SCAM? NOT FOR PROFIT? OR BOONDOGGLE

Assessors: New rule won't halt tax 'SHAM' ---
State board proposal is aimed at developers who use nonprofits to GAIN low-income exemption.
By John Hill --
Bee Capitol Bureau
Published 2:15 am PDT Thursday, June 30, 2005
Story appeared on Page A3 of The Bee

County assessors recently brought what they saw as an emerging problem to the state Board of Equalization: for-profit operators of low-income housing unfairly winning property tax exemptions by teaming up with "SHELL" nonprofit groups. BUT the assessors say the tax board's response, which will come to a vote today, doesn't go far enough and won't stop the problem of developers using nonprofit fronts to fatten their bottom lines. "They turned around and made it worse than it is," said Larry Stone, Santa Clara County assessor, who also happens to be a for-profit developer of low-income housing. "I think this is wrong, even though potentially I could benefit from it," he said. "The losers are all the SCHOOL systems and local government" whose property tax revenues are reduced by what he called "sham" nonprofit groups. Some developers, contrary to the existing law, are not using the money they save on lower property taxes to reduce rents, Stone said. Yet the proposed rules are so lax, he said, that a nonprofit group named as the managing partner of a low-income housing project need never set foot on the site.

Board Chairman John Chiang said the proposed regulations have enough clout to curb abuses, which he believes are not widespread. "The Board of Equalization is not going to support a scam," he said. At the same time, Chiang said, the board has to consider competing interests and stay within the boundaries of state law. Some nonprofit groups want to control projects, even though they don't put up most of the money, Chiang said. "It's a balance, obviously," he said. Among other things, the proposed changes require a nonprofit group to perform any two of 11 "substantial management" duties.

Property tax exemptions are one of the main subsidies for low-income housing, said Jonathan Webb, executive director of the Foundation for Social Resources, which rehabilitates and preserves affordable housing. His organization supports the proposed regulations as a way to clarify the rules while assuring that the flow of money to worthy projects is not interrupted. "The overall goal is so important," Webb said. The dispute centers on a 1988 state law that allows low-income housing developments to qualify for a property tax exemption as long as a nonprofit group serves as the managing general partner of the limited partnership that runs the project.

Some assessors, who are responsible for collecting property taxes, started to notice cases in which a nonprofit group seemed to serve as little more than a front, allowing the project to qualify for a tax break. In one case in Los Angeles County, a partnership was running 167 properties consisting of 8,400 units even though the non-profit group listed as managing general partner had only two or three employees, Assessor Rich Auerbach said. "It was apparent from what 'managing general partner' meant that this couldn't be possible," Auerbach said. Stone, the Santa Clara County assessor, said he first learned about the prevalence of abuse while discussing his own low-income housing project with a San Jose housing official about three years ago.

Stone said he told the official he didn't want to partner with a nonprofit group because he wanted to maintain control over the project. The official, Stone said, responded that "there are ways to get around that." In response to the assessors' plea for a clarification of the rules, the Board of Equalization, which oversees assessment practices, came up with the proposed regulations being considered today.

The California Assessors' Association and others say the changes would not be enough, however. They want the nonprofit groups to meet both of two fundamental criteria - participating in day-to-day operations and dealing with government regulations - or a greater number of the 11 proposed by the board. The regulations as proposed, Auerbach said, would allow nonprofits to qualify by doing basic "record-keeping," such as delivering partnership documents. But Chiang defended the requirements as much more substantial. "You can't just stick a piece of paper in a file cabinet," he said. In addition, he said, the board plans to AUDIT partnerships to make sure the groups actually are involved in the affordable housing operations. If the board approves the regulations at its meeting today, they will go through a formal process to make sure they comply with standards for all state regulations. That includes a 45-day public comment period.

ABOUT THE WRITER:• The Bee's John Hill can be reached at (916) 326-5543 or jhill@sacbee.com.