Legislature(1999 - 2000)
02/01/2000 08:15 AM House CRA
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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
HOUSE COMMUNITY AND REGIONAL AFFAIRS
STANDING COMMITTEE
February 1, 2000
8:15 a.m.
MEMBERS PRESENT
Representative John Harris, Co-Chairman
Representative Andrew Halcro
Representative Lisa Murkowski
Representative Fred Dyson
Representative Reggie Joule
Representative Albert Kookesh
MEMBERS ABSENT
Representative Carl Morgan, Co-Chairman
COMMITTEE CALENDAR
HOUSE BILL NO. 272
"An Act relating to the tax assessment by a home rule or general
law municipality of housing that qualifies for the low-income
housing credit under the Internal Revenue Code; and providing
for an effective date."
- MOVED HB 272 OUT OF COMMITTEE
HOUSE BILL NO. 233
"An Act granting authority to each municipality to be a debtor
under 11 U.S.C. (Federal Bankruptcy Act) and to take any
appropriate action authorized by federal law relating to
bankruptcy of a municipality."
- HEARD AND HELD
PREVIOUS ACTION
BILL: HB 272
SHORT TITLE: MUNICIPAL TAX: LOW INCOME HOUSING
Jrn-Date Jrn-Page Action
1/10/00 1890 (H) PREFILE RELEASED 1/7/00
1/10/00 1891 (H) READ THE FIRST TIME - REFERRALS
1/10/00 1891 (H) CRA
1/10/00 1891 (H) REFERRED TO CRA
1/12/00 1909 (H) COSPONSOR(S): CROFT
1/24/00 1996 (H) COSPONSOR(S): PORTER
1/26/00 2019 (H) COSPONSOR(S): KEMPLEN
1/28/00 2035 (H) COSPONSOR(S): HUDSON, MURKOWSKI
2/01/00 (H) CRA AT 8:00 AM CAPITOL 124
BILL: HB 233
SHORT TITLE: MUNICIPAL BANKRUPTCY
Jrn-Date Jrn-Page Action
5/12/99 1340 (H) READ THE FIRST TIME - REFERRAL(S)
5/12/99 1340 (H) CRA, JUD
2/01/00 (H) CRA AT 8:00 AM CAPITOL 124
WITNESS REGISTER
JONATHON LACK, Legislative Assistant
to Representative Halcro
Alaska State Legislature
Capitol Building, Room 418
Juneau, Alaska 99801
POSITION STATEMENT: Presented HB 272 and answered questions.
ROBIN GILCRIST, President
Housing First
130 Seward Street, Suite 204
Juneau, Alaska 99801
POSITION STATEMENT: Supported HB 272.
TAMARA ROWCROFT, General Manager
Alaska Housing Development Corporation
1800 Northwood Drive
Juneau, Alaska 99801
POSITION STATEMENT: Supported HB 272.
JOHN BITNEY, Legislative Liaison
Alaska Housing Finance Corporation
4300 Boniface Parkway
Anchorage, Alaska
POSITION STATEMENT: Supported HB 272.
JAN SIEBERTS, Commercial Real Estate and Construction Lending
National Bank of Alaska
PO Box 100600
Anchorage, Alaska 99510
POSITION STATEMENT: Discussed the banking community's view of
HB 272.
PAT CARLSON, Assessor
Kodiak Island Borough
710 Mill Bat Road
Kodiak, Alaska 99615
POSITION STATEMENT: Related his perspective from a small
community.
WILEY BROOKS, Certified Property Manager;
Member, Alaska Chapter Real Estate Management
2525 Blueberry Road, Number 204
Anchorage, Alaska 99517
POSITION STATEMENT: Asked questions about HB 272.
JEFF JUDD, Executive Director
Anchorage Mutual Housing Association;
Anchorage Neighborhood Housing Services
3700 Woodland Drive, Number 500
Anchorage, Alaska 99517
POSITION STATEMENT: Discussed various issues surrounding HB
272.
SHANNON WILKS, President
Board of Directors
Alaska Housing Initiative
PO Box 202222
Anchorage, Alaska 99520
POSITION STATEMENT: Discussed the problems associated with the
current market value approach.
DAVID LAWER, President
Alaska Bankers Association;
First National Bank of Anchorage
1273 Bannister Drive
Anchorage, Alaska 99508
POSITION STATEMENT: Supported HB 272.
ACTION NARRATIVE
TAPE 00-4, SIDE A
Number 0001
CO-CHAIRMAN HARRIS called the House Community and Regional
Affairs Standing Committee meeting to order at 8:15 a.m.
Members present at the call to order were Representatives
Harris, Halcro, Murkowski, Dyson and Joule. Representative
Kookesh arrived as the meeting was in progress. Representative
Morgan was not in attendance.
HB 272-MUNICIPAL TAX: LOW INCOME HOUSING
CO-CHAIRMAN HARRIS announced that the first order of business
would be HOUSE BILL NO. 272, "An Act relating to the tax
assessment by a home rule or general law municipality of housing
that qualifies for the low-income housing credit under the
Internal Revenue Code; and providing for an effective date."
Number 0110
JONATHON LACK, Legislative Assistant, Representative Halcro,
Alaska State Legislature, informed the committee that HB 272 was
brought to Representative Halcro's attention by another member
of the legislature as well as a number of individuals who own or
finance federally qualified low-income housing in Anchorage.
Mr. Lack explained that until 1997 the Municipality of Anchorage
assessed low-income housing based on the rent-restricted income
as opposed to the property's market value. The rent
restrictions are part of the deed as a function of the
property's qualification for low-income housing tax credits. In
1997 and 1998 the Municipality of Anchorage changed its method
of assessing these low-income housing properties. In some
cases, the change doubled the tax assessment on those
properties. Since there is very little, if any, profit margin
on low-income housing for the nonprofit organizations which
sponsor these properties, some of these properties are in
jeopardy. He pointed out that this situation exists in other
municipalities in the state. Every time there has been an
appeal to the Board of Equalization or the equivalent by the
owners of such low-income housing, that appeal has been
successful and the properties were assessed based on the rent-
restricted incomes. However, the appeal process is lengthy and
costly for the owners of these rent-restricted properties.
Additionally, the banking community has now become reluctant to
finance low-income housing because of the new tax assessment
formula used by the Municipality of Anchorage.
Number 0400
MR. LACK noted that last fall letters were sent to the Anchorage
Assembly and the Mayor of Anchorage. Those letters requested
comments on HB 272. The letter also suggested that perhaps, the
Anchorage Assembly could address this matter through ordinance.
There has been no response from the Municipality of Anchorage.
In conclusion, Mr. Lack said:
House Bill 272 would require that local governments
assess low-income housing at the rental value instead
of the estimated market value. It is appropriate for
the state law to be changed to encourage the
development of needed affordable housing for low-
income families.
REPRESENTATIVE HALCRO indicated that this committee should act
quickly on HB 272. He noted that municipalities face increased
pressure to find revenue. He believes that since these
properties were constructed with deed restrictions, those
restrictions should be taken into account when the property is
valued. He also noted that there is no stability in the market
because many banks are wary with regard to financing such low-
income housing. He informed the committee that some states have
totally exempted these properties. This legislation, HB 272,
simply proposes a fair and reasonable way to protect affordable
housing and encourage development. He did not believe it is
fair for both a deed-restricted property and a property without
a deed restriction to be valued at the same fair market value.
The problem is that the one property, the deed-restricted
property, can only charge a specific while the other property
can charge what the market will bear. This is an important
piece of legislation and affordable housing is becoming more
important.
Number 0636
REPRESENTATIVE MURKOWSKI referred to a memorandum from William
A. Greene, Deputy Municipal Attorney, to Kevin Meyer, Chair of
the Anchorage Assembly. Mr. Greene cites state law as the
authority by which the property should be assessed at the full
market value. In review of the statute, Representative
Murkowski found that it does say that "the assessor shall assess
property at its true and full value with the exception of,
apparently, agricultural land or land that has been subject to
some kind of a disaster." She understood that the Municipality
of Anchorage either disregarded this statutory language prior to
1997 or did this statute not apply at all?
MR. LACK disagreed with Mr. Greene's assessment. He pointed out
that AS 29.45.110 says that the assessment shall be on the "full
and true value." The memorandum from Mr. Greene placed the word
"market" in parenthesis. Prior to 1997 the assessor did not
believe that the true value was the market value. In fact, the
Uniform Standards of Professional Appraisal Practice indicates
that in determining the true and full value, any restrictions or
conveyance on a deed would be taken into consideration. That
was followed by the Anchorage municipal assessor prior to 1997.
Therefore, Mr. Lack did not believe that state law mandates that
the assessor use the market value of the property. However, if
the municipal assessor is now taking the position that the
property must be assessed at the market value, then the impetus
for HB 272 is greater.
REPRESENTATIVE MURKOWSKI asked if Mr. Lack had any understanding
with regard to why the Municipality of Anchorage changed its
position on this matter.
MR. LACK responded that there was simply a change in the
assessor in the Municipality of Anchorage. He noted that Mr.
Sieberts is also online and may be able to address that
question.
Number 0860
REPRESENTATIVE MURKOWSKI inquired as to whether there are
similar interpretations in other areas of the state.
MR. LACK understood that the City & Borough of Juneau initially,
assessed low-income housing based on the market value as opposed
to the deed-restricted value. There have been appeals to the
equivalent of the Board of Equalization in Juneau at which the
low-income housing units have been successful. He reiterated
that although the appeal process may prove successful, it is
expensive.
REPRESENTATIVE DYSON provided his understanding that the real or
market value of improved real estate is diminished by the
inability to raise the rent and is enhanced by some type of
federal tax credit.
MR. LACK replied not necessarily. He explained that in general,
the low-income housing tax credits are set up such that there is
a limited partner and a general partner. The committee packet
includes an article which explains how low-income housing tax
credits are generally set up. Generally, banks are a limited
partner in these developments. He pointed out that through the
Community Reinvestment Act, banks are encouraged to develop
properties for low-income and minority people within urban
areas. Banks usually enter as a limited partner and basically,
purchase the tax credit from the nonprofit agency, who has no
need for the tax credit as they do not pay any federal taxes.
He explained that the bank would purchase the tax credit from
the nonprofit agency in exchange for a sum of money, which can
be utilized to construct the unit. Therefore, the bank receives
the tax credit and the nonprofit provides housing and thus the
tax credit is separate from the individual, the nonprofit, that
pays the property taxes. He pointed out that without the tax
credits there would be no incentive for the banks to finance
such developments.
Number 1105
MR. LACK explained that prior to 1998 in the Municipality of
Anchorage, banks based their investment on the amount of the
actual assessment under the rent-restricted assessment
procedure. He pointed out that the rent restrictions do not
allow for any increase in the rent in order to cover the
increased assessment. Therefore, there is no place to obtain
the money to pay the municipality. He recalled that one unit in
Anchorage has been under appeal for both the 1998 and 1999 tax
assessment year; they have simply not been able to pay the
increased assessment, which is about $5,000 per month.
REPRESENTATIVE DYSON asked if the federal tax credit is a one-
time-only tax credit.
MR. LACK answered that he was not sure of that; however, Mr.
Sieberts could probably provide a more complete answer.
REPRESENTATIVE MURKOWSKI pointed out that the effective date is
January 1, 2001. She asked if anything is being done to address
those who are in the current assessment dilemma.
MR. LACK explained that those in the current assessment dilemma
are under appeal. He understood that generally, the legislature
does not like to intervene in appeals. Furthermore, he did not
know the legislature's ability to make this retroactive. In
further response to Representative Murkowski, he stated that the
effective date was chosen because that is the next assessment
year.
Number 1303
REPRESENTATIVE KOOKESH returned to Mr. Lack's earlier statement
that low-income housing was developed for minorities and low-
income people. He asked if the minorities are required to also
meet the low-income criteria as well.
MR. LACK responded, "Absolutely." He understood that prior to
the 1970s and the 1980s banks needed a push to rent to
minorities, especially in the urban areas. The Community
Reinvestment Act was initially envisioned to say that banks have
a responsibility to rent to everyone regardless of their racial
status. For the units being discussed, one has to qualify as
low income in order to become a resident.
CO-CHAIRMAN HARRIS expressed concern with the possibility that a
developer could receive tax credits or receive money for tax
credits from lending institutions and leave someone else to face
the higher taxes.
MR. LACK commented that the word "developer" in the sponsor
statement may be misleading. The "developer" in these
situations is not who one would typically think of, but rather
the "developer" would be an entity such as Anchorage
Neighborhood Housing. The developers are nonprofit
organizations and the banks are limited partners with a limited
role. The banks basically grant the initial capital for
construction of the project, which is why the tax credits get
separated from the nonprofit organization. There is no profit
for anyone in the development of low-income housing. Mr. Lack
said that low-income housing has been taken on by the nonprofits
because the traditional commercial developers are not doing it.
He informed the committee of his understanding that nationwide
60 percent of all rental units for new construction are being
built under the low-income housing tax credit program. He
reiterated that there is a separation of the tax credits from
those who own the units. Furthermore, the banks are often in
these projects for 15-30 years.
MR. LACK, in response to Co-Chairman Harris, said that he did
not have any idea how strict the enforcement of income levels
is. He noted that one of the developers from Juneau is present
and could possibly better answer that question.
Number 1594
ROBIN GILCRIST, President, Housing First, informed the committee
that Housing First is a nonprofit housing development agency.
She said that she strongly supported HB 272 and then she offered
to answer any questions.
MS. GILCRIST, in response to Representative Halcro, informed the
committee that Housing First is an all-volunteer board of which
one member is an attorney. Fortunately, that attorney has been
willing to do the battle with the tax assessor each year.
Furthermore, each year Housing First has been fortunate to
arrive at an agreement with the assessor. However, the process
is very time consuming and unstable. Each year a budget has to
be determined for the building and without knowing what the
assessment will be, it is very difficult. Also as the building
ages, a certain amount of money must be maintained in order to
maintain the building. Therefore, Ms. Gilcrist said that
Housing First would appreciate an assessment every year that it
could count on, one based on the collection of the rent.
MS. GILCRIST, in response to Co-Chairman Harris, confirmed that
she is from Juneau. In further response to Co-Chairman Harris,
she specified that the tax assessment for low-income housing is
based upon the market value of the building. She agreed that
the assessor does not take into account that the building is not
producing income, and therefore each year the battle must be
fought.
REPRESENTATIVE JOULE inquired as to what would happen when a
renter in low-income housing experienced an increase in his/her
income. Is there an adjustment that could be made?
MS. GILCRIST answered that the rent is restricted, and therefore
cannot be adjusted. Furthermore, the individual could not be
evicted.
Number 1830
TAMARA ROWCROFT, General Manager, Alaska Housing Development
Corporation, explained that the Alaska Housing Development
Corporation is a nonprofit corporation, which began 26 years ago
in order to work with Juneau to provide affordable housing to
families. The Alaska Housing Development Corporation has acted
as a sponsor and nonprofit owner/manager of three different
low-income housing developments over those 26 years. Ms.
Rowcroft said she is very much in support of HB 272. She
informed the committee that she has personally worked in this
arena for 14 years; it is becoming more difficult to get
affordable housing out to Alaskans. The jobs available in the
local economy are lower paying, in many cases. Therefore, this
[low-income] housing is critical.
MS. ROWCROFT turned to the issue of compliance. She explained
that the nonprofit is being forced to comply with program
guidelines which are developed by the Internal Revenue
Service(IRS). Furthermore, the nonprofits files are reviewed on
an annual basis by the Alaska Housing Finance Corporation
(AHFC). At any time, the nonprofit could be subject to a full
compliance audit by the IRS.
Number 1927
JOHN BITNEY, Legislative Liaison, Alaska Housing Finance
Corporation (AHFC), supported HB 272. He believes it is an
admirable cause to establish a consistent state policy with
regard to how these properties should be assessed. He noted
that AHFC is the administrator of the tax credit program in
Alaska, and therefore performs very strict compliance audits for
all the organizations. Mr. Bitney turned to Representative
Murkowski's comments regarding the current statute and said that
AHFC believes that the assessor has the discretion in this area.
With the uncertainty of the assessment, banks and developers
question whether they should take on this responsibility. He
feared that if nothing is done, these [low-income] properties
will be developed outside of organized municipalities in order
to avoid such questions on an annual basis.
CO-CHAIRMAN HARRIS commented that communities complain to the
legislature about unfunded mandates. He asked if Mr. Bitney had
any idea how much of a reduction in tax revenue this would
create for Anchorage.
MR. BITNEY recalled that one of the organizations online
provided a presentation to the assembly during which he believed
it said that about $300,000 would be lost in changing from the
market value approach to the income approach. However, he
expressed the need to remember that these properties do not have
the cash flow to operate the building and pay the full market
value assessment. He pointed out that generally, these deed
restrictions are on the property for up to 30 years. Even if
the property is sold or transferred, that deed restriction will
stay with the property.
MR. BITNEY posed a scenario in which such property had to be
foreclosed, AHFC would do so because AHFC is also the financing
agency for the loan portion of the property. At the point of
foreclosure, there is the real possibility that AHFC would then
manage the properties as a public housing property. In such a
case, the property would then have full tax-exempt status as do
properties of AHFC.
CO-CHAIRMAN HARRIS commented that communities would be farther
ahead if people lived in low-income housing versus being
homeless; it may actually save the communities money in the long
term.
Number 2178
REPRESENTATIVE HALCRO informed the committee that from some
interim hearings he recalled that the cost of this to Anchorage
would be $250, 000. With regard to this being an unfunded
mandate, he did not consider HB 272 an unfunded mandate. The
legislation simply secures the ability to provide affordable
low-income housing. Representative Halcro indicated agreement
with Co-Chairman Harris in that it would be far better to have
people in a home rather than in a shelter or on the street. He
alluded to the effects to public safety and public health when
people do not have affordable housing available to them.
REPRESENTATIVE KOOKESH commented that one of the goals of the
municipalities has to be to provide housing to everyone in the
municipality. Without low-income housing or taxation to the
demise of low-income housing, only people who could afford to
would live in that particular municipality. That is not
reality. Representative Kookesh agreed with Representative
Halcro that HB 272 is not an unfunded mandate, it is simply a
mandate to provide housing. He believes that the amount of
money that will be lost by the municipalities will be small in
comparison to having vacant properties and low-income housing
people without housing. This legislation is morally
appropriate; there needs to be a statewide answer to this
problem.
Number 2327
REPRESENTATIVE MURKOWSKI referred to a letter received by the
Municipality of Anchorage from the U.S. Department of Housing
and Urban Development (HUD). She interpreted the letter to be a
scathing attack on the municipality's policy on this matter.
She pointed out that the letter says, "disregarding the rent
restrictions on these properties is the single greatest threat
to the preservation of existing stock, and future development of
affordable housing in Anchorage today." She asked if HUD could
approach AHFC and charge that it is not complying with the
intent of low-income housing, which could jeopardize the funds
coming into the state for low-income housing.
MR. BITNEY replied yes. He explained that in this case, AHFC
administers the Housing Comprehensive Development (HCD) plan for
the entire state. That is then submitted to HUD, which
basically qualifies the state and AHFC to act as a pass through
for a number of federal housing funds from HUD. He pointed out
that Anchorage is the one case in which the municipality deals
directly with HUD, and therefore submits its own HCD plan. Mr.
Bitney clarified that, generally, what is being referred to is
the Community Development Block Grant Program.
MR. BITNEY turned to the letter referenced by Representative
Murkowski. He explained that as part of Anchorage's annual HCD
submittal to the federal government, the municipality has
referenced its desires and initiatives to low-income housing.
However, the assessor's policy in Anchorage is creating a
conflict. He said that HUD, if it feels that the municipality
is not in compliance with its HCD, does have the ability to make
a determination that the municipality is out of compliance with
its HCD and could withhold. At this point, HUD does not view
the State of Alaska as out of compliance.
REPRESENTATIVE MURKOWSKI surmised then that Mr. Bitney is
suggesting that there is the possibility that the Municipality
of Anchorage could lose some HUD funding due to this assessor's
policy.
MR. BITNEY replied yes.
Number 2509
JAN SIEBERTS, Commercial Real Estate and Construction Lending,
National Bank of Alaska (NBA), testified via teleconference from
Anchorage. He commented that what is really being discussed
here is the future development/construction of affordable modern
housing in Alaska. Banks and external financial institutions
have invested lots of money in quality, fire-safe and affordable
housing by using the federal low-income housing tax credit
program. However, "we" have come up against a wall in
Anchorage, which could cause the financial community to severely
limit investment in affordable housing throughout the state.
MR. SIEBERTS informed the committee that NBA became interested
in the low-income housing tax credit program due to the
determination that the quality and suitability of rental housing
in the Anchorage community was deficient. He pointed out that
this deficiency was documented by the Municipality of
Anchorage's own housing plan, which was submitted to HUD.
Furthermore, the military performed a study in Anchorage which
concluded that the rental housing was deficient in meeting the
needs of its service personnel. This was at a time when the
military anticipated expansion. Mr. Sieberts acknowledged that
this is not the case with all properties. However, properties
designed to house construction workers, pipeline workers and
singles were not designed to meet the needs of the mixed
population of today.
MR. SIEBERTS turned to the current state law, which he believes
is fine. Generally, the income approach to property is what is
established as the market value and what people will buy and
sell properties for. As one who has probably reviewed more
appraisals than any other individual in the state, including
most assessors, he believes that with income-producing property,
normally, the net income/operating income is used in conjunction
with the capitalization rate in order to determine a value. In
these affordable housing properties, the rent is controlled by
the federal government and cannot be increased. Furthermore,
these properties cannot be bought or sold without IRS approval.
Mr. Sieberts had not heard of any case in which an affordable
housing project built with low-income housing tax credits had
been bought or sold, anywhere in the United States.
MR. SIEBERTS explained that in the U.S. the tax credit form for
developing housing was developed because rents obtained from
low-income people are not sufficient to create a value that will
support the cost. Therefore, the federal government created the
low-income housing tax credit under the Budget Reform of 1986.
This was made a permanent program in 1993. By 1998, this
program had been leveraged into over $12 billion worth of
affordable housing or over 900,000 units across the country.
Therefore, if the desire is to make quality, affordable housing
for those who do not make in excess of 50 percent of the median
income, then there has to be a fair and stable taxation program
statewide.
MR. SIEBERTS commented that HB 272 parallels a similar law in
Portland, Oregon. He also noted that nonprofits do not pay
property tax on affordable housing property, property with
restricted rents, in the states of California, Washington,
Montana and Hawaii. Furthermore, in California if a for-profit
developer owns a restricted-rent property, they only pay
property tax on the income approach. Mr. Sieberts believes
there is considerable room for new development of these
properties throughout Alaska.
REPRESENTATIVE DYSON asked Mr. Sieberts to explain how the
federal tax credit works.
MR. SIEBERTS commented that the tax credit program is different
than most housing programs of the federal government. This
program is administered by the U.S. Treasury Department in the
form of the IRS, which continually audits these programs.
Through HUD, the U.S. Treasury Department allocates so many tax
credits to each state. The State of Alaska receives the lowest
amount, $750,000 per year, of tax credits of any state. That
$750,000 is administered by AHFC, which puts these tax credits
out to competitive bid. Therefore, a request for proposals
(RFP) is put out each year and for-profit and nonprofit
organizations can apply for these tax credits.
MR. SIEBERTS further explained that AHFC evaluates the
properties in order to determine which properties are the best
quality projects for the money. Then those projects are
allocated to the developer, who then approaches the financial
market and places the tax credits out to bid. Generally, the
financial institution that is willing to pay the most receives
the tax credit. Mr. Sieberts posed an example in which NBA paid
$.75 on the dollar for a tax credit. Over a ten year period,
NBA would receive a deduction on its income tax liability for
those tax credits. During that ten-year period, the bank would
be faced with unusual risk for a bank investment.
REPRESENTATIVE DYSON posed a situation in which the property was
sold or transferred during the ten year period. He asked if the
federal tax credit transferred with the property to the new
owner or partner.
TAPE 00-4, SIDE B
Number 2940
MR. SIEBERTS responded that to his knowledge, that there has not
been a case in the United States where one of these properties
has been sold. Effectively, the tax credit and the real
property could be sold independently of one another. However,
it would be difficult to sell one of these properties without
government approval. The tax credit effectively would have to
go with the property.
REPRESENTATIVE DYSON agreed that a rent-controlled property
surely mitigates or affects the real value of the property in
the market. If tax credits go with the property then that is
going to make the property more valuable. If the municipal
assessor is not using the rent control issue to value the
property at less value, he asked if the assessor is using the
tax credits which are valuable as a factor in raising the
appraisal value.
MR. SIEBERTS answered that the purchase of the tax credits are
an investment with considerable federal restrictions and
oversight. It would be like the bank making an investment in a
municipal bond or loan or home mortgage. The Municipality of
Anchorage does not tax the bank on interest it makes from car
loans or the bonds they purchase. It is an investment. The tax
credit is a subsidy or grant from the federal government to make
up the difference in the cost of the real value of the project
and the cost of building the project.
REPRESENTATIVE DYSON noted that municipal law in Anchorage
requires that property be assessed at its actual value. He
agreed this is a tough one because it is very difficult to
establish the real value of the property because it is not going
to be sold. There is no real test of what the market value
would be. It would appear that the fact that a property is rent
controlled would lower the tax assessment because the property
would have a lower value and will not sell for as much;
however, there is a huge advantage to owning the federal tax
credit. It would seem that in fairness both things need to be
evaluated in coming up with the real value and fulfilling the
municipal law which requires that assessments reflect the market
value. If the property is not going to sell, the philosophical
question of what assessments ought to do is raised.
PAT CARLSON, Assessor, Kodiak Island Borough, testified via
teleconference from Kodiak. He shared his perspective from a
small community. He pointed out there is a significant
difference between the historical low-income housing projects
and these projects. A normal one requires that the housing
authority or the entity that is creating the project reach an
agreement with the municipality, and that agreement is required
before the project can go forward. The municipalities have no
say, no control or input whatsoever in the economic decisions of
the bank and Alaska Housing [AHFC] and the developers. When one
of these projects is constructed in a small community it can
have a two-fold effect. If the committee forces an exemption -
which is what he is calling it because that is what it is in his
mind - for the project, they also by default are creating
another evaluation problem because these projects take renters
from other buildings. Therefore, the vacancy rate in those
other buildings rises.
MR. CARLSON told the committee as an assessor, he has to
recognize the fact that the vacancy rate drives the value and
income approach that has been stated, and that is the most
appropriate method to use. Another issue is there are three
owners to this low-income property. There is the nonprofit
entity, the bank and to some degree AHFC. None of those are
necessarily exempt authority. The nonprofit group may be able
to get an exemption under existing law, but if nonprofit means
the owner is not making money until the building sells 30 years
down the road, that is different.
MR. CARLSON agrees that state law requires assessors to
recognize conveyances and deed restrictions. He believes the
state law is speaking to things like a conservation easement
that is detached from the property. Here [In the case of these
low-income housing properties] they are trying to come up with
the value of the entity and assure they are equitably treated
with all other properties. There has been more research done in
Anchorage than he has done. He said there have been some sales
of the properties in Anchorage. Every state is different; every
project is different; every state law is different. From his
perspective in Kodiak, he believes that the properties being
discussed are sufficiently distinct from existing properties.
He acknowledged that some considerations should be taken, but
not to the degree that the developers desire. The biggest
complaint he has is the inability to have local approval.
Another significant issue is the buildings can be filled up with
a group of individuals that at the time are low income; but who
could later double their income and remain a resident in the
project. Under existing standard low-income housing projects
the rent for such individuals would increase to [parallel]
market [rents]. Therefore, these individuals would slowly move
away from the property and into the general market and not cause
as much disruption as what they would have with one of these
projects.
REPRESENTATIVE HALCRO asked if Mr. Carlson has seen people in
Kodiak move out of older low-income housing to a newly built
project.
MR. CARLSON indicated that such has occurred, but the problem is
these individuals do not necessarily come from a standard HUD
low-income project. It tends to happen from the other older
projects that are privately owned, which drives up the vacancy
rate and lowers the assessment on those properties.
REPRESENTATIVE HALCRO asked Mr. Carlson if people moved from an
older project to a newer project, wouldn't that encourage the
owners of the older project to make improvements to attract
renters.
MR. CARLSON answered to some degree that is true, but now the
person who made private business decisions to own that building
is subjected to a government subsidy that harms him/her
economically. The money is not there necessarily to make the
improvements because the owner has to compete with this newer
building and the higher vacancy rates.
REPRESENTATIVE HALCRO stated that he is attempting to get at the
overall net gain for the communities with this legislation. If
these tax credits enable a developer to build a low-income
housing project, it meets a need. Furthermore, since the
property is not exempted and has to be assessed based on the
deed restriction, the community receives a net gain because
there are property taxes on the tax roll that would not be
present if these tax credits were not in place.
MR. CARLSON commented that in his opinion, when the initial rent
rolls are set up as low income for purposes of qualifying, they
cease to exist as low income after [the renter increases his/her
income]. Furthermore, there is no requirement that the person
move out of the property [when his/her income increases]. He is
not sure it has a positive effect for Kodiak. He said that
decision should be made by Kodiak's assembly and its residents
because they are the ones who are going to write the check. Mr.
Carlson said that it is not a true exemption; by requiring that
it go to the low-income project, it is a partial exemption
because the interest of NBA or whatever bank is exempted. For
example, if he builds a house for $100,000, he receives a
$50,000 basic subsidy to the construction project from the bank
in return for the bank's writing off his mortgage interest over
ten years. He isn't sure that is a positive effect.
REPRESENTATIVE HALCRO asked Mr. Carlson if there are any
qualified projects in Kodiak.
MR. CARLSON answered that they have a variety of different types
of low-income projects, ones that are owned by the state housing
authority and ones that are under the old HUD program. He
indicated Kodiak does not have any of these low-income housing
projects. He believes that Kodiak's low-income requirements are
more than adequately satisfied under the existing program, and
that may be why there are none of these low-income housing
projects.
REPRESENTATIVE KOOKESH inquired as to the financial impact that
this legislation would have on Kodiak.
MR. CARLSON said without having a project defined, the biggest
effect Kodiak would experience would be an increase in the
vacancy rate, which can have a corresponding effect on all other
rental property. If it were an extremely large project that
drew a lot of folks, it could have a substantial impact. He did
not have a sense of the scope or scale of these projects. He
noted that Anchorage and Fairbanks have quite a bit of exposure.
He reiterated that in Kodiak the impact would depend on the
project size.
REPRESENTATIVE KOOKESH said he is asking for a real example of
the problem Mr. Carlson sees right now.
MR. CARLSON responded that he doesn't have a problem, except for
the issue of equity. He explained that the inequity would be
that he would be required to treat a project owned by these
entities, maybe one owned partially by the bank differently than
a project that was totally privately owned. He said he has not
seen any evidence of why the two projects should be treated
differently. These low-income housing projects are not
permanently for low income renters, only initially. The bank
basically absorbs whatever loss the party presents as its low
income.
REPRESENTATIVE KOOKESH said he is trying to get to the point of
Mr. Carlson's objection and can't seem to get a handle on it.
He asked for an example of people who are living in a project
right now that have exceeded the low-income restriction, but are
still residents.
MR. CARLSON said his observation has been that with the existing
projects when the rents are raised to market levels, the renters
move out into the general population away from the existing
multi-family complexes.
Number 2232
WILEY BROOKS, Certified Property Manager; Member, Alaska Chapter
Real Estate Management, testified via teleconference from
Anchorage. He commented that he just learned of this bill
yesterday and is present primarily to learn something about it.
He asked if he can assume that the municipalities can lose some
tax dollars if this bill is put into effect.
CO-CHAIRMAN HARRIS surmised from the testimony, that the
municipalities probably could lose some tax dollars.
MR. BROOKS said if the municipalities lose tax money, can he
assume that will have to be made up by others.
CO-CHAIRMAN HARRIS replied that was up to the municipality.
MR. BROOKS noted that somebody is going to have to fill the gap.
He informed the committee that he has managed subsidized
projects, and therefore is familiar with the rules and
regulations. He has experienced trying to get renters out who
no longer qualify as low income, and it is difficult to get them
out. He asked if there has been any examination of the
financial statements of the owners of any of the subsidized
housing. He heard testimony earlier that these were not
profitable to the owners unless they benefited from this
legislation. He asked if anyone knows that in fact that is the
case.
REPRESENTATIVE HALCRO pointed out that the committee heard
testimony from the director of a local housing authority, who
testified that these organizations/owners are under strict IRS
guidelines, constant review and possible audits. Therefore,
Representative Halcro said he would say yes, these
organizations/owners are reviewed and audited quite frequently.
MR. BROOKS mentioned the shake out in the 1980s when the state
over built housing and rents decreased. Many landlords lost
their income property and never really recovered from that. In
the last two to four years there has been subsidized housing
built, however he knew of very few private non-subsidized
housing that has been built. If there is not profit in
subsidized housing, he wondered why more subsidized housing
would be built when the private sector can't compete with it.
REPRESENTATIVE HALCRO answered if the private sector cannot
compete with subsidized housing, then somebody has to provide
the product. He asked if the private sector can't build it, who
is going to build it, and who is going to service that need.
MR. BROOKS asked if "they" are going to continue to hold down
the marketplace so that private investors cannot make money in
the apartment business. For example, a couple in their 60s went
out a bought a four-plex with their savings and are using the
money from this four-plex for their retirement income. They are
going to have their taxes increase because subsidized housing is
going to get a decrease in its tax burden.
CO-CHAIRMAN HARRIS announced that he intended to hold HB 272.
MR. BROOKS asked if this wasn't really a subsidy on top of
subsidy.
REPRESENTATIVE HALCRO answered the amount of these credits is
limited. Therefore, there is not going to be an explosion of
low-income housing to compete with the private sector. However,
the ability for these projects to be built in every community in
the state does need to be protected. There will not be a
situation reminiscent of the early 1980s when condominiums and
apartment buildings went up quickly. These credits are limited
and do provide a very valuable way for communities to provide a
low-income housing product.
REPRESENTATIVE HALCRO referred to the example of the senior
couple and asked how much their property tax increases because
of public safety, public health costs and other costs associated
with those situations that arise because people do not have
affordable housing. He believes there is a net gain for the
community. The community gets additional money on the property
tax rolls as well as there is a low income segment of the rental
market that has a product it can afford it. Although he does
not like government competing with the private sector, this is a
segment of the market where it is clear that the private sector
has no interest in providing this type of product.
MR. BROOKS disagreed.
Number 1780
JEFF JUDD, Executive Director, Anchorage Mutual Housing
Association, testified via teleconference from Anchorage. He
also stated he is representing Anchorage Neighborhood Housing
Services (ANHS). He informed the community that the Anchorage
Neighborhood Housing Services has developed a number of
properties in Anchorage over the course of the last eight to ten
years. In 1995 and 1996 ANHS filed an appeal with the Board of
Equalization regarding the assessment value that had been
derived by the local assessor. Ultimately, ANHS was successful
in the appeal. The basis of the appeal was simply that the
property should be assessed on the real income that those
properties actually generate. In 1997 the assessor issued an
assessment value that was considerably over the value ANHS
believed to be appropriate, based on the real economics of the
property again. Through a negotiation process with the assessor
at that time, ANHS derived a methodology they believed to be a
middle ground. It wasn't everything his organization wanted,
but it wasn't everything the Municipality of Anchorage wanted
either. It was a fair settlement of the issue.
MR. JUDD reported that in 1998 a new local assessor started with
the municipality and in the minds of ANHS, he discounted the
methodology that was established in the prior year. In fact, he
significantly increased the valuations of the Anchorage
properties beyond what had ever been seen before. For example,
one local property owned by Anchorage Housing Initiatives
experienced an increase of 184 percent in one year. Anchorage
Neighborhood Housing Services, who is the general partner on two
tax credit properties, saw increases in the valuation of over
120 percent on two properties and other properties went up 70 to
90 percent all in one year. The increase in assessment means
they pay a significantly higher amount in property taxes, an
amount that these properties cannot pay because they simply
don't generate that amount of cash flow.
MR. JUDD told the committee the owners have provided financial
statements that show that a good share of these properties have
operated historically at a loss and that the increase in
property taxes effectively bankrupts these properties. Some are
in technical default. These nonprofit organizations who look to
provide affordable quality housing for those who need it are
going to have to determine at some point whether or not they
have the ability to carry these properties or are willing to
carry them at a very substantial loss, especially if HB 272 is
not adopted.
MR. JUDD referred to one question which came up earlier about
how much they have actually spent in legal and appeal
preparation costs. He noted that about a year and a half ago,
the local organizations got together and formed a group of
affordable housing providers to appeal the existing 1998
assessments. Because of the very technical nature of this
process and the preparations the local assessor was undertaking,
they had to hire an attorney and a consultant. The group has
spent over $40,000 in the last 12 months preparing for the Board
of Equalization appeal. The appeal process with the Board of
Equalization was fairly brutal with four and a half hours of
testimony by both parties. The appeal process involved
attorneys on both sides and consultants and a full panel of
local assessors that have taken a much more aggressive look at
this issue this year than they ever had in the past.
MR. JUDD told the committee the basic premise he discerned from
the local assessor's approach is simply that the tax credits
have some value. As Mr. Sieberts had indicated, the tax credits
are there to support the development of affordable, quality
housing in the communities. In his mind, the tax credits do not
have real property value but rather are an intangible that is
used in order to make the project developmentally feasible in
the first place. For example, [the tax credit] covers the
difference between what it costs to build a project and what the
restricted rent levels will actually allow it to borrow from
organizations such as the AHFC. The tax credits do not
contribute to an operating income approach. He explained there
is no income that is derived from the tax credits in annual
operations. The housing organizations are simply asking for a
consistent assessment methodology that is based on the full and
true value, as reflected by the restricted income that the
affordable housing property actually generates.
MR. JUDD agrees with Mr. Sieberts that full and true value as
currently stated in state law actually addresses this issue in
his mind. However, the local assessor has indicated that the
full and true value does not allow him to consider the deed
restrictions that apply under this low-income housing tax credit
program, AHFC multi-family direct financing program or other
federal programs that enable affordable quality housing for low
income tenants to be built in the first place. The full and
true value by law is the estimated price that a property would
bring in an open market under the prevailing market conditions
in a sale between a willing seller and a willing buyer both
conversant with the property and with prevailing general prices.
The mere definition implies that a person would only pay what
the value is truly worth, full and true value, given those deed
restrictions.
MR. JUDD believes a person would have to be totally ignorant to
buy a property at "market value or market rent" because in fact
they cannot charge market rent and can only charge something
significantly less. Furthermore, those tax credits come with
significant compliance risk that effectively means that the
limited partner, the bank who buys the credit, may in fact not
be able to use them dependent upon whether an organization
effectively manages the property in compliance with the tax
credit program or other restrictions that apply.
MR. JUDD noted that, ironically, the universally recognized
document for proper appraising in this country is the Uniform
Standards of Professional Appraisal Practice (USPAP). This
standard includes procedures for mass appraisals such as tax
assessments and requires the appraisers to consider known
easements, restrictions, encumbrances, leases, reservations,
covenants, contracts, declarations, special assessments,
ordinance or other items of a similar nature. The very document
that appraisers around the country use as the universally
recognized approach require them to consider those deed
restrictions. Yet the local assessor is not doing that. As a
matter of public record, the local assessor stated during the
Board of Equalization hearing that the assessors didn't know how
to value the tax credits even if they could and thus they would
assess the property using market rents as that was the only
thing they knew how to do. In fact, the owners cannot charge
market rent. Most of these properties are all deed restricted
and most have specific rent restrictions that are generally
below the market rent that can be charged. The owners have no
ability to raise the rent during a long-term compliance period,
generally a minimum of 15 years and in most cases 30 years.
MR. JUDD referred to the issue of sale of these properties.
There has not been one sale of a tax credit property or other
deed restricted property in Alaska or anywhere else in the
country. He acknowledged that the tax credits move with the
property and in order to claim the tax credit, one would have to
be an owner in the property. He posed a situation in which the
property is sold and the general partner is being replaced
perhaps in what is a limited partnership. The bank who
originally purchased the credit would stay as the limited
partner in the deal for the compliance period. There might be,
in theory, the ability for the limited partner to sell the tax
credit to another bank, perhaps who might then become the
limited partner. However, the reality is, in all likelihood,
that will never happen or it would happen very seldom. In any
event, the property is still bound by the deed restrictions for
the full compliance period.
Number 1076
REPRESENTATIVE DYSON asked whether fairness and equity would
require that if the assessor takes into account the rent
restrictions, that he/she should take into account the tax
credits that go with the property - in the unlikely event that
it is sold.
MR. JUDD answered that their position is that the tax credits
are not truly real property. The tax credits are tied to the
property in that in order to use the credit someone has to be an
owner in the property. The value of the credit is simply
nothing more than a development subsidy to help make the project
feasible in the first place. More specifically, the tax credit
covers the difference between what it costs to build a property
and what the actual income will enable the property to borrow,
the true value.
REPRESENTATIVE DYSON asked what Mr. Judd would speculate as the
major motivation for the banks that get involved in financing
these organizations and taking the federal tax credit.
MR. JUDD answered there are several answers. The banks benefit
from the Community Reinvestment Act compliance issues with these
properties. Furthermore, the banks see this as an opportunity
to improve the housing stock in the communities. There is some
investment value to the tax credit, however it is a very limited
investment value given the history of these properties. Over
time the amount they have had to pay for the credit has
increased, there is significant compliance risk in these deals.
In one case, a local banker had to invest a substantial
(additional) amount into a property to make that project
feasible, especially given the local tax issue. To say that
there is a huge value to the tax credit to the bank is simply
untrue. There is some investment value, but it is very limited.
Number 0841
SHANNON WILKS, President, Board of Directors, Anchorage Housing
Initiative, testified via teleconference from Anchorage. She
informed the committee that Anchorage Housing Initiative is the
limited partner in two of these properties. She noted that the
Alaska Housing Initiative, a recognized community development
organization in Anchorage, has a mission to provide community
integrated housing for people with disabilities. However, she
did note that the two complexes that Anchorage Housing
Initiative is a general partner in are not complexes solely for
those with disabilities. Still, a number of the units in each
building are completely accessible. With regard to the Hill
Point Park Apartments, the property taxes increased 184 percent
in one year. Therefore, a major problem with the mortgage arose
because when property taxes increase, the mortgage holder
reviews that and reassesses the mortgage in order to ensure
there are enough funds for property taxes. In the case of Hill
Point Park Apartments, the mortgage increased from $7,378 to
$11,756. There is not $4,378 additional funds in the operating
revenue of the building. As a result, the building has been
paying the mortgage that it can afford and even at that level,
it is barely breaking even. She echoed the earlier comments
that this type of housing basically does not make any money.
Therefore, the result of such assessments will be foreclosure on
these properties. Anchorage Housing Initiative is a small
nonprofit that, like Housing First in Juneau, is a volunteer
organization. She further noted that Anchorage Housing
Initiative operates on a grant income that barely amounts to an
income of $25,000 per year.
REPRESENTATIVE MURKOWSKI inquired as to the average residency of
tenants in Anchorage Housing Initiative units.
MR. WILKS estimated that there has generally been a turnover of
5 percent, if not more.
REPRESENTATIVE MURKOWSKI expressed concern with some of the
comments that there are abuses of the low-income housing units
in that some individuals choose to remain in these units even
when their income increases. She noted that she has a very
large housing project in her district from which she has
observed that, in general, people are present because of a
marginal income. She expressed curiosity with regard to how
long people stay in low-income housing. She did acknowledge
that there will be abuses.
Number 0266
DAVID LAWER, President, Alaska Bankers Association; First
National Bank of Anchorage, testified via teleconference from
Anchorage. He announced his support for HB 272. With regard to
the motivation of banks in these investments, the single
motivation is to provide assistance in connection with a
worthwhile cause. He acknowledged that banks derive some return
in terms of the tax credit. It is also the case that banks are
not in business to provide low-cost or no-cost housing for the
community; the bank is entitled to a return on its investment.
He indicated that the low-income housing tax credit is a way in
which the federal government has decided to make use of private
capital. Furthermore, there is a Community Reinvestment Act
motivation on behalf of the bank. However, banks also have
access to alternate investments, which produce a considerably
higher return. Currently, banks have the opportunity to make
single family mortgage loans at a higher rate of return. Mr.
Lawer pointed out that [investment in] low-income housing
entails considerable risk.
TAPE 00-5, SIDE A
Number 0010
MR. LAWER mentioned a low-income housing project in Wasilla from
which the low-income tax credits were sold to the bank. Those
tax credits were sold at a price that would yield 6.8 percent to
the investor, if no other money had to be invested. Mr. Lawer
said that is equal to the return on the [loan] bonds, an
investment that has absolutely no risk. He emphasized that
[banks] make no excuse that a return from these tax credits is
enjoyed.
CO-CHAIRMAN HARRIS announced that public testimony would be
closed. Then the committee took an at-ease from 9:51 a.m. to
9:56 a.m.
CO-CHAIRMAN HARRIS acknowledged that the majority of the
committee felt that this legislation should be reported from
committee. Therefore, he announced that he would entertain a
motion.
Number 0164
REPRESENTATIVE HALCRO moved to report HB 272 out of committee
with individual recommendations and the accompanying zero fiscal
note.
REPRESENTATIVE DYSON objected and noted that he would still like
to have some questions answered.
Upon a roll call vote, Representatives Kookesh, Halcro,
Murkowski, Joule and Harris voted in favor of the motion to
report HB 272 out of committee, and Representative Dyson voted
against it. Therefore, HB 272 was reported out of committee
with a vote of 5-1.
The committee took a brief at-ease.
HB 233-MUNICIPAL BANKRUPTCY
Number 0231
CO-CHAIRMAN HARRIS announced that the next order of business
before the committee would be HOUSE BILL NO. 233, "An Act
granting authority to each municipality to be a debtor under 11
U.S.C. (Federal Bankruptcy Act) and to take any appropriate
action authorized by federal law relating to bankruptcy of a
municipality." He noted that there was a committee substitute
(CS) and he would entertain a motion.
REPRESENTATIVE HALCRO moved that the committee adopt the
proposed CSHB 233, Version LS0948\G, Cook, 1/26/00. There being
no objection, it was so ordered.
Number 0283
JONATHON LACK, Legislative Assistant to Representative Halcro,
Alaska State Legislature, pointed out that HB 233 was introduced
by the House Community & Regional Affairs Committee last year,
when the committee was co-chaired by Representative Halcro. He
explained that in 1994, the U.S. Congress changed the Bankruptcy
Code requiring that if local entities were going to seek
protection under Chapter 9 of the federal Bankruptcy Code, the
legislature must provide specific authorization to do that.
Alaska is one of the few states that has not brought its law
into compliance with the federal requirements. There is a CS
today because the initial version of HB 233 only allowed the
municipal entities and local governments to seek bankruptcy
protection, while the CS broadens that to include all local
governments and political subdivisions. For example, the CS
would include the Rural Education Attendance Areas (REAAs).
MR. LACK explained that local governments would like bankruptcy
protection available to them in order to avoid a local
government being placing in jeopardy by a creditor coming in to
seize assets. A creditor will seize assets that are sellable
such as emergency equipment, fire equipment, et cetera. This
legislation allows local governments the ability to file in
Bankruptcy Court in order to avoid assets being seized and allow
reorganization. [HB 233 was held over.]
ADJOURNMENT
There being no further business before the committee, the House
Community & Regional Affairs Standing Committee meeting was
adjourned at 10:02 a.m.
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