State of California
State of California Board of Equalization Legal Department-MIC:83 Office of the Chief Counsel (916) 445-4380 Fax: (916) 322-0341 Memorandum To: Honorable Jerome E. Horton, Chairman Honorable Michelle Steel, Vice Chair Honorable Betty T. Yee, First District Senator George Runner, Second District Honorable John Chiang, State Controller From: Randy Ferris Chief Counsel Subject: Board Meeting, November 19-20, 2014 Item J- Chief Counsel's Rulemaking Calendar Regulation 140.1, Requirements for Managing General Partner of Limited Partnership for Welfare Exemption for Low-Income Housing Properties Date: October 8, 2014 We request your approval to place proposed changes to Property Tax Rule 140.1, Requirements for Managing General Partner of Limited Partnership for Welfare Exemption for Low-Income Housing Properties, on the Chief Counsel's Rulemaking Calendar for the November 19-20,2014 Board meeting. The rule defines the term "managing general partner" and prescribes the requirements to establish that an eligible nonprofit corporation is the managing general partner of a limited partnership for purposes of qualifying for the welfare exemption under Revenue and Taxation Code section 214, subdivision (g). The proposed changes make the rule consistent with the repeal of Corporations Code sections 15611 and 15641 and the enactment of Corporations Code sections 15 901.02 and 15 904.01. Corporations Code section 15611, subdivisions (1), (n), (q), and (r), respectively, defined the terms "foreign limited partnership," "general partner," "limited partner," and "limited partnership" for purposes ofthe Revised Limited Partnership Act (Corp. Code,§§ 1561115724). Corporations Code section 15641 governed the admission of general partners to limited partnerships under the Revised Limited Partnership Act. Corporations Code sections 15901.02 and 15904.01 were included as part of the Uniform Limited Partnership Act of2008, which was enacted by Assembly Bill No. (AB) 339 (Stats. 2006, ch. 495, § 20). Corporations Code section 15901.02, subdivisions (k), (m), (p), and (q), respectively, define the terms "foreign limited partnership," "general partner," "limited partner," and "limited partnership" for purposes of the Uniform Limited Partnership Act of2008. Corporations Code section 15904.01 governs the Item J2 11-19-14 Honorable Board Members October 8, 2014 -2- admission of general partners to limited partnerships under the Uniform Limited Partnership Act of 2008. Also enacted as part of the Uniform Limited Partnership Act of2008 was Corporations Code section 15912.06, which by its terms provided for Corporations Code sections 15901.02 and 15904.01 to apply to all limited partnerships beginning on January 1, 2010. In addition, Corporations Code section 15724 was enacted as part of AB 339 in order to provide for the repeal of the Uniform Limited Partnership Act, including Corporations Code sections 15611 and 15641, effective January 1, 2010. Therefore, in accordance with Corporations Code sections 15724 and 15912.06, the provisions of Corporations Code section 15611 were superseded by the provisions of Corporations Code section 15901.02 and the provisions of Corporations Code section 15641 were superseded by the provisions of Corporations Code section 15904.01, beginning on January 1, 2010. The proposed changes to Property Tax Rule 140.1 replace references to repealed Corporations Code section 15611, subdivisions (l), (n), (q), and (r), with references to current Corporations Code section 15901.02, subdivisions (k), (m), (p), and (q), respectively, and replace a reference to Corporations Code section 15641 with a reference to current Corporations Code section 15904.01. Based on the foregoing, Board staff will request the Board's authorization to change Property Tax Rule 140.1 under California Code of Regulations, title 1, section (Rule) 100, without the normal notice and public hearing process. These changes are appropriate for processing under Rule 100 because they make the regulation consistent with current law and do not materially alter any requirement, right, responsibility, condition, prescription or other regulatory element of any California Code of Regulations provision. Attached is a strikeout and underlined version ofProperty Tax Rule 140.1 illustrating the proposed changes. If you have any questions regarding this request, please let me know or contact Mr. Bradley Heller at (916) 323-3091. Approved: Randy FerriS::ef Counsel C~r Approved: BOARD APPROVED At the //-I 9 -1 i:( Board Meeting Dean Kinnee, Acting Deputy Director Property and Special Taxes Department Joann Richmond, Chief Board Proceedings Division ~~~ -3- Honorable Board Members RF:BH:yg Atachment cc: Ms. Cynthia Bridges Mr. Dean Kinnee Ms. Joann Richmond Mr. Robert Tucker Mr. Richard Moon Mr. Bradley M. Heller Ms. Glenna Schultz M1C:73 MIC:64 MIC:80 MIC:82 MIC:82 MIC:82 MIC:64 October 8, 2014 Text of Proposed Changes to California Code of Regulations, Title 18. Section 140. 1 Rule 140.1. Requirements for Managing General Prutner of Limited Partnership for Welfru·e Exemption for Low-Income Housing Properties. (a) De finit ions. The definitions set forth in this regulation shall govern the construction of Revenue and Taxation Code section 2 14, subdivision (g), which provides the requirements for the welfare exemption for low-income housing properties owned by a limited partnership in w hich the managing general partner is an eligible nonprofit corporation or eli gible limited liabili ty company. ( I) ..General partner" means ··general partner"" as defmed by section 1590 1 .02~, subdivision (ma) oftbe Corporations Code. (2) .. Limited partner·· means '·limited partner"' as defined by section 1590 1.02~. subdivision (Rtf) of the Corporations Code. (3) ··Limited partnership'· means a ··timited partnership" as defined by section 15901.02 15611 , subdivision (gf) of the Corporations Code. or a ··foreign limited partnership., as defined by section l 5901.02-J...5.6..t-.l.. subdivision (kl) of the Corporations Code. (4) ··Li mited partnership agreemenC means any valid written agreement of the partners as to the affairs of a limited partnership and the conduct of its business, includ ing all amendments thereto . (5) ..Majority in interest of the general partners·· means more than 50 percent of the interests of the general partne rs, and does not include tbe interests of any of the limited partners, in the current profits derived from business operations of the limited prutnership. (6) '·Managing general partner" means a general partner that: (A) is a nonprofit corporation, or an eligible limited liabi lity company meeting the requirements of Revenue and Taxation Code section 2 14, designated in the limited prutnership agreement as the ·' managing general partner'' of the limited partnership; (B) is authorized to receive a partnership management fee, or similar form of compensation. payable in the amount and the manner set forth in the limited partnership agreement or other agreement executed by all of the general partners for perfonning its duties: (C) has ··material participation; · as defined in subdivision (a)(7) below, in the control, management, and direction of the limited partnership's business; and (D) the officers and directors of the for-profit general partners, for-profit li mited partners. or any of its for-profit affiliates. do not, as individuals or col lectively, have a controlli ng vote or majority interest in the nonprofit managing general partner. (7) .. Material participation'' means that the limited partnership agreement or other agreement executed by all of the general partners expressly provides that the managing general partner: (A) has a right to vote in all the "major decisions.'· defined in subdivi sion (a)( 8) below: (B) performs '·substantial management duties,'' defined in subdi vision (a)( l 0) below; (C) directl y, or indirectly under its supervision. manages the limited partnership; (D) annually conducts a physical inspection oflhe low-income housing property to ensure that the property is being used as low-income housing and meets all of the requirements set forth in Regulation 140: and (E) annually submits a certification to the county assessor for the county in whjch the property is located that the low-income housing property meets all of the requirements set forth in Regulation 140. (8) .. Major decisions'· means those acts, if any. that require a vote of a majority in interest of the general partners. (9) ·'Partner'· means a limited or general partner. ( 10) "Substantial management duties'' means that the managing general partner actually performs fi ve or more of the following partnership management duties on behalf of the limited partnership: (A) rents, mruntains and repairs the low-income housing property, or if such duties are delegated to a property management agent, participates in hiring and overseeing the work ofthe property management agent; (B) parti cipates in hiring and overseeing the work of all persons necessary to provide services for the management and operation of the limited partnership business; (C) executes and enforces all contracts executed by the limited partnership; (D) executes and delivers all partnership documents on behalf of the limited partnership; (E) prepares or causes to be prepared all reports to be provided to the partners or lenders on a monthly. quarterly, or annual basis consistent with the requirements of the limited partnership agreement; (F) coordinates all present and future development, construction, or rehabi li tation of lowincome housing property that is the subject of the limited partnership agreement; (G) monitors compl iance with all government regulations and files or supervises the filing of all required documents with government agencies; (H) acquires. holds, assigns or disposes of property or any interest in property; (I) borrows money on behalf of the limi ted partnership, encumbers limited partnership assets. places title in the name of a nominee to obtain financing, prepays iJ1 whole or in part. refinances, increases, modifies or extends any obligation; (J) pays organizational expenses incurred in the creation ofthe partnersh ip and all operational expenses; (K) determines the amount and timing of distributions to partners and establishes and maintains al l required reserves; and (L) ensures that charitable services or benefits, such as vocational training, educational programs. childcare and after-school programs, cultural activities, family counseling, transportation, meals, and linkages to health and/or social services are provided or informat ion regarding charitable services or benefits are made available to the lowincome housing tenants. (b) The managing general partner must maintai n records and documents evidencing the duties perfo1med by the managing general partner. Such records and documents may include, but are not limited to: ( l ) accounting books and records; (2) tax returns; (3) budgets and financial reports; (4) reports required by lenders; (5) documents related to the construction or rehabilitation of real propetty; (6) legal documents such as contracts, deeds, notes, leases, and deeds of trust; (7) documents related to complying with government regulations and filings; (8) documents related to property inspections; (9) documents related to charitable services or benefits provided or the information provided regarding such services or benefits; (I 0) reports prepared for the partners; ( 11) bank account records: ( 12) audited annual financial statement oftbe limited partnership; and ( 13) property management agreement. (c) Substitution of Managing General Partner. A limited partnership in which the managing general partner is an eligible nonprofit corporation or an eligible limited liability company that has qualified for the welfare exemption fo r low-income housing may allow a substi tution of its managing general partner by another eligible nonprofit corporation or el igib le limited liability company without affecting the organizational qualiticatjon for the welfare exemption provided that: ( 1) the limited partnership agreement authorizes the withdrawal or removal of the managing general partner and the admission of a substi tute managing general partner on the same effective date and such admission of the substituting managing general partner into the limited partnership is in compliance with the requirements of section 15904.0 I~ of the Corporations Code: and (2) the substitute managing general partner meets all of the requirements of a managing general partner set forth in subdivision (a)(6) above. (d) Delegation of Authority Clause. If the limited partnership agreement contains a delegation of authority clause. such clause must provide either that: (I) the managing general partner may not delegate any of its substanti al management duties defined in (a)(! 0) above; or (2) the managing general partner may delegate its substantial management duties, defined in (a)( 10) above. to persons who, under its supervision. may perform such duties for the partnership subject to the supervision by the managing general partner. If the managing general partner elects to delegate one or more of its substantial management duties. the managing general partner must demonstrate that it is actually supervisi ng the performance of the delegated duties. (e) Certification Requirements. The limited partnership must ftle for and receive a supplemental clearance certificate from the Board as provided in Regulation 140.2. (f) The provisions of thi s regulation shall apply prospectively to claims or applications tor the welfare exemption under Revenue and Taxalion Code section 21 4 and supplemental clearance certificates under Regulation 140.2, fil ed on or after the e ffecti ve date of this regulation. For supplementa l clearance certificates issued prior to the effective date of thi s regulation, c laimants sha ll have until the January I, 2007 lien date to be in compliance with this regul ati on unl ess the Board has issued a written notice of noncompliance. ffthe Board has issued such notice, claimant shall have 90 days from the date of the notice to comply wi th this regu lation. Upon written request fo r an extension of time prior to the expiration of the 90-day period to comply. the Board shall grant a reasonable amount of time to comply with this regulation. Note: Authority cited: Section 15606, Government Code. Reference: Section 2 14. Revenue and Taxation Code.