Life Cycle of an Asset:
The real estate investment cycle has four distinct phases: buy, lease-up, holding, and sale. No matter which phase you are in, ITR can help you identify opportunities to minimize your property taxes.
Purchase Price Vs. Fee Simple Value: Although the law makes rebuttable presumption that the purchase price in an arms-length transaction represents a property's fair market value, there are many reasons your assessment could be lower than the purchase price. A thorough analysis of purchase price assumptions should be conducted to identify potential tax savings opportunities.
Owner/User Sales: Owners/users often pay the highest price to acquire real property because they face deadlines or other opportunity costs that have more dire consequences if a property is not acquired in a specific timeframe. Owners/users typically focus on the utility value of a real property to the business enterprise, not the investment value of a resale. However, court cases have held that the fair market value should be measured by how much a property would sell for on the open market, regardless of the business value to the current owner. Owners/users are advised to seek an opinion of fair market value for assessment, rather than paying taxes based on construction costs or acquisition value.
Off-market transactions. Off-market transactions often drive sales prices higher than market value. Motivations for such purchases are often non-monetary, and more personal and emotional. ITR can perform an informed analysis to ascertain the difference between fair market value and sales price to identify potential tax reductions.
Purchase of a business enterprise. Certain real property, such as a hotel, always sells as part of a business enterprise because the income of the property can be attributed to tangible and intangible property. By law, intangible property is not assessable in California. ITR can assist property owners with quantifying intangible property value, either before or after a sales transaction.
Partial interest transfer. Sophisticated investors buy properties that have complicated property interest structures, such as ground leased or possessory interest properties. It is imperative that future property tax liability is estimated correctly to ensure investment or return objectives are achieved.
Anticipated benefits not achieved. If a purchase price was predicated on certain anticipated benefits that are not achieved, the purchase price should be reexamined. Whether misrepresentation of the seller or misinterpretation of local zoning or development restrictions, ITR can help owners identify discrepancies and present a case for tax reduction.
Construction, Renovation, Lease Up
Standard of value. The standard of value in California taxation is not cost of construction but fee simple fair market value. Cost is a consumption concept, a measure of the economic sacrifice required to achieve an objective (for example, building a dream home). Market value is an exchange concept, a measure of the most probable price a buyer might pay in an arms-length transaction.
Cost vs. value. It is an exception rather than a rule that cost equals value. When cost exceeds value, the project contains functional or economic obsolescence (or both). On the other hand, when value exceeds cost, the investments returns entrepreneurial profit. Knowing the difference is very important for minimizing your taxes.
Different types of construction costs. Construction costs are treated very differently for property tax purposes, depending on the nature and reasons for the cost. Assessable Costs are typically for additions, major renovations, or change in use. Exempt costs, such as solar energy improvements, are specified in the law. Excluded costs are assessable but excluded by legislature either for a period of time or into perpetuity. Finally, certain costs are not new construction, such as roof replacement, and therefore should have no property tax consequences.
Real property is subject to internal and external forces that may impact fair market value. During the 2009-2011 down cycle, most owners took advantage of real estate Proposition 8 or "temporary decline in value" appeals. As the market and values recover, previously reduced values will return to Proposition 13 maximum values. These value increases are not limited to the Proposition 13 limit of two percent per year. If an assessor indiscriminately returns your property assessment to the Prop 13 limit, ITR can help ascertain if the fair market value is still lower than the factored base year value, providing commensurate tax savings.
External extenuating circumstances are not limited to general economic trends. Local factors may also impact value. Such factors can have specific local or regional regulatory causes such as zoning changes.
Internal factors can also cause value to decline. Such factors may be functional or design related, or they may be temporary in nature, such as loss of a major tenant.
Regardless of the cause, if your property value declines, you must file an appeal between July 2 and September 15th of each year to preserve your right to receive refunds.
Realizing value without raising taxes. Low property taxes enhance property value. Higher taxes have the opposite effect. ITR can help owners engineer transactions and reap the benefit of higher value without triggering a change in ownership, which is typically associated with higher taxes.
Minimizing transfer taxes. Documentary transfer tax is levied on "realty sold." This tax is typically paid by the seller. Some properties, such as hotels, sell as part of a business enterprise, so a portion of the price is for intangible property and not "realty sold." To the extent that the intangible value is identified and quantified before the sale, the seller can save transfer taxes on the intangible portion of the sales price.
Understanding future tax liability. Sellers must disclose their current property tax liability, but for buyers, an understanding of future tax obligations is perhaps even more important. This is particularly true for complicated ownership structures, such as bifurcated ownership of land, and improvements, and ground leased or possessory interest property. For sellers, knowing your buyers' perception of future taxes can help you price an asset correctly and maximize the final sale price.