2014 -- H 7895

========

LC004980

========

     STATE OF RHODE ISLAND

IN GENERAL ASSEMBLY

JANUARY SESSION, A.D. 2014

____________

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:

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

adding thereto the following chapter:

CHAPTER 33.7

PROPERTY TAX RATE FOR RESIDENTIAL PROPERTY SUBJECT TO LOW INCOME

HOUSING COVENANT RESTRICTIONS

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

following meanings:

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

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

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

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

year.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

defined in this chapter.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

income shall be imputed to such space.

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

covenant.

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

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

LC004980 - Page 2 of 5

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

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

and

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

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

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

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

commission.

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

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

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

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

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

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

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

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

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

chapter herein; or

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

income.

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

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

operating income is divided by the capitalization rate.

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

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

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

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

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

or construction of the project.

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

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

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

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

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

LC004980 - Page 3 of 5

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

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

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

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

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

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

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

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

under this section.

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

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

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

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

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

Administrative Procedures Act relating to the establishment of capitalization rates.

     SECTION 2. This act shall take effect upon passage.

========

LC004980

========

LC004980 - Page 4 of 5

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

***

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

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

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

income based approach to valuation.

     This act would take effect upon passage.

========

LC004980

========

LC004980 - Page 5 of 5