Thousands of California tenants could face murky tax bills for living in subsidized housing (2023)

Last year, amid a tight rental market, Sydney Wright considered leaving California.

With her salary of $72,000, the 30-year-old from La Crescenta said the only one-bedroom apartments she could find were:very expensive, very neglected or in neighborhoods she considered unsafe.

Then Wright changed. She moved to the Hudson, a luxury apartment complex in downtown Pasadena that has a pool, two gyms, and indoor washers and dryers. Wright got a relative deal and signed a lease for just over $2,300, nearly $200 less than the average for similar units there the previous year, even as rents in Pasadena have soared.

But maybe it's too good to be true.

The discount is the result of aunique programserving middle-income people in a state that is trying to thin out—project by project, program by program—in its ownhousing crisis. And the legal knot in which it is tied reflects difficulty taking even small steps forward.

In this program, government agencies known as Joint Powers Authorities, or JPAs, work with private companies to buy apartment buildings and reduce rents. The agencies say it works because, like the state, they don't have to pay property taxes, allowing them to pass that savings on to tenants.

But under the opaque tax rule, thousands of tenants like Wright could set aside some of the lost income and pay individual tax bills of more than $1,000 a year.

Tenants say rental agents never discovered such a possibility before they moved in, and those who support the program say they didn't expect it either.

"It seems kind of ridiculous to me that you have this crisis going on and then you turn around and punish the people you're supposedly trying to help," Wright, 32, said.

John Drachman, co-founder of Waterford Property Co., which manages Hudson and 14 other properties on behalf of APP, put it more succinctly: "It's just crazy."

The fact that tenants may have to pay more to live in subsidized housing centers is based on a mysterious concept in the tax code known as possessory interest.

Although government property is usually exempt from property taxes, if the government leases part of your property to a private entity, then that entity may have a "possessory" interest that must be taxed.

Examples include a car rental office at an airport or a restaurant in a public park.

The Joint Powers Authority began purchasing housing complexes for middle-income housing in 2019, with one purchased by Hudson in 2021.

Attorney John Bakker represents three JPAs with such projects.

He said the agencies did not anticipate that tenants would face property taxes because at the time they were relying on existing state board guidelines that he said should be interpreted as exempting anyone who receivesrent breaksin projects.

Last year, several appraisers were less sure and specifically asked the state commission whether such projects create a taxable "ownership interest."

In October 2022, they received a response from the California State Board of Equalization, which promotes uniformity in property tax laws.

In the letter, the board said residents of JPA properties have a taxable ownership interest, but assessors should refrain from taxing only if they are low-income residents, as defined by California law.

The board described its guidelines as "long-term," which Bakker disputes.

The final decision on taxes rests with the county assessors, but as evidenced by their original request, the assessors look to the council for guidance and there is no argument that the recent opinion does not provide an exemption for most residents on JPA projects.

Typically, one-third of the units in the projects are reserved for people who meet the law's definition of low income: 80% or below the median income for the area. The remaining two thirds are generally reserved for families earning between 81% and 120% of the median income for the area - individuals who may still be struggling to find a good home in some countriesthe most expensive markets.

The two assessors for the project counties in their jurisdictions, Los Angeles and Alameda, said they did not want to tax middle-income residents and were looking into the issue further after receiving guidance from the board. But if the state legislature doesn't intervene, they warn, they could end up deciding the law requires them to tax tenants.

Los Angeles County Assessor Jeff Prang estimated that annual taxes for individual tenants could range from $500 to $1,500. Initial bills could be higher because tenants would be billed for each year they stay there.

If taxes are not paid, residents will face liens that could make it difficult to qualify for mortgages and other loans.

For Wright, the prospect of paying an extra $1,500 a year, which equates to an extra $125 a month, is another hurdle.

Despite Hudson's rent discount, she said she lives paycheck to paycheck and will soon have additional expenses when her student loan payments resume, which Wright estimates will be more than $300 a month.

"I don't even know how I would manage everything," she said. "Honestly, when I think about it, I want to cry."

JPA projects rely on a complex structure, but generally viewers say that's how it works.

Authorities with joint powers issue bonds to purchase the building and, with the property off the tax records, use that money to reduce the rent. After 15 years, the local city, which must approve the initial APP purchase, can direct the sale of the property or take out a loan on the building to make up for lost tax revenue.

To run the business, JPAs partner with private real estate companies that set up bond financing and manage projects.

Agreements and some cities and towns are disputedaffordable housing advisorsI think the programs are risky and not worth it. In particular, APPs and private property managers, known as project managers, have faced criticism that their fees are excessive and therefore restrictiverent reductionthe project can offer.

At least two county assessors, those from Orange County and San Diego County, have taken the position. that project administrators, not tenants, should pay tax on leasehold interest.

"These guys are making money and ... they don't want to pay taxes, but you have to pay your taxes," Orange County Tax Assessor Claude Parrish said, arguing that project managers control the buildings and therefore own an interest.

The project manager, Waterford Property Co., has received property tax bills for several projects it is managing in Orange and San Diego counties. The company is appealing, arguing that it does not qualify for a possessory interest.

If the taxes are finally passed, middle-income projects will cease to exist, according to Waterford's Drachman.

Despite concerns about the fees, which Waterford disputes as too high, annual property taxes are higher than what the company earns each year to operate the buildings, Drachman said.

One example, he said, is the Parallel apartments in Anaheim, where Waterford faces an annual tax bill of $1.2 million and makes about $700,000 a year.

Instead of losing money, Drachman said, the company would abandon the projects and, since no one would likely manage the properties at a loss, they would be sold to real estate companies that would chargemarket rentand delete all savings.

If tenants get a bill instead, Waterford said no future deals can be negotiated. That's partly because investors who buy corporate-backed bonds do so because they believe rent discounts will keep occupancy high — and their yields safe.

"The group that will be hurt the most by their actions are the renters," Drachman said of the appraisers. "At the end of the day, are they going to send them an interest bill or are they going to come after us and make it."

Prang said he doesn't want to be an "obstacle" to creativity.solutionsbut it has to follow the law and criticized the APPs for not consulting the assessors first.

Prang said he's awaiting the county council's opinion on whether taxing project managers is an option, but warned the county board of supervisors in March that it might have to tax middle-income tenants.

"We're trying to find a solution" to not do that, Prang said in an interview. "But one of the things that's holding it back is having a solid bill and a legislator willing to support it."

California Counselors Association. recently agreed to ask state lawmakers to clarify that project managers — not tenants — have an ownership interest, according to the group's president, Kristine Lee.

So far, Sacramento's efforts to exempt middle-income tenants have stalled. Two bills seeking to do that, Assembly Bill 1553 and Senate Bill 320, are dead this year after failing to meet statutory deadlines.

Alternatively, a third bill that specifically leaves middle-income tenants open to property taxation passed unanimously in their first home.

The bill, Senate Bill 734, codifies the Board of Equalization's existing guidelines, exempting only low-income tenants.

According to an analysis of the bill, author Sen. Susan Rubio (D-Baldwin Park) said the legislation is necessary because, despite the fiscal council's guidance, "existing law is ambiguous" about whether low-income tenants are actually exempt.

The bill, which must be approved by the Assembly by mid-September, is supported by the Equalization Council and opposed by some cities that have middle-income housing projects.

In a letter to Rubio, Pasadena Mayor Victor Gordo said the city has nearly 1,100 units in its JPA housing projects and that rents have been reduced by an average of 20%.

“If SB 734 passes as written, 60% of the tenants in these units will be eligible for property interest tax bills, which we do not believe is in the best interesthousing policyin California," wrote Gordo.

In all, Bakker said JPAs have about 14,000 units across California, with about 9,000 currently housing middle-income families or earmarked for such families in the future.

Rubo's office declined to answer several specific questions about the law, including why it does not exempt middle-income tenants. In a note provided by her spokeswoman, the senator said she was trying "keep families fosteredand works closely with the Equalization Committee on that measure.

BOE President Antonio Vazquez said he does not support extending the exemption to middle-income earners, at least for now.

"I think we have to be careful because it would create a huge financial impact for cities and counties that depend on [property tax] revenue," he said.

Waterford leaders dispute that taxing individual tenants would recoup a significant amount of revenue, but Vázquez's concerns echo longstanding criticism of APP's housing model, particularly that rent reductions are too modest to justify the property's tax loss.

For example, APPs have often purchased newer, more luxurious apartment buildings, and although they have reduced rents, they are often cheaper,the oldest apartmentFollowing.

Wright now pays just over $2,400 in rent on Hudson after receiving an annual raise allowed under the program.

That's far less than the roughly $2,800 to $3,000 or more that similar buildings typically charge. But recently on Zillow, 53 old one-bedroom apartments in Pasadena were listed for rent that were at least $200 cheaper than what Wright is paying.

If Wright gets hit with property taxes, she won't see these older units as an easy fix.

For one thing, she said, she doesn't have enough money to cover the initial costs of moving.

She chose Hudson for a reason.

The program must keep your rent in line with your income. And when the tax collector works late into the night during tax season, he doesn't have to look for street parking when he gets home. He can park in his safe spot and do laundry the next day in the comfort of his apartment.

The older units she's seen look like makeshift landing sites with broken sinks, worn carpets and bad paint, but the Hudson looks more durable.

"I deserve to have a place to call home and not move around all the time," Wright said. “It felt like a place where I could see myself living.”