HOUSE BILL NO. 264 "An Act allowing a deferral of municipal property taxes on the increase in the value of real property attributable to subdivision of that property; and providing for an effective date." 2:57:06 PM REPRESENTATIVE CATHY MUNOZ, SPONSOR, explained that HB 264 would give municipalities the option to provide an incentive to develop land for housing by deferring for up to five years a property tax increase directly related to the subdivision of a piece of property into three or more lots. She elaborated that there was a limited land base in Juneau, which resulted in limited new housing opportunities. She detailed that when a developer purchased a piece of land and began the subdivision process as soon as the surveying and planning paperwork was filed the property was reassessed at a rate that could be between 5 and 10 times the predevelopment cost before any work had occurred on the property. She stressed that the issue was an incredible disadvantage and disincentive for new housing development especially in communities faced with limited housing opportunities. Representative Munoz continued to explain the legislation. The bill would provide municipalities the flexibility to defer increases in property taxes on subdivided parcels until a lot was sold or until a residential or commercial building was constructed on a plot of land. The local government would be allowed to adopt an optional deferral for all or a portion of the subdivided property and could decide the terms of paying the tax deferral. She communicated that supporters of the legislation believed that it would provide an incentive for developing privately owned property by holding taxes at the undeveloped land value until improvements occurred that led to the development or sale of the parcel. The land would then be more valuable and capable of generating more revenue for the local community. Representative Munoz delineated that the purpose of the bill was to encourage land development and more housing opportunities and to let local governments decide whether a property tax deferral would benefit the community. She was sensitive to the concerns of local municipalities related to exemption legislation and the passing on of unfunded liabilities to cities; the bill would not impose the burden on local municipalities. The sponsor had worked closely with the Alaska Municipal League (AML). She expounded that the deferral was optional and that property taxes would ultimately be due when the property was sold or developed. She informed the committee that the assistant state assessor and others were available to testify. Co-Chair Stoltze appreciated the process that had led to the bill. He had been slightly disappointed that the bill only included a deferral, but he understood that it had been crafted carefully. 3:01:18 PM Vice-chair Fairclough MOVED CSHB 264(CRA) as a working document before the committee. BILL ROTECKI, MEMBER, KETCHIKAN GATEWAY BOROUGH ASSEMBLY, spoke in support of the legislation. He discussed that the issue had come up as a suggestion when the borough had done an economic development survey that included the housing industry. He explained that local builders would be more inclined to subdivide parcels before selling them if taxes could be deferred for five years or until the property was sold. He relayed that Ketchikan would face a housing shortage if the local shipyard was awarded the contract to build new state ferries or if new mining opportunities arose. He elaborated that building housing to meet the needs of any of the possibilities would take time. The borough did not want individuals moving to the community to have to commute from another location due to a lack of housing options. He opined that under the legislation the municipality would most likely gain rather than lose. He furthered that the community could not lose tax revenue that it did not already have, but the revenue would be generated if the subdivision of property occurred. 3:04:30 PM ALAN WILSON, CHAIRMAN, JUNEAU AFFORDABLE HOUSING COMMISSION, voiced support for the bill. He relayed that the Juneau Assembly had established the Juneau Affordable Housing Commission in 2007 to address local housing issues. The commission had worked on multiple items including comprehensive planned issues, density overlays, free gravel for site improvement, and other. He relayed that the commission had looked at tools utilized by communities in the Lower 48 that allowed them to develop a region or to target specific types of housing; the deferral of property taxes had been a strategy used by other communities. Carrying costs over time was a burden to developers and could result in a loss of property. Mr. Wilson communicated that HB 264 was the first tool in the toolbox that private developers could utilize directly. The commission viewed the tax deferral as an economic development tool versus a housing tool; however, anything that would help address Juneau's housing vacancy rate that was currently less than 1 percent would be beneficial. Co-Chair Stoltze thought the problem was about a cash flow issue; builders did not want to put out cash prior to making money. Mr. Wilson replied in the affirmative. Vice-chair Fairclough asked whether the commission had asked the city assessor's office why the price of property was increased immediately after it was subdivided and whether it would consider stair-stepping the tax increase. Mr. Wilson answered that the commission had asked the local assessor why tax costs could not be deferred. The response had been that according to state statute all property must be valued fairly. He explained that a ten acre parcel could be valued below a one acre parcel, but once the ten acre property was subdivided the value and desirability of the parcels increased. Co-Chair Stoltze noted that there were a number of strong state assessor laws. Mr. Wilson agreed. 3:09:09 PM JOHN HARRINGTON, MEMBER, KETCHIKAN GATEWAY BOROUGH, PLANNING COMMISSION AND ECONOMIC DEVELOPMENT ADVISORY COMMITTEE, spoke in favor of the legislation. He relayed that the entities had interviewed local business sectors who had been developing economic development action plans. The borough assembly had adopted approximately one-third of the plans, one of which was the same proposal encompassed in the bill. The assembly had been told that the proposal was not legal under current law; therefore, the introduction of the bill had received broad support. Co-Chair Stoltze asked whether the borough had separate property tax levies from the Cities of Ketchikan or Saxman. Mr. Harrington replied in the negative. Vice-chair Fairclough believed that the legislation impacted several groups including the homebuilders and the homeowners. She surmised that the homeowner would pay a smaller amount of taxes depending on how quickly they purchased a lot on a subdivided property and created a different type of ownership from one where liens would be placed on each lot based on tax deferred by the year. She provided a scenario in which a ten acre lot was divided into 10 parcels; only one of the lots sold in the first year. She asked whether under the scenario the homeowner would only be responsible for one year of deferred taxes in their purchase price. Mr. Harrington replied in the affirmative. Vice-chair Fairclough had concerns about how the repercussions of a developer that went bankrupt would impact homestead property owners that carried the note themselves. In the event of the bankruptcy she wondered whether the homesteader would be responsible for any deferred taxes on the subdivided parcel. She was concerned that if a bank was responsible that it would be second in line to the government take. Mr. Harrington replied that he was not the appropriate person to answer the question. He added that the situation in the Ketchikan Gateway Borough involved landowners interested in subdividing their properties. He explained that the typical situation involved remaining land on subdivided property that was developed at a later time and did not match the look of the prior development. He believed that it made much more sense to allow the landowner time to implement a plan for the entire development and to proceed systematically. 3:14:38 PM Vice-chair Fairclough agreed, but surmised that the homeowner could have $10,000 of additional costs built into a property they were purchasing depending on the amount of the deferred property tax. She understood that the bill made the process easier for developers and that cities would receive their share as well, but she had questions remaining related to the homeowner. Co-Chair Stoltze noted that subdivision costs were a big revenue generator for the Municipality of Anchorage. 3:15:57 PM FRED MORINO, MANAGER, D.J.G. DEVELOPMENT, JUNEAU, supported the legislation. He believed the bill would provide a positive economic impact statewide for homeowners, municipalities, and developers. 3:16:37 PM DAVE HANNA, OWNER, JLC PROPERTIES, JUNEAU, voiced support for the bill. He referred to communication with representatives from several banks who saw the bill as a great incentive for development. He had worked with multiple homebuilding associations including Alaska General Contractors and everyone had been in favor of the proposal. He addressed that AML had concerns but the entity believed that given the bill's flexibility the proposal was tailored to suit every city's needs; communities could use the deferral as a tool to encourage development. The bill was more than a cost saving measure; it could be used to steer the desired development. He detailed that the incentives could be offered to a developer who was willing to create the lot sizes the city wanted or to include features like a bus stop or a park. Mr. Hanna believed the bill would help developers who were "hanging out to dry." He explained that the development of a subdivision was a drawn out, expensive process. He communicated that people typically did not enter the business without a good incentive and a healthy demand for lots. He pointed to building cycles that occurred and relayed that some developers looking to take advantage of a good market were experiencing a significant financial burden because the subdivision process was lengthy and the market and demand fell before the lots could be sold. The taxes were a tremendous disincentive for development and he believed lessening the burden would be good for the economy. He had submitted an example showing that if a subdivision had been bought two years earlier than it normally would have, it would be a net revenue increase to the municipality because taxes were higher on houses than on raw land. 3:20:48 PM Vice-chair Fairclough asked which financial institutions had been communicated with. Mr. Hanna replied that the institutions included Alaska Pacific Bank, True North Federal Credit Union, and First Bank in Ketchikan. Co-Chair Stoltze remarked there had been a large housing development planned in one of his precincts until the economy had taken a downturn. He observed that the bill had far reaching impacts. Vice-chair Fairclough was supportive of the concept before the committee, but she reiterated her concern about homeowners in her district that were dealing with the ramifications of a bankruptcy. She believed the proposal was an excellent idea and that the sponsor had created flexibility in the way the state would pass the law; however, she wanted a more detailed understanding of the bankruptcy process in order for municipalities to factor it into their implementation of the law. Mr. Hanna relayed that based on conversations with the state and local assessor's offices he understood that municipalities could take a second position if desired. He elaborated that the tax liability by law could stay with the owner of record, but the municipality could also choose to defer the liability to prevent it from transferring to another person in the event of a bankruptcy. Vice-chair Fairclough understood that the flexibility existed, but she guessed that in her municipality the government would take its cut first. She shared that when the government took its cut on a foreclosure or bankruptcy it meant that the Anchorage property tax payers would be accepting the burden and risk. She believed the state framework in the bill worked fine, but the devil was in the details related to who the responsible party was if the developer went bankrupt. 3:24:30 PM Co-Chair Stoltze CLOSED public testimony. Representative Munoz read from a letter she had received from Juneau commercial banker Jerry Kromer: From a lending perspective the increased cash outflow needed to carry the property taxes on the full final value of the lots without being matched to the timing of the cash inflow when the lots are sold creates greater risk to the lender. Risk is compensated in two ways: higher rates for borrowing and/or lower loan amounts, each of which adds to the costs to the end purchaser of the lot and higher housing or commercial prices without real increased benefit to the developer or to the lender. Through the higher costs and reductions in the amount of development that could have been done, the taxing authority is in my opinion getting less revenue through less eventual development. Representative Wilson asked whether the tax deferral stopped at the beginning of a housing project or upon completion. Representative Munoz answered that the tax liability would be due when the lot sold within the initial five year period or it would require the building to be completed if there was not a building permitting process. Representative Wilson noted that there was not a permitting process in Fairbanks and asked for verification that the developer would not pay the deferred tax until the house was completed. Representative Munoz replied that either the sale of the lot or the construction of the building would occur before the tax deferral ended. Co-Chair Stoltze referred to the zero fiscal note. Co-Chair Thomas MOVED to report CSHB 264(CRA) out of committee with individual recommendations and the accompanying fiscal note. There being NO OBJECTION, it was so ordered. CSHB 264(CRA) was REPORTED out of committee with a "do pass" recommendation and with one new zero fiscal note from the Department of Commerce, Community and Economic Development.