California legislators who are angling to pass AB 448, which would repeal the protections of Proposition 13 for property taxes on commercial and apartment properties, should have been given a homework assignment to read Daniel Defoe’s 1719 novel “Robinson Crusoe.”
In Chapter 9, Crusoe says: “Now I saw, though too late, the Folly of beginning a Work before we count the Cost, and before we judge rightly of our own Strength to go through with it.”
The current system of property taxation in California under Proposition 13 is based on reassessing all properties in the state only when there is a valid sales transaction, just as capital gains taxes are paid only when stock is sold. Under the state Legislature’s proposal, commercial and apartment, but not single-family residential properties would be assessed and taxed differently. All 494,693 commercial and apartment properties in the state would be reassessed annually, while the 8.7 million single-family residential properties would still be reassessed only upon resale. It is uncertain if the 1 percent base tax rate or 2 percent annual maximum inflation adjustment for residential properties under Proposition 13 would stay the same.
Proponents of increased taxation as a solution to California’s structural budget deficit have clamored for years for adoption of what they call a more “equitable” split of commercial and residential properties on tax rolls. That purportedly would raise the assessed value of all nonresidential property to market value. To taxation advocates, “rich” commercial property owners are being granted an unfair subsidy that is robbing public schools and the medically needy.
The opponents of Proposition 13 could scarcely envision that the real estate market would inadvertently deliver their long-sought Holy Grail as commercial property values have fallen to levels that are generally the same as assessed value.
We asked Co-Star Real Estate Market Data service to trend commercial real estate values in California from the peak of the bubble in 2007 to the end of 2010. The results of Co-Star’s analysis of 11,145 sold properties indicate that average unit values for commercial properties have declined about 35 percent in that period. That agrees with Moody’s national Commercial Property Index.
If commercial property values have declined roughly 35 percent since 2007, their market value today would be about 65 percent of the value at that time.
We additionally contacted the California State Board of Equalization for the commercial property tax assessment ratio it used for the years 2006 to 2010, which were: 2006 – 65.6 percent; 2007 – 61 percent; 2008 – 59.9 percent; 2009 – 58 percent; and 2010 – 65.1 percent. Thus, aggregate market values of commercial properties are about at parity with assessed valuations as of 2010. Just looking at the average price in 2010 shows it slightly lower than the estimated average assessed value in 2007.
Extinguishing Proposition 13 for commercial properties would be folly: It would not yield any large increase in tax revenues but would entail significant costs and about a three-year delay to implement. It would also, by inference, produce a tax system that is even more volatile than what we have today. As the state budget got slammed by falling capital gains taxes after the dot-com bubble, property taxes would also rise in good times, encouraging spending, only to fall in bad, leaving a wider budget gap.
California needs to think twice before reflexively voting to repeal the protections of Proposition 13 on commercial and apartment properties.
Wayne Lusvardi is former chief appraiser for a large water utility in Southern California and writer at CalWatchdog.com. Charles B. Warren is a former assessor and independent appraiser in San Francisco.