2014 -- H 7895

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LC004980

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     STATE OF RHODE ISLAND

IN GENERAL ASSEMBLY

JANUARY SESSION, A.D. 2014

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A N   A C T

RELATING TO TAXATION - PROPERTY TAX RATE FOR RESIDENTIAL PROPERTY

SUBJECT TO LOW INCOME HOUSING COVENANT RESTRICTIONS

     

     Introduced By: Representative Jeremiah T.O`Grady

     Date Introduced: March 06, 2014

     Referred To: House Municipal Government

     It is enacted by the General Assembly as follows:

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     SECTION 1. Title 44 of the General Laws entitled "TAXATION" is hereby amended by

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adding thereto the following chapter:

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CHAPTER 33.7

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PROPERTY TAX RATE FOR RESIDENTIAL PROPERTY SUBJECT TO LOW INCOME

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HOUSING COVENANT RESTRICTIONS

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     44-33.7-1. Definitions. -- As used in this chapter the following terms shall have the

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following meanings:

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     (1) "Capitalization rate" means a market capitalization rate that is typical for the area in

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which the property is located as determined annually by March 31 by the housing resources

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commission or designee and as published by the housing resources commission.

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     (2) "Collection loss" means the amount of actual uncollectable rents in the applicable tax

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year.

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     (3) "Gross potential income" shall be calculated as follows: (i) For residential units

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receiving assistance under a project-based rental subsidy contract, the gross potential income for

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such units shall be the rents specified in each unit's respective contract.

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     (ii) For all other residential units subject to a legal affordability restriction, the gross

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potential income shall be the maximum restricted rents allowed by the legal restrictions

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governing said units for the area in which the property is located; provided that, where multiple

 

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legal restrictions apply, the most restrictive shall be used. Maximum restricted rents shall be

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adjusted as appropriate using the utility allowances for the area in which the units are located as

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determined by the United States Department of Housing and Urban Development.

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     (iii) For all non-restricted residential units in properties in which only a portion of the

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units are subject to a legal affordability restriction, gross potential income shall be calculated by

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using non-restricted rents as determined by local market data or, in the event that local market

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data is unavailable, by using the United States Department of Housing and Urban Development

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fair market rent for the area in which the property is located.

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     (iv) Other income shall be included in the property's gross potential income.

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     (4) "Net operating income" shall be calculated for a property by subtracting from the

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gross potential income that property's vacancy loss, collection loss, and operating expenses as

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defined in this chapter.

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     (5) "Operating expenses" means the actual ordinary and typical annual expenses that are

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necessary to keep the property in compliance with its contractual obligations under the specific

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affordability restrictions and legal covenants and to keep the property functional, and shall

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additionally include deposits to restricted reserve accounts as required by the property's

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respective housing subsidy covenants or other legal restrictions, but shall not include property

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taxes, mortgage debt service, or depreciation incurred with respect to the property.

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     (i) Expenses for capital improvements, meaning improvements with an expected life

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exceeding five (5) years (as opposed to expenses associated with yearly maintenance or work

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performed in preparation for unit turnover) shall not be considered operating expenses.

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     (6) "Other Income" means income that is attributable to the real estate and is ordinary and

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recurring including, but not limited to, laundry or vending machine income.

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     (i) Interest earned on restricted reserve funds shall be considered other income.

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     (ii) For properties with non-residential space that is or can be rented as commercial space

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to third parties (with consideration of any legal, market, or covenant restrictions), market rent

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shall be attributed to such space and shall be considered other income.

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     (iii) Common area space within a property that is used primarily to benefit the property's

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residents or to provide services to the property's residents shall not be assessed separately and no

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income shall be imputed to such space.

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     (7) "Property" means the property described in the recorded land use restrictions/subsidy

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covenant.

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     (8) "Restricted reserve funds" means funds that are required to be reserved by the low

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income housing tax credit program and/or other affordable housing covenants as they may pertain

 

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to the subject property, and are restricted to specific uses. Such funds shall be treated as follows:

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     (i) Actual deposits or payments into such funds shall be considered an operating expense;

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and

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     (ii) Actual interest earned on such funds shall be considered other income.

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     (9) "Vacancy loss" means a reduction in gross potential income calculated by multiplying

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the gross potential income for the residential rental units by the rental market vacancy rate for the

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area in which the property is located as determined by the Rhode Island housing resources

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commission.

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     44-33.7-2. Tax rate for residential property subject to low income housing covenant

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restrictions. -- (a) The assessment for real estate tax purposes on multi-family residential rental

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property which is governed by section 42 of the Internal Revenue Code and which is subject to a

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recorded housing subsidy covenant that restricts tenant eligibility, rents, and resale shall, upon the

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affirmative request of the taxpayer, be determined under the provisions of this chapter,

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notwithstanding any statute, law, rule or regulation to the contrary.

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     (b) A taxpayer eligible to make an election under this section shall be liable for the real

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estate taxes on the property in an amount that is the greater of:

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     (1) The taxes determined using the income-based approach to valuation as defined in this

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chapter herein; or

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     (2) The taxes in an amount equal to eight percent (8%) of the property's gross potential

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income.

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     (c) The assessed value of the property subject to a housing covenant as described under

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this chapter shall be calculated using an income-based approach to valuation under which the net

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operating income is divided by the capitalization rate.

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     (d) The assessed value of the property subject to a housing covenant as described under

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this chapter shall not take into consideration the value of intangible assets including, but not

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limited to, government subsidies or grants, below market rate mortgage financing, and tax credits

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where such subsidies are used to offset project development expenses in order to allow for

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restricted rents. The assessed value shall not take into consideration the actual cost of acquisition

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or construction of the project.

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     (e) A taxpayer who makes an election for assessment under this chapter shall, by April 15

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of each applicable tax year, provide the assessor with the relevant information described in this

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chapter, using a form prepared by the Rhode Island housing resources commission.

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     (f) Financial information that is required from the taxpayer under this chapter shall be the

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audited financial statements from the prior calendar year as prepared by a third-party certified

 

LC004980 - Page 3 of 5

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public accountant. For properties seeking to include financial data for only part of the prior

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calendar year, the assessor shall use the partial data provided and the projected operating budget

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for the first full year of operations as provided by the Rhode Island housing and mortgage finance

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corporation to extrapolate a full year's estimated operating financials.

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     (g) A copy of the recorded land use restriction required by section 42 of the Internal

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Revenue Code or other low-income rental use restriction covenant(s) required by the Rhode

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Island housing and mortgage finance corporation, Rhode Island housing resources commission,

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or another governmental entity is sufficient proof that the property is eligible for assessment

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under this section.

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     (h) Upon election by the taxpayer, the qualifying property shall be assessed under this

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section for the following fifteen (15) years, or so long as the property remains subject to the

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recorded housing subsidy covenants, proof of which is defined in this chapter herein.

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     44-33.7-3. Rules and procedures.-- The Rhode Island housing resources commission is

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hereby directed and empowered to adopt rules and procedures pursuant to the Rhode Island

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Administrative Procedures Act relating to the establishment of capitalization rates.

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     SECTION 2. This act shall take effect upon passage.

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EXPLANATION

BY THE LEGISLATIVE COUNCIL

OF

A N   A C T

RELATING TO TAXATION - PROPERTY TAX RATE FOR RESIDENTIAL PROPERTY

SUBJECT TO LOW INCOME HOUSING COVENANT RESTRICTIONS

***

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     This act would establish a property tax rate for qualifying residential property which are

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subject to certain low income housing covenant restrictions. The rate would equal the greater of

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eight percent (8%) of the property's gross potential income or the tax as determined using an

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income based approach to valuation.

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     This act would take effect upon passage.

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