Hello this is Ron Henderson, President & Broker of mres in Los Angeles. The other day i was at a meeting with John Noguez the Los Angeles county assessor. The primary topic of discussion was the potential modification of proposition 13 that’s being pushed around by the mayor and other politicians. Let me start with giving a overview of what prop 13 is.
In 1978 california voters passed prop 13. It reduced property taxes but it also gave it an element of predictability. The initial tax is based on 1% the purchase price, plus bond indebtedness, and direct assessment taxes like mello roos, figure around 1.25%. And it can increase by 2% annually. At least you have reliability of knowing what your tax is going to be year over year. The property can still be completely reassessed on a change of ownership.
The proposition was designed to be applied towards all types of real estate, single family, aparment buildings, commercial, etc. The powers that be, knows a blanket elimation of prop 13 will never pass with the general population, so now what they are talking about doing is splitting up the different property types. They had a hard time figuring out how to apply it towards aapartment buildings because of rent control. They would have to modify the present rent control laws so there can be a pass threw of some the extra taxes, but at this point it looks like they’re not going to touch apartments, just go after commercial properties.
They’re probably going to attempt to get this potential change on the next election ballot. Now why would the population vote for this change? Of course everyone wants better schools, and it’s always easier to accept tax increases when it’s the other guy, especially an investor or business, is going to pay. Plus what if they bribe the voters by increasing the $7,000 homeowner exemption to $70,000? That’s what’s on the drawing board, but before you cast your vote lets think this through.
First lets look at an example of what an annual reassessment could look like. Under prop 13 if a property was aquired in 2010 for $400ooo, it would go up to $408 in 2011, $416,160 in 2012, and if it was sold the new assessment would be again based on the aquisition price. If it’s reassessed annually all bets are off, if bought for $400k in 2010, there won’t be a limitation on the quantity of increase so it can go to $450k in 2011, $520k in 2012, and again be taxed on the sales price if sold. This is of course assuming an appreciating market.
Now what’s the big deal in removing commercial properties from prop 13. Bottom line is it can generate income, but at what cost? Any potential buyer would need to analyze the expense numbers to determine if an investment in a property is valid. Removing the reliability of knowing what the tax is going to be adds uncertainty so they’ll have to hedge their bets and lower the cap rate, or potential purchase price.
Lenders lend money on commercial properties based on debt to coverage ratios, not loan to values like on a standard residential loan. It’s not like qualifying for commercial loans is easy right these days, but lenders will tighten their criteria even more because of the unknown element of future tax expenses.
The majority of commercial loans are based on 3, 5 , or 10 year balloons, not 30 year loans like residential. Making commercial loans more difficult will add more properties to the foreclosure rolls because many owners won’t be able to refinance as their loan comes due.
This year we have arount $60 billion commercial loans maturing, come 2016-2017 that’s going to jump up to about $135b a year. That’s a huge quantity of loans that’s going to have to be dealt with, one way or the other. Commercial property owners are going to try and pass through the property tax increases to tenants, which are businesses, using net leases. That’s going to put more financial pressure on local businesses. Increasing the property taxes and making it an unpredcitable amount may not be a business deal breaker on it’s own, but like death by 1000 cuts. Add it on top of other negative business elements, especially in Los Angeles. The unintended consequense is a more negative economic envionment, lower local employment, and less investment in our region. It’s interesting that we’ve actually had a year over year increase in property tax revenues.
Also, reassessing properties every year won’t come without a cost. La county used to have 1800 assessors. Because of the tight budget they’ve had to scale back to 1500. The assessors office estimates they’ll need another 1000 assessors to handle the annual reassessments. Ironically John Noguez indicated because of budgetary reasons, they would have to do what other regions in the country has had to do… Outsource the work to india. Go figure, take more taxes from local business, and send it over seas.
I’m not crazy at all about more taxes, but if we had to adjust prop 13, just add .1 or .2% to the annual inflaction factor, and avoid the extra costs to implement annual reassessments, and the uncertainty of what the tax expense is going to be year over year it’ll avoid a lot of problems. But nothing logical will happen, because this is all political than practical. We’ll just have to see how this pans out. If you’re in the Los Angeles region, and have any specific questions, always feel free in contacting me through my website mres.com, or my email address or phone number shown below.
Ron Henderson President/Broker of Multi Real Estate Services gives an overview and thoughts about proposed changes to California’s Prop 13. Information from a meeting with John Noguez – Los Angeles County Assessor Aug 23, 2011. Covers basics of Prop 13, the potential splitting of the property types, how the gov’t will bribe general population to vote for it, and the potential unintended consequences.
Specialist in the Art of Real Estate Sales and Finance
Los Angeles, San Fernando Valley, Conejo Valley, Simi Valley