor's Association further state that "the meaning of
'enforceable restrictions' is limited to government entities -
and for good reason. Government entities are in the best
position to evaluate the overall benefit to the entire
community relative to the loss in property tax revenue."
4)Background : Habitat for Humanity works with families who
contribute sweat equity to the construction of the home.
Habitat for Humanity attaches a covenant or restrictions
sometimes known as a "silent second mortgage", secured by a
deed of trust that limits any family purchasing the home from
reselling it so that the home remains affordable should the
initially selected family choose to move out. Households that
assume a mortgage from Habitat for Humanity are restricted
from spending more than 30% of their income on their monthly
mortgage, which includes property taxes, insurance, HOA dues,
and deferred maintenance. The family must agree to the
covenant in order to buy the subsidized home. Assessment of
the property at fair market value, without consideration of
the affordability covenant which limits the resale price,
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increases the amount of the property taxes the homeowner must
pay making the home less affordable for lower income families.
5)What is the Problem ? Habitat for Humanity claims that county
assessors do not always take the affordable housing
restrictions within the contract into consideration. In 2015,
the organization surveyed 22 counties and found that
assessment practices varied on homes their affiliates sold.
The organization states that in some areas the assessed value
is based on whether or not the construction involved city or
county funds and in others the value is based on verbal
agreements with the local assessor. According to Habitat for
Humanity, the "variance in local tax policy financially
disadvantages one low-income family purchasing a home in one
area of the state compared to a low-income family in a
neighboring jurisdiction."
6)Do Assessors have Authority to Consider Private Agreements ?
Existing law requires every assessor to assess property
subject to general property taxation at its full value. In
the assessment of land, the assessor must consider the effect
of any enforceable restrictions to which the use of the land
may be subject, such as zoning, easements, environmental
restrictions, and recorded contracts with governmental
agencies. However, "[a]s a general rule, private parties
cannot reduce the taxable value of their property by imposing
private encumbrances upon it; only enforceable government
restrictions under [R&TC] Section 402.1 are recognized as
limiting the full fee simple interest." (Assessor's Handbook
Section 502, ADVANCED APPRAISAL December 1998, Reprinted
January 2015, pg. 6). The inability of private parties to
reduce the taxable value of their property through
self-imposed private encumbrances has long been recognized by
courts. (Carlson v. Assessment Appeals Board, 167 Cal. App.
3d 1004).
In Carlson v. Assessment Appeals Board, Walton entered into a
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written agreement with Standard Realty and Development Company
(Standard Company) for the purchase of a 4.9-acre parcel of
unimproved land. The agreement required Walton to construct a
warehouse of not less than 60,000 square feet on the property
within two years, contract with Western Pacific Railroad for
rail services to the warehouse, and grant an easement to
Western Pacific. If Walton failed to construct the warehouse,
Standard Company had the option to repurchase the land for the
price sold. Walton was not allowed to either assign the
agreement or convey the property without Standard Company's
prior written consent.
The assessor valued the property as a "fee simple
unencumbered" using comparable sales method, but the
assessment appeals board determined that the deed restrictions
adversely affected the value of the property. The Court of
Appeal reversed, holding that the assessment appeals board
unlawfully considered the restrictions placed upon the
property by agreement of the owner and seller. In reaching
this conclusion, the Court of Appeal explained that Walton did
not acquire complete rights of fee ownership because an
interest in the property remained with Standard Company.
Furthermore, having multiple legal interests in property does
not affect the assessment because the assessment is against
the property itself. (Id.) Therefore, the assessor properly
took into consideration the value of the fee simple absolute,
which included the combined interests of Walton and Standard
Company. (Id.)
According to information provided by Habitat for Humanity, in
consideration for receiving a home for less than fair market
value, the family receiving a home must generally agree to the
following conditions: (a) Habitat for Humanity maintains an
option to repurchase the home if the property is leased,
refinanced, encumbered, or transferred; (b) the home shall be
used only for the use of the family along with present and
future children; (c) the family must maintain the home; (d)
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additions or substantial alterations may not be made without
the Habitat for Humanity's consent; and, (e) the home must be
maintained for affordable housing. The restrictions imposed
on land within the "grant deed," without additional
information, appear to be the kinds of private party
encumbrances described within the Assessor's Handbook and in
Carlson v. Assessment Appeals Board.
It is clear that private encumbrances cannot be considered in
the assessment of land. However, R&TC Section 402.1 does
provide for the consideration of recorded government contract
in the assessment of land. Habitat for Humanity, in its
letter of support, has stated that "[i]n some areas, the
assessed value was reduced based on whether or not city or
county funds were involved in the construction." Using city
or county funds for a project, by itself, does not appear to
be a government contract because the restrictions imposed on
the use of land are contained within the grant deed agreed to
between Habitat for Humanity and the family purchasing the
property. It could be that city or county funds are
conditional upon the family's acceptance of the restrictions
held within the grant deed, but additional information would
be required. Finally, Habitat for Humanity explains that in
other areas the assessed value was reduced "based on verbal
agreements with the local assessor, which recognized the
effect of our long-term affordability restrictions upon the
value of the land." There appears to be even less authority
supporting the reduction in assessed value for long term
affordability restrictions recognized by verbal agreements.
Therefore, it is unclear to Committee staff whether assessors
have the authority to consider such private land restrictions
in the valuation of property. As such, authorization in law
may be required.
7)What Does this Bill Do ? This bill requires the county
assessor, when valuing real property, to consider a recorded
contract that restricts the use of the land for at least 30
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years to affordable housing with a nonprofit corporation whose
primary purpose is the advancement of affordable housing. In
essence, this bill requires a county assessor to consider the
private encumbrances created by nonprofit corporations that
advance affordable housing. Such a change in law would allow
private entities to effectively reduce the assessment value
based on self-imposed encumbrances, which could be problematic
for local property tax revenue. To try and limit the
application of the law to legitimate nonprofits providing
affordable housing, the Committee on Housing and Community
Development suggested limiting the application of this bill to
501 (c) 3 nonprofit organizations that have been approved by
the BOE for a welfare exemption for properties intended to be
sold to low-income families who participate in a special
no-interest loan program. However, requiring a nonprofit
organization to receive approval from the BOE for a welfare
exemption does not provide oversight with respect to long-term
restrictions imposed on the property or the price a low-income
family pays for the property, all of which affect the
assessment value. Even if the bill limits the application to
legitimate nonprofits, assessors and local governments are
subject to varying restrictions decided between private
parties.
8)Double referral : This bill was double referred to the
Assembly Committee on Housing and Community Development, which
passed this bill on April 15, 2015, with a vote of 6-0. For
additional discussion of this bill, please refer to the
analysis prepared by the Assembly Committee on Housing and
Community Development.
9)Prior Legislation : SB 449 (Wyland), of the 2013-14
Legislative Session, is identical to this bill. SB 449 was
held on the Senate Appropriations Committee's Suspense File.
REGISTERED SUPPORT / OPPOSITION:
AB 668
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Support
Habitat for Humanity California
California Housing Consortium
Opposition
California Assessors' Association
Analysis Prepared by:Carlos Anguiano / REV. & TAX. / (916)
319-2098