Property Tax Reductions
Does COVID-19 provide an opportunity for a California property tax reduction? Possibly and sometimes, but it involves some careful planning.
While COVID-19 can certainly affect property values, because California uses a January 1, 2020 lien date to set most assessed values – and that’s what determines the property tax bill, unfortunately, the Assessor’s determination of the 2020-year assessed value this year will in most cases pre-date the effects of COVID-19.
On the other hand, that does not necessarily eliminate all opportunities to request a tax reduction. Nor does it limit the opportunity to actually force the Assessor to reduce the assessed value by other means. It is complicated, but anytime there is a tax savings, it worthwhile to understand.
California Proposition 13 and Proposition 8
Before attempting to obtain a reduction in the assessed value for property taxes in California, there is a quick self-check that anyone can do. First, ask and decide what the property is really worth today – or actually as of January 1, 2020. Second, ask what the Assessor will set as the the assessed value.
The second question can be quickly answered. The assessed value is what is also called the “enrolled value” for any property. Its that total amount showing for value on a secured property tax bill mailed usually in October. But, many actually may get a notice from the County Assessor well in advance. Its not done for your benefit, but shortens the time to file an Appeal. The assessed value is supposed to be the lower of the “base-year value” or market value, and we will get into that in a bit. It is also posted on the internet by Assessors on their websites. In any event, if the assessed value is higher than what the property is worth on January 1, 2020 then there is a reduction opportunity.
So what does this mean? Obviously, for very long-held properties, a reduction opportunity is pretty much unlikely.
For property acquired prior to March 1, 1975, California’s famous Proposition 13 rolled back the assessed value to the amount shown on the 1975-76 assessment roll (i.e., the base-year value). It then further limited the county assessor’s right to change that value – which we call the “base-year value” annually by the lesser of the Consumer Price Index (“CPI”) or 2% per year. In fact, the value can actually be required to go down if the CPI is negative.
So, given long-term appreciation, rarely are older properties purchased before 2005 reflecting a market value because market values have usually gone higher than base-year value. Of course, there are those old closed up shopping malls, where you got your jeans, when you went as a teenager where the parking lots are more useful for driver’s training than shopping. Every larger community has at least one, and some have several.
On the other hand, the base-year value can reset for many owners at a more recent date. It will always reset upon a “change in ownership” – such as when property has been sold. It may partly reset when new construction occurs. And, it will reset in some circumstances where there is a change in a legal entity’s owners, sometimes referred to as a “change in control.”
What we have seen already is not COVID-19, but that for properties acquired within the last 15 years, or where there was a destruction, such as the Butte fire, or other disaster that the Assessor is continuing to overstate the assessed value of property. This presents two related, but somewhat different appeal opportunities to request a reduced assessed value.
First, for recent purchases, not surprisingly Assessors are human. An Assessor may set the base-year value at the wrong amount. While it is important to request a correction quickly, to file an Appeal within 60 days of a notice of a changed assessment (whether supplemental or escape) by way of an Application for Changed Assessment filed with the Clerk for the Assessment Appeals Board or Board of Supervisors, absent an appeals board, an Appeal may be still filed even if it is late for later January 1 lien dates. While late appeals are helpful prospectively, and not for earlier years, they may be requested within four years.
Second, there are situations, such as due to the Great Recession or a disaster, or other decline in value where the base-year value will be higher than the actual property value. Assessors, or their staff, may fail to reduce the assessed value – if it is lower than the Proposition 13 base-year value. Or, they may simply determine the wrong market value to be the base-year value. This is true because Assessors don’t really know every owner’s property, and what is going on.
Under California Proposition 8, everyone is entitled to an assessed value at the lower of the market value or base-year value. If not voluntarily reduced by the Assessor, one may request that the Assessor correct the “assessed value” to market value. There are a few catches in making this request. First, Proposition 8 reductions are granted separately as to each year. Second, the reductions to value is only based on the value as of the January 1 annual assessment lien date.
So what does this mean for COVID-19 valuation reductions?
While COVID-19 valuation reductions may exist for January 1 2021, we don’t yet know where the market will be then.
In addition, the California Legislature (as of July 1, 2020) is considering SB 1431, which would allow an earlier reduction for dates after April 5, 2020. If enacted (and only if), Assessors may treat the “COVID-19 Pandemic as a ‘major misfortune or calamity'” allowing owners to request a retroactive reduction for the impact of COVID-19.
Without SB 1431, the impact of COVID-19 on California will likely be felt too late by most Assessors because it would not be a valuation decline event as of January 1, 2020.
In addition, whether or not SB 1431 passes, there are other opportunities which may involve an Appeal or actually “forcing” a reassessment.
Example. A commercial building that is 1/2 empty on January 1, 2020, may qualify for a Proposition 8 valuation reduction decline if it is worth less than the base-year value as of that date. While COVID-19 will not be relevant to the value decline directly, it may be argued that the likelihood of re-renting the property to reach full capacity will be low due to both a recession and due to COVID-19.
The Value of an Appeal
Regardless of COVID-19’s effects, an Appeal certainly makes sense sometimes. A reduction to the assessed value should be requested if either: (i) the base-year value is simply wrong (and timely challenged); or (ii) the assessed value fails to correctly reflect a valuation decline.
The best way to get a reduction is to timely file an Appeal. While an Appeal is an administrative process, and is supposed to involve an informal, independent hearing before a local Assessment Appeals Board (or the County Board of Supervisors), they are often anything but informal. A formal appeal application must be filed and a fee paid. And, the Boards are often assisted by legal counsel, former County Counsel, who may turn the hearing into a mini court proceeding. In any event, the owner carries the burden of proof and must show that the assessed value should be reduced.
That means documentation. And there are two common, more frequently used proof of value approaches commonly used before Board hearings.
One is based on comparable sales. To make that argument, the owner must provide actual sales information, covering similar properties that sold for less than the Assessor’s enrolled (i.e., assessed) value. In looking for comparable sales information, the rule of thumb is that one can go back 6 months and only forward 3 months to find similar property sales – i.e., actual closings, not listings. In most instances, due to differences in size, condition and location, the owner must be able to demonstrate appropriate adjustments to the value to address differences between the “comparable” properties and the appealed property..
The other approach, and this is usually for larger residential rental properties and nearly all commercial properties, an income capitalization approach, is the better measure of value. It is based on capitalizing the annual net income before interest, depreciation and taxes. While this appears to be a formula-driven approach, there are a number of factors that may vary the opinion of value, including what adjustments may be needed to make the computation “standardized”, items of income and expenses, and expected years to lease-up vacancies, property type risks and the expected investor rates of return in pricing property purchases. Both vary based on conditions/ages and the costs of necessary improvements required to bring rent to market levels.
Under both of these valuation methods, the effect of COVID-19 for the 2020-2021-year may only have a very limited role in California, unless California passes SB 1431, because of the January 1, 2020 lien date. While the Assessor for Cook County (Chicago) Illinois expects to make significant reductions to property values for restaurants, hotels and other businesses adversely affected, their property tax rules differ.
In addition, in making a presentation, while it is not required that there be a qualified appraiser, having an appraisal and the appraiser present tends to present a stronger case. The appraiser, in some cases, has greater credibility due to his or her experience. However, appeals boards are aware that this is not always necessary. In addition, there are legal rules and presumptions. While members of the Appeals panel are usually not experienced in legal issues, it is often important to have legal counsel present to coordinate the presentation as well as respond to legal issues, including to respond to the Assessor staff (or County Counsel) who will often try to present misstatements of law or present red-herrings, or try to pass off bad evidence to the Board.
On the other hand, not all is lost for those affected by COVID-19. Sales that close during the COVID-19 period may be at a sales price that is actually higher than market price. In addition, while California value declines as of January 1, 2020 will not be based on COVID-19, there are situations where one can “reset” the measuring date to try to consider the impact of COVID-19 and the 2020-year recession.
In particular, on the first point, a buyer during COVID-19 may not be able to stop a closing and require a reduced price, even where values have declined. A buyer may challenge and claim that the base-year value should not be based on the purchase price, if the price was greater than the property’s actual fair market value. For example, imagine the buyer of a restaurant building, or a buyer of a stand-alone JCPenney building, who feels he must close or lose a large down payment deposit or option payments, even if the building has just been shuttered. The price may be far above the value of the property on the closing date. An Appeal is certainly needed as the Assessor will presume under Property Tax Rule 2 that the sales price and value are the same.
Second, for existing properties, if there has been a decline in value, where a property owner intentionally triggers events that causes a “change in ownership” or “change in control,” that event may be used to “reset” the base-year value. Upon that event, the Assessor is required to establish a new base-year value, hopefully at the lower value.
There are several different strategies that may result in a permanently lower base-year value due to COVID-19, wherein the owner need not wait until January 1, 2021 to see if values recover or will temporarily remain declined. Without listing all, here are a few to consider:
- A parent transfers her property to her son, but does NOT claim any reassessment exclusion under the parent-child transfer exclusion;
- ABC, LP, a limited partnership, deeds property to ABC LLC, a limited liability company, having the same exact owner-members, but has each member own slightly different ownership than before;
- The 50% owner, Member D, of a Delaware LLC, a limited liability company, increases his or her ownership in the entity to 50.1%; and
- E, F, and G, individuals, deed real property to EFG LLC, a limited liability company, (or receive the real property from the Company), but each has a membership interests that differ slightly from their interest held as a co-tenant interest.
Each of the foregoing are reassessment events. Forcing a reassessment means that the Assessor must determine if a change in ownership/control occurred and then must reassess – and reset the base-year value for the property. If this value is lower, property taxes should be reduced for the remainder of the property tax-year.
On the other hand, one must be careful. Assessors do not always agree that the base-year value has declined. Also, where property values start to decline, and this has been true of many recessions, the number of sales may “seize up” wherein there is limited comparable sales data. And with an Appeal, there is always some risk. Accordingly, these strategies should not be attempted without assistance of legal counsel.
Lastly, owners should keep their eyes on the aforementioned SB 1431, which if enacted will recognized COVID-19 as qualifying for a disaster relief reduction to value request. While this will absolutely help adversely affected properties operating hotels, restaurants, and other non-essential businesses, it may also assist other owners whose tenants have been unable to pay rent.
For example, property value will be affected where rents cannot be collected. In prior articles, we discussed Executive Order 28-20, signed last March, allowing cities and counties due to COVID-19, to enact local ordinances and emergency orders that allow tenants who claimed COVID-19 affected them to pay zero (0) rent. With Executive Order 71-20 extending the period to September 30, 2020, and Court rules that will further delay evictions for an additional 90 days, from court re-opening, if any, many rental property and commercial property owners may be severely adversely affected. SB 1431 will help for requesting a reduction of value before January 1, 2021, due to the impairment of these provisions on property values.
Property tax reductions are a significant way to save money for property owners. While COVID-19 may provide only very limited opportunities, anytime that there has been a decline in value, property tax reduction planning should be considered. In that respect, for any property tax appeal based on a valuation decline as of January 1, 2020, the “open season” to file an appeal asking for an assessment reduction will begin July 2, 2020 and will continue to September 15, or November 30, depending on the local county. Lastly, for those who don’t want to wait to see where the market will be next year, there may be an opportunity to force a reassessment with careful planning. All of this should be done in consultation with experienced legal counsel who understands the nuances of California property taxation.
Cameron Hess is a partner with Wagner Kirkman Blane Klomparens & Youmans LLP. Mr. Hess has focused on real estate and property tax issues for over 30 years, and formerly helped with the start-up of KPMG’s Los Angeles Office state and local tax practice. For questions on this article, Mr. Hess may be reached at firstname.lastname@example.org or (916) 920-5286.