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
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.
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