Under existing law, property used for religious, hospital, or charitable purposes by a nonprofit entity is eligible for an exemption from property tax, referred to as the “welfare exemption.” To be eligible for the exemption, property owners must certify that funds, otherwise necessary to pay property taxes, are used to maintain the affordability of, or reduce rents otherwise necessary for units occupied by lower income households.
As a result of losing property taxes from these housing developments, some jurisdictions have entered into agreements with affordable housing developers to provide funding for services they will provide as a result of the development. These funding arrangements are referred to as Payments In Lieu of Property Taxes (PILOT). In response to cities utilizing PILOT agreements to pay for services, some county assessors have raised objections and pursued escape assessments for the lost property tax revenue. Additionally, some assessors claim that PILOT agreements violate the welfare exemption and thus compromise a nonprofit’s ability to claim the exemption.
Feb. 3 Joint Committee Hearing
During the joint committee hearing Assembly members heard and engaged in discussion with a panel of low income developers along with a panel of local government representatives. A video of the hearing and agenda items is available online
To begin the hearing, a representative with the nonpartisan Legislative Analyst’s Office (LAO) provided an overview of a recent LAO report
on nonprofits and the property tax. One conclusion reached in the report was that affordable housing does not appear to be a large component of California’s nonprofit property tax exemption. According to the report, “although comprehensive data [is] unavailable, affordable housing developments likely account for only a small portion of value exempt under the state’s welfare exemption.”
The LAO found that PILOTs are not common in California. The report states that “local governments in some state operate standard PILOT systems, in which all tax-exempt nonprofits that meet certain criteria — based on size, nonprofit type, or revenue composition — make PILOTs. Instead, California PILOTs appear to be less common and typically negotiated on a case-by-case basis as part of the land use approval process.”
Local government representatives stressed that PILOTs do not violate the welfare exemption if done correctly. For example, Oroville City Attorney Scott Huber testified that a PILOT arrangement Oroville entered into with a senior affordable housing project was based upon estimated increased costs incurred by the City to provide ambulance and fire services to the project. A fee nexus study demonstrated that the city would need an additional one-half of one firefighter position and based the PILOT upon the additional costs supported by the study. Even though the cost of the firefighter position was greater than the loss of property tax revenues, the city did not seek revenue in excess of the amount of the lost property tax revenue.
Representatives from local governments included the following:
Scott Huber, city attorney, Oroville;
Michael Colantuono, attorney, Colantuono and Levine;
Tia Boatman Patterson, general counsel, Sacramento Housing and Redevelopment Agency, and;
Dan Goodwin, assessor,Ventura County.
For additional information, please see the legal annotation
in which the Board of Equalization opines that if the low-income housing developer has maintained rents in accordance with statutory requirements and has a reasonable belief that its PILOT payments will be used to support or benefit the development, certification can be made in good faith.
Draft PILOT Proposals
The issue of PILOTs, and whether or not they violate the welfare exemption, has generated much interest in the Legislature and has already resulted in two draft proposals circulating the Capitol. The first approach would make all PILOT agreements, existing and future, unlawful. It would also limit development impact fees that could be imposed on a development claiming the welfare exemption to fees imposed on all other residential developments. The second proposal clarifies that PILOT agreements are not inconsistent with the welfare exemption and that such agreements may be entered into if the local agency performs a study to demonstrate that the fees are reasonably related to the cost of the services provided for which payment is sought.
Information on PILOT agreements has proven difficult to obtain. In order to collect relevant and pertinent information on this important issue, please contact League Legislative Representative Kirstin Kolpitcke
if your jurisdiction has entered into a PILOT agreement.