Appealing California Property Taxes

Property taxes are the largest expense outside of debt service for income producing properties. Many property owners generally accept their assessed property valuations without questioning its comparison to true market value as of the lien date. In this current economic environment more property owners need to take a close look to see what they can do to reduce their property tax exposure. This is especially true now with all states, cities and counties experiencing additional stress on their budgets due to significant drops in tax revenue. Local taxing authorities will now be under more pressure to raise revenue.

One of the most common factors causing a decline in property valuation is economic duress. Some of the market factors causing this are:

  • Lower effective rental rates

  • Increased vacancy

  • Increased operating expenses

  • Rising capitalization rates

  • Increased competition

Any decline in a property’s Net Operating Income performance could indicate a form of economic duress.

Most assessor offices are understaffed and do not have the resources to complete detailed valuations, most rely on mass appraisal techniques. These techniques utilize general assumptions and often have significant errors and omissions. It is important to keep in mind that the filing of a formal appeal does not relieve the property owner from paying the current taxes.

Key Property Tax Dates: In California the County Assessment Appeals Formal Filing periods are from July 2 to either September 15 or November 30 depending on the county.

If the taxpayer does not file an appeal by the deadline date they lose any opportunity to reduce the property taxes for that year. Depending on the number of appeals filed the Clerk of the Assessment Appeal Board (AAB) will schedule a hearing. The Revenue and Taxation Code requires the AAB to hear cases and render a decision within two years from the appeal filing. This is the only time constraint legally placed upon the counties. During declining real estate markets the number of appeals filed increases and it is not unusual for counties to take 18 months or more before cases are heard.

At the AAB the assessor’s opinion of value is presumed to be correct. The appraiser or assessor’s representative will present their case to sustain the current assessed value. The burden of proof is on the taxpayer or their representative to substantiate their opinion of true market value as of the lien date and demonstrate weakness in the assessor’s case. It is not enough to demonstrate that the current assessment is erroneous. You must determine an opinion of value and be able to support the value under questioning from the assessor and the AAB.

Common reasons why appeals are denied by the AAB include:

  • Inadequate or irrelevant information

  • Lack of knowledge of the AAB rules and regulations

  • Insufficient market knowledge and experience

  • Lack of knowledge or experience to highlight deficiencies in assessor’s evidence

Ironstone Group’s property tax valuation team reviews assessments and prepare initial property valuations of fair market value for all of our client’s properties. If the property taxes appear to be excessive we file an appeal.


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California Property Tax: PROP 13 and PROP 8

In California the Revenue and Taxation Code provides the laws regarding the imposition of real and personal property taxes. It is the local county assessors’ office and tax collector that are responsible for assessing and collecting the tax. Generally assessments are determined as of the “lien date” which is January 1. Property tax is an ad valorem tax which means it is a tax based upon market value. Revenue and Taxation Code requires the assessor to annually enroll the lesser of a property's Prop13 factored base year value or its market value as of January 1st. 

In June 1978, California voters approved Prop13. It limited the property tax rate to 1 percent plus the rate necessary to fund local voter-approved bonded indebtedness. It also stated that property assessments cannot increase more than 2% annually.  In November 1978,  California voters passed Prop8, which amended Prop13 to allow temporary reductions in assessments where real property suffers a decline in value.  

A decline in value occurs when the current market value of real property is less than its adjusted base year value as of the lien date, January 1.  A property's base year value is when the property last changed ownership or underwent new construction. The base year value adjusts annually by the lower of the percentage change in the consumer price index (CPI), or 2 percent. The adjusted base year value is also known as the factored base year value.

The market value of real property may decline from one lien date to the next lien date; however, the property will not benefit from a lower assessment unless its market value falls below the current factored base year value. If you acquired your property during an up real estate market and subsequently the real estate market declines your property will benefit from a Prop8 appeal. The decline in value is typically temporary and may be the result of changes in the real estate market, the neighborhood, or the property itself.

Once a property's assessment has been reduced under Prop8, the assessor will review the assessment annually to determine whether it should remain in decline-in-value status. The assessed value of a property in decline-in-value status may increase each lien date by more than the standard two percent maximum allowed for properties assessed under Prop13; however, a property's assessed value can never increase above its existing factored base year value. 

Every property owner has the right to a hearing for a property reassessment with the Assessment Appeals Board. The Board hearings are like mini-trials, the taxpayer or their representative must be thoroughly prepared to present and defend all relevant property and market information in order to substantiate the new opinion of value. The taxpayer or their representative needs to be familiar with the State and Local Assessment Appeal Board rules. In order to obtain a reassessment the burden of proof is on the taxpayer.  


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COVID-19: Adjustments on Capitalization Rates and Sales Comps

Ironstone Group has been valuing and appealing real estate and personal property tax assessments since 1974. We have experienced several severe declines in real estate during this time. Over the past several years, primarily due to low interest rates, real estate valuations have increased and capitalization rates have subsequently seen historic lows. As a result of the sudden halt to the overall economy due to COVID-19 and the multitude of new government rules and regulations our team of valuation experts believe we are entering into another severe downturn in real estate values.

After the 2008-09 Great Financial Recession a large number of former single family property owners became renters in multi-family properties. This surge in renters led to higher rents and occupancy levels which coupled with historically low financing cost drove down capitalization rates to unprecedented levels. Over the past several years we have seen properties selling for sub-4% capitalization rates. Many of the financial modeling was being done with assumptions of aggressive continued annual rent increases and high occupancy assumptions. These low risk assumptions are no longer the case in this new higher risk investing environment.

The immediate impact of this severe downturn is having a devastating effect on retail and hotels valuations and will soon apply to all types of real estate over the next several months. Most of us living today have never experienced this type of health crisis coupled with the sudden collapse of the economy. With the stock market losing a third of its value almost overnight, businesses closed, unemployment numbers projected to be worse than the Great Depression we are entering into a “New Normal.” All of us are and will continue to be affected by these events for quite some time. Don’t anticipate a “V-shaped” recovery.

We certainly expect valuations for property tax assessments to decrease because of increased vacancies, lower effective rents and capitalization rates in many cases doubling from there previous historic low levels. The effects of the GFC in 2008-09 was muted by the efforts of the Federal Reserve, they will have a difficult time repeating that this time. The last time we saw a severe downturn to the extent we expect was the S&L crisis of the late 1980’s and the Resolution Trust Corp (RTC).

We see a significant decrease in the volume of sales transactions for both commercial and residential real estate. Due to the lack of sales transactions we see most weight being given to the Income Approach when appraising income producing property and much less to the Sales Comp Approach. As for residential properties the market is typically determined on the margin by the most recent two or three sales in a neighborhood. Much will be determined by what residential lenders and government imposed rules are put into place with an increase in foreclosures.

Ironstone Group’s team of property tax professionals will assist you in determining the correct assessment value for your properties and appeal to the assessor to reduce your assessments so they fairly reflect today’s market value.


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COVID-19 Impact on Real Estate Values

As things continue to evolve around the spread of COVID-19 governments and businesses are preparing for the sharp decline in economic and social consequences. Ironstone Group REA is actively engaged in preparing our staff and clients for the consequences to come. We are committed to continuing our best efforts to communicate with you and the assessor’s office regarding your property tax assessments and personal property reporting. As we have consistently done for over four decades our work will be done in the best interests of our staff and clients.

IGREA is committed to business continuity for our clients. For consulting and valuation work it often involves travel and interaction with others within occupied buildings. Several of our clients have contacted us recently asking our opinion on how the situation will affect property values. If the loss of rental income becomes an issue and it appears it most likely will then NOI will decrease and CAP rates will rise. However, it will be some months before real data that we can utilize to support a decline in value is available.

Real estate values reflect economic conditions and a shutdown of retail establishments, all forms of travel restrictions, and other interruptions will have a severe impact on the valuation of all types of real estate. We see an imminent decline in the number of active buyers and tighter underwriting from lenders that will lead to a decline in valuations. We know from experiencing several severe downturns in the real estate industry over the past 45 years capital markets are the life-blood of the industry. Should the capital markets cease lending then it will certainly lead to further real estate valuation declines.

IGREA will continue to provide our clients with experienced property tax assessment valuations based on our proprietary information and over 45 years of continued operation. Please contact us should you have any questions regarding your property tax needs.


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Housing/Consumer Lending

From Realtor.com –“The past year has been filled with plenty of highs and lows, no matter your perspective. And housing was no different, closing out 2019 with a mixed scorecard. The big takeaway is, it was a somewhat disappointing year for housing, says Javier Vivas, director of economic research at realtor.com. Low mortgage rates should have propelled home sales much higher than we saw. Prices just got to levels that were too high for buyers.”

Nationwide home prices were up over the previous year, however, one in five cities saw falling prices, such as several California cities. The price drop reflects the fact that prices in recent years have risen to levels that are sustainable.

Arcadia, in LA County, benefited from foreign buyers over the past few years. It has been popular especially for Chinese buyers. Several recent factors have slowed their buying binge. According to Redfin, home prices in Arcadia have fallen ~11% since last year.

San Diego Union Tribune: Home types for November 2019 – Resale SFRs down 5.5% from peak June 2019; Condos down 9.6% from peak August 2019; New SFRs down 16% from October 2018 peak.

Currently there is ~$1.3 Trillion(T) of auto debt, it is the 3 rd largest from of Debt, after mortgages (~$9.4 T) & student debt ~1.5 T. The amount of auto debt has increased ~75% since the “Great Recession”.

ATTOM Data Solutions November 2019 report indicates that bank repossessions have risen 4% since October & 22% from a year ago.

California experienced the most outbound migration in the U.S. in 2018 ~700,000 left the state. High taxes & property prices have something to do with this.


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