California Dreamin’… About Base-Year Valuation



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California Dreamin'... About Base-Year Valuation

By Michael Barton

Hello again Real Estate Investment Fans. Of course, if you happen to be in acquisition mode here in California, you may soon become a former Real Estate Investment Fan. What is going on with those prices for multi-family, single family, retail and so forth?

With values hovering at such a high level, the last thing an investor wants is to overpay for an already pricey property. Add to this the probability of excessive assessments from your friendly property tax jurisdiction and it can make you want to invest elsewhere…as in Guam, perhaps.

As you may know, a change in ownership in California creates a new “Base Year Value” for the acquired property. Whenever an opportunity exists to lower your base year value, it can be very beneficial to take advantage. This is due to the fact that your initial value may be the basis of your assessments for the duration of your ownership of that property. As a result, any reduction in base year value will pay off year after year.

Now I realize this is pretty boring stuff, but it’s about to get worse. That’s because here is where I have chosen to insert a blurb from the Property Taxes Law Guide (http://www.boetaxes.ca.gov/property). Specifically, this is paragraph (b) of Rule 2. THE VALUE CONCEPT:

“When valuing real property as the result of a change in ownership for consideration, it shall be rebuttably presumed that the consideration valued in money, whether paid in money or otherwise, is the full cash value of the property. The presumption shall shift the burden of proving value by a preponderance of the evidence to the party seeking to overcome the presumption. The presumption may be rebutted by evidence that the full cash value of the property is significantly more or less than the total cash equivalent of the consideration paid for the property. A significant deviation means a deviation of more than 5% of the total consideration.”

This means if you acquire a property by way of an arm’s length transaction and are a typical, knowledgeable buyer (especially if you pay all cash), don’t come down to the Assessor and try to arrange for a reduced base-year value. That is unless you don’t mind a little name-calling coming your way (“knucklehead” seems to be a favorite in many jurisdictions). After all, if you knew a property was worth less than you paid for it at the time of acquisition…

Now it’s time for the obligatory “you need to hire me” part because there are circumstances whereby your base year value can be reduced, primarily when there is a non-real estate component in the transaction such as creative financing or significant IRS considerations. But the playing field is tilted in the Assessor’s favor (if you can take it, read Rule 2 again, particularly the “preponderance” part) and you only have one shot at this.

As an example, let’s say you sold a property for $10 million for which you paid $2 million (good for you). You could be on the hook for something like $2 to $2.5 million in tax on the gain. On the other hand, you might opt to perform a 1031 exchange and defer the taxes indefinitely. All you have to do is identify a replacement property within 45 days of the sale of your property, which means very little negotiating with the prospective seller and limited due diligence. Additionally, your initial bid would have to be at a level that not only chases away all competitors, but must also be such that the seller can’t turn it down. Then, you have to close the deal within 180 days of the sale of your property. All this or you’ll be asked to cough up roughly $2.4 million on the gain. Sounds a lot like a “highly motivated buyer” to me.

This is a story that can result in a base year value below a purchase price, though it is only the beginning. You (or your representative) must still quantify the difference between purchase price and market value. This requires income analysis, sales comparables and perhaps a cost approach, as would any successful property tax appeal.

The point here is that the reward of a reduction in base year value can be significant and it can be attained. Be aware that there will be at least one extra step in the process, that being to demonstrate why you chose to pay more than market value for your new property.

Contact:

Michael Barton, Vice President - Real Estate Tax Services
Property Tax Assistance Company
16600 Woodruff Avenue
Bellflower, CA 90706
MBarton@Property-Taxes.com

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© Michael Barton

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