Patrick R. Sabelhaus Joel A. Rice jrice@sabelhauslaw.com Stephen A. Strain Law Offices Of Patrick R. Sabelhaus I 006 Fourth Street, Sixth Floor Sacramento, California 95814 (916) 444-0286 Fax (916) 444-3408 October 10, 2014 Honorable Jerome E. Horton, Chair 1100 Corporate Center Drive, Suite 203 Monterey Park, CA 91754 Sherrie Kinkle P.O. Box 942879 Sacramento, CA 94279-0064 Honorable Michelle Steel, Vice Chair 16715 Von Karman Avenue, Suite 150 Irvine, CA 92606 Honorable Betty T. Yee, Member 455 Golden Gate Avenue, Suite 10500 San Francisco, CA 94102 Senator George Runner (Ret.), Member 500 Capitol Mall, Suite 1750 Sacramento, CA 95814 Honorable John Chiang State Controller 300 Capitol Mall, Suite 1850 Sacramento, CA 95814 Dear Chairman Horton, Honorable Members and Ms. Kinkle:
Pursuant to an email from Ms. Sherri Kinkle dated September 30, 2014, our office has met and conferred with a number of professionals in the area of the Welfare Property Tax Exemption. [Revenue & Taxation Code Sections 214(g), et seq and BOE Rules 136, et seq.. ] The (Kinkle) email and its bullet point section was intended to inform interested parties that due to the passage (Assembly Bil11760 and Senate Bil11203) and their signature into law by the Governor on September 27, 2014, three BOE forms would have to be revised: BOE -267-H, BOE-267-L and BOE-267-L-1. Interested parties were invited to submit comments to the revised forms, accordingly we respectfully submit the following comments to the Board and Ms. Kinkle. The commenting parties are professionals who have worked tirelessly on various issues concerning the Welfare Property Tax Exemption for a number of years and are actual practitioners in the field who are very familiar with the existing forms and the applicable law and procedure. These experts were also interested parties intimately involved in all "PILOT" (payment in lieu of taxes) meetings, debates, public hearings and legislative efforts over the past few years, which if not addressed by all concerned, would have resulted in the loss of homes for many qualified low-income renters throughout California. We would like to thanl< all who participated in a positive resolution of the PILOT crisis including the Board Members and their staff members who put in countless hours. We also applaud your hard and fruitful work at the Board. Forms Discussion In short, (and as will be explained in more detail below), our group of experts urges the Board to (a) not adopt new forms on such short notice, (b) to allow a significant period extending into 2015 if necessary to properly evaluate any new forms and perhaps more importantly any peripheral and ancillary issues which are certain to arise because of the nature and structure of the changes to the proposed forms, and (c) to engage in a public comment period or other Board approved procedures as necessary to make sure the new forms will correctly address only the statutory changes made by Assembly Bill 1760 and Senate Bi111203, but the procedures which must be followed by every applicant for the Welfare Property Tax Exemption (Low Income Housing) and not delve into new and unexplored territory which may in turn, spawn new debates and legal challenges.
Specific Concerns Definition of "Property" "Revenue & Taxation Code 103. "Property" includes all matters and things, real, personal, and mixed, capable of private ownership." BOE' s understanding of the broader meaning of "property" is also clear when one looks at the BOE 267 Form under "IDENTIFICATION OF PROPERTY" there are several sub-categories, including (a) property, (b) real property, (c) land, (d) building or improvements and (e) personal property. (all of which can be tax exempt "property" under the Welfare Property Tax exemption if the proper tests are met). In English v County of Alameda ( 1977 ) 70 Cal. App. 3d 226;(Assessors Handbook, page 16); the court concludes that the Legislature in enacting Revenue & Taxation Code Section 214 intended that the exempt "property" be all the property of whatever nature which was associated with the low-income housing development. "... The conclusion that, by using the word "property" in the statute, the Legislature intended to extend the welfare exemption to the aggregate of property rights is further underlined by the circumstance that pursuant to the cited constitutional provisions the Legislature was empowered to exempt all or any portion of property used exclusively for charitable purposes and owned by the qualifying charitable organizations. By employing the all-inclusive term of "property" without any limitation or restriction in Rev. Code, section 214. the Legislature expressed its intent that the tax exemption accorded charitable organizations should include not only parts or fractions, but the entirety of the property rights." The broader definition of "property" used by the Legislature in Section 214 including subsection (g) is important in this discussion, particularly in light of the new division in BOE Forms 267-L and 267L-1 into sub-categories of property under "improvements" and "land" and the application of those concepts to "shared use" projects with commercial and residential uses.
BOE Forms 267-L and 267-L-1 One area of the proposed forms that "jumped out" at all of our reviewing group was the new "separation" of Sections "C" (Residential) & "D" (Mixed Use)on proposed BOE Forms 267-L & 267L-1. BOE Forms 2671 and 2671-1 "Instructions" under SECTION 4D both state the following in part: "Land ineligible for exemption consists of any shared use of land by both commercial use and qualified residential housing use. For instance, if residential housing units sit atop a commercial use, the land on which the commercial development sits and any shared use of the land, such as a parking area, is not eligible for exemption. Calculation of land available for exemption may be computed by deducting the actual footprint of land in which commercial improvements sit plus any designated parking spaces, common areas, etc. for commercial tenants from the total land area." Our suggested replacement language for the BOE instruction above is the following: "Land ineligible for exemption includes that which is designated for commercial (such as commercial parking spaces) located under a structure which is ground-floor commercial with housing above. The value of the land itself shall be apportioned prorata based on the total square footage of commercial space and commercial ancillary space such as parking spaces, ("Total Commercial") and the total square footage of low-income housing and related facilities. ("Housing") Calculation of land available for exemption may be computed by deducting the Total Commercial from the overall square footage of all building structures including Housing. For example there is 150,000 total square footage of improvements and 40,000 square footage of land, the fraction should have a denominator of 190,000 (150,000 + 40,000) and a numerator of160,000 (135,000 plus 25,000) square feet for an exemption percentage of 84.21% and not 62.50% (see LAND calculation table Page 2, Section D of this form). Our experts are fearful that if the above express BOE language were implemented, one plausible reading of this section would indicate that even though a building was ten (10) stories tall, and nine (9) stories consisted of otherwise qualified low income apartment units (and qualified "Related Facilities" as defined in new Revenue & Taxation Code Section 214(g)(3)(B)), the following would or could be true depending upon one's interpretation:
~ All of the property tax burden for land upon which the entire building is constructed would be borne by the first -floor commercial ownership and/ or the resulting tenants. This is an unworkable situation as the building construction financing would be underwritten with the idea that the commercial space was only 1/10'h of the entire structure and that the lowincome housing would provide the vast majority of debt service for the loans and other obligations secured by the entire project. Conversely, since the security value to the lender includes both the housing and commercial, the income from the commercial space alone could not sustain the entire property tax burden for the land the entire building rests upon. ~ Such a construction as depicted above gives no "land value" to the nine floors of housing above the commercial space. Another way to look at this for analysis purposes is: What if the commercial space was on the second floor and the ground floor was qualified low-income housing? Isn't it more appropriate to value the commercial space on a per square foot basis and apportion the "land value" to the whole building prorata, assigning a portion of the land value to the area devoted to low-income housing and Related Facilities? ~ This discriminates against the most common form of mixed use property, in single buildings, rather than separate commercial and residential buildings on one lot. Because most of the mixed use properties are in urban core areas (where the availability of nearby commercial facilities is of high importance to affordable housing tenants), land costs are at a premium. The only way to finance the added land costs is to build high rise projects with maximum FARs ("floor area ratio"). ~ Therefore one real risk is that by failing to craft a focused definition of "shared use", or similar concept by another name, the BOE may open the door to an overbroad interpretation of the term "shared" use, such that all--- or most of the building which should be exempt---- could lose its exemption. There is nothing in the shared use cases starting with Cedars of Lebanon v County of Los Angeles (1952) 35 Cal. 2d 729, 746, (cited throughout the Assessor's Handbook);... that supports the conclusion land or anything else is shared with the commercial other than the commercial space itself. ~ Section 214(g)(1) now states in pertinent part: "... shall be entitled to a partial exemption equal to that percentage of the value of the property
that is equal to the percentage that the number of units serving lowincome households represents of the total number of residential units in any year which any of the following criteria applies:... " [emphasis added] The statute uses the term "property" not "land" or "improvements" and as mentioned above the best and most reasonable inference is that the property interests which the Legislature intended to exempt from taxes include all types of property interests including land and improvements, as well as other personal property ("Related Facilities"). The proposed BOE 267-L and L-1 forms further confuse this "land and improvements" issue by stating on each of the forms: "Maximum percentage of value of improvements eligible for exemption." (whether under the "land" or "improvements" categories of Section D of the Forms.) [emphasis added] >- The fact that designated parking spaces for the commercial tenants or their customers are non-exempt is understood, but what about driveways into the parking garage and structures which support the parking garage? Aren't these structures "Related Facilities"? >- These and other issues need to be clarified (see below) prior to releasing a new form set. Other Issues/ Forms Section Con page 2 of Forms 267-L and 267-L-1 indicates: "Note: the low-income calculation under section 214(g) is the value of low-income households to the total area of the property." Our experts believe at a minimum that this advisory note should state: "Note: the low-income calculation under section 214(g) is the value of low-income households plus the value of applicable related facilities to the total area of the property." [suggested language and emphasis added]
The above notion is included at the end of the Forms, proposed Section C so the above added language would be consistent: "Maximum percentage of value of property eligible for exemption, including all "related facilities". Section D (1) states: "1. Area in square feet of qualified lower income households and related facilities improvements." Our experts believe the word "improvements" in this sentence is superfluous and does not add anything to the description. Section D(2) states: "2. Total area in square feet of all improvements, including non-qualified residential households and commercial use." Our experts believe the words "non-qualified residential households and" are superfluous as "Total area in square feet of all improvements, including commercial use." Should include all project structures unless the Board wanted to add "and all Related Facilities" just to remain consistent in the fact that the exempt uses include all qualified low-income housing, whether occupied or held exclusively for low-income use (unless occupied by a non-qualified tenant) but also include all applicable "Related Facilities" as defined at Revenue & Taxation Code Section 214(g)(3)(B). Of course if a tenant is over-income that has to be reported and will be demonstrated by the required attached "list" of qualified tenants. None of the above discussion is intended to imply that exemption applications cannot work with a commercial I residential structure, as many such housing I commercial arrangements have been approved under the existing system, (although one clear reason the "Related Facilities" concept was carefully defined in new Revenue & Taxation Code Section 214(g)(3)(B) was that some of the county assessors in the past few years came to the belief that many of the "common areas" such as hallways, community space and even parking lots (or portions of the parking lots unrelated to designated commercial tenant parking) were non-exempt portions of the properties.
In conclusion, as the Board can readily see, the task before it as well as Board Staff and all practitioners in this area is to carefully craft and create revised forms which clearly reflect the law, and apply the law in a manner that suits the vast majority of low-income projects (including projects which combine commercial with low-income housing), with the goal of fortifying both the right to both the (housing) exemption and the extent of the housing exemption vis a vis all "property" of the affected qualified applicants. Thank you very much for the opportunity to meet and confer in this manner and for listening to our carefully considered concerns regarding the adoption of any new forms at this juncture. We have attached "Sabelhaus Drafts" of Forms 267-L and 267L-1 for your review. Law Offices of Patrick R. Sabelhaus