The Legislature is attempting to deal with the unintended consequences of a decision it made in 1987 to exempt low-income housing developments operated by non-profits from property taxes. That decision has led recently to many cities seeking to recoup the lost revenue through PILOT (payment in lieu of taxes) agreements between cities and housing developers. This has created a dilemma between the housing developers, tax officials, and local governments as to whether or not low-income housing is beneficial enough to our society to allow it to maintain this tax exemption, and if it is exempt, who pays for its cost to the community.
Low-income housing in the 1960s and ‘70s was a federal government program. Federal agencies funded local housing authorities, and required local governments to provide tax exemption for the land, on which were built huge housing projects run by government bureaucrats. That model changed in the 1980’s, when the federal government created the Low Income Housing Tax Credit, which led to the creation of private, non-profit, housing developers who built and owned low-income housing projects.
This new model was based on the developer holding down costs of operating the project in order to provide rents that are affordable to low-income residents. One of those costs was the property taxes paid to the local government. The 1987 legislation (AB 2144 by Assemblyman Bill Filante) exempted the developments from property taxes, similar to property owned by churches, charities, and non-profit hospitals. Commonly called the “welfare exemption,” low-income housing developers and advocates contend that their housing projects provided similar benefits to the public.
In order to ensure there were public benefits adequate to justify the tax exemption, a later law required non-profit housing developers to certify that their property tax savings were being used to “maintain the affordability of, or reduce rents otherwise necessary for the units occupied by lower income households.”
Low-income housing is not an easy sell in most communities in California. Many residents attribute high crime rates, overcrowded schools, and decline in surrounding property value to low-income housing projects.
In an effort to make the developments palatable to local residents, and to maintain their local revenue base, cities try to recoup costs through these PILOT agreements. Ostensibly, the agreements fund police, fire, roads and other development costs to the community.
In 2013, the Ventura County Assessor revoked the welfare exemption for several non-profit housing developments in that county because in his opinion, the developers were using the savings from their property tax exemption to pay the local city in a PILOT agreement, and not to lower the rent or provide affordability to the residents of the project. The Assessor believes the PILOT agreement abrogates the property tax exemption and has billed the developers for back property taxes that the developers believed they did not have to pay. This action obviously places the housing developments in jeopardy of foreclosure if they cannot pay these back taxes.
The State Board of Equalization (BOE) has recently provided an opposite opinion. In an update to a ten year-old legal opinion that found one PILOT agreement unconstitutional, the BOE has stated that as long as the low-income housing developer “has a reasonable belief that its PILOT payments will be used to support or benefit the low-income housing development, in our view, such developer can make the (exemption) certification in good faith.”
Two bills have been introduced in the Legislature relating to these PILOT agreements:
AB 1760 (Chau) creates a presumption that payments made under a payment in lieu of taxes (PILOTS) agreement entered into prior to January 1, 2015 were used to support the affordability of the low income housing development, allowing the development to avoid paying any back property taxes and to continue receiving an exemption from paying property taxes. Local governments, however, would not be permitted to enter into any future PILOT agreements after January 1, 2015.
SB 1760 (Jackson) would void any existing PILOT agreements as contrary to the welfare exemption provided for in the California Constitution and in statute, and prohibit future PILOT agreements. It would also prevent County Assessors from charging back taxes on projects that have previously made PILOT payments.
Both bills take the side of low-income housing advocates and would prohibit PILOT agreements going forward. Both would prevent county assessors from charging back taxes on any affordable housing development covered by a previous agreement. If either bill becomes law, local governments will lose the revenues they are receiving under PILOT agreements, and housing developer’s tax exemptions will be protected. This would conceivably encourage future development of low-income housing -- but prevent cities and counties from recovering the costs of such projects.
Cities and counties may decide to oppose these bills, because although the welfare exemption for affordable housing is a miniscule part of the $122 billion total exemption statewide, no government agency likes to lose a revenue source.
Legislators will be asked to decide what is more important, the ability of local government to receive payments in lieu of taxes that would have been paid from for profit developments, or continued encouragement of non-profit developers providing housing for low and moderate income Californians through a property tax exemption.
For more information on this report or other Housing issues, contact Doug Yoakam, Senate Republican Office of Policy at 916/651-1501.