The California Board of Equalization (BOE) has apparently resolved a high-stakes regulatory dispute stemming from allegations that housing businesses were avoiding property tax by teaming with nonprofit "managing general partners" that did no real managing.
Cal. Revenue and Taxation Code Sec. 214(g) grants a "welfare exemption" from property tax where low-income housing is owned by a partnership whose managing general partner is a nonprofit organization. The law does not specify such partners' duties, nor, until recently, did BOE regulations. But on Dec. 13, 2005, the BOE voted to publish Rules 140, 140.1, 140.2, and 143 providing that, among other requirements, nonprofit "managing general partners" must perform five out of 12 "management duties." A comment period and March 28, 2006 hearing were scheduled, but by January the parties that had disagreed were already focused on mending strained business relationships.
The BOE decision reflected a compromise by county assessors and many housing businesses and nonprofits. A small dissenting caucus, however, called the new rules inadequate to ensure tax exemptions benefited low-income tenants. The dissenting group included nonprofit housing developers/managers Mid-Peninsula Housing Coalition and EAH, Inc.
Even the parties that agreed on the rules didn’t necessarily agree on why they were needed.
Santa Clara County Assessor Lawrence Stone said there had been "sham transactions out there where the nonprofit was a shell or a front," and he would have preferred stronger requirements, but the compromise would "eliminate the outrageous scammers." Stone said he discovered the issue as a private developer when a San Jose housing official told him to partner with a nonprofit to get the exemption. He objected that it would make him uncomfortable as assessor, and, more important, he didn't want to give up management control. The official replied, "You don't have to worry about that, there's ways around it." Afterward, he realized he was "being told by San Jose Housing how to violate a statute that I was responsible for administering as county assessor." He said other developers told him certain nonprofits would join a partnership for a management fee without insisting on much control, and one developer said, "We don't allow them to manage the property."
By contrast, attorney Stephen Ryan of Cox, Castle & Nicholson LLP, a leader in the largest business/nonprofit coalition on the issue, condemned "the new 'urban legend' of sham nonprofits that seems to have been perpetuated." Ryan said he had not seen improper conduct and knew of just one investigation. He said nonprofits that manage housing with large staffs seem to view only their own approach as correct – leaving out, for example, a small nonprofit able to provide land but not management. He noted managing general partners were not necessarily property managers.
The rulemaking began in 2004 after Los Angeles County Assessor Rick Auerbach spoke to BOE about cases his office discovered, One, he said, involved an entity with a staff of two or three serving as managing general partner for "a great number of properties." (BOE spokeswoman Anita Gore wrote: "We were contacted by local officials in Los Angeles, regarding alleged abuses of the exemption. Public questions during a board meeting caused the board to take a second look at the rules. The Board is auditing one nonprofit organization that's involved in housing developments, but the details of such audit are confidential.")
"We now have the rules that will solve the problem," Auerbach said. He said he had denied some exemptions for lack of BOE guidance, notably on tax credit housing that was rent-restricted but no longer receiving credits.
Members of Ryan's coalition included nonprofits as well as investors and syndicators. Key participants included Steven Fayne of GMAC Commercial Mortgage and David Kunhardt of AEGON USA Realty Advisors, Inc. Kunhardt credited Ronne Thielen of Related Capital Co. and Terry Freeman of Klein Financial Corp. as negotiators and said the California Housing Consortium organized a "revelatory" meeting when negotiations stalled last spring.
In November, the dissenting caucus unsuccessfully proposed interpreting Sec. 214(g)(2)(B) to ban distributions of profits unless property tax was paid or rents were reduced below their regulated level by the amount of the tax exemption. Joel Rubenzahl of Community Economics, Inc., explained the proposal came late because "At a BOE interested parties meeting in June... Staff assured those present that the language in [Rule] 140.2 was sufficient to enforce the law. It was only later, after further investigation, that it became clear that there were widely differing interpretations of the requirement and that further clarifying language was desirable." The proposal was widely opposed, principally as a cause of uncertainty for investors.
No one contacted for this article would accuse any nonprofit by name of impropriety. All agreed, however, that some nonprofits have employed few staff despite joining many partnerships - an impression supported by the Form 990 tax disclosures (see www.guidestar.org) of some "managing general partners" listed at For more rulemaking details, see www.boe.ca.gov/proptaxes/ptrwelfare.htm.
