Tip:
Highlight text to annotate it
X
hello this is Ron Henderson president broker of MRES
in Los Angeles
the other day was at a meeting with John Noguez the LA county assessor
the primary topic of discussion was a potential modification of proposition
thirteen has been pushed around by the mayor
and other politicians let's start with giving a quick overview of what
PROP 13 is.
in 1978 california voters pass PROP 13
reduce property taxes but also given element predictability
the initial tests based on 1% of the purchase price plus 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 where your taxes going to be year-over-year
in the property could still be completely reassessed on a change of
ownership
the proposition was designed to be applied towards all types real estate
single family apartment buildings commercial Etc.
the powers that be they know that a blnket elimination of PROP 13 will
never pass with the general population
so now what they're talking about doing a splitting up the different property
types
the had a hard time figuring out how to apply it towards apartment buildings because
rent control
they would have to modify prisoner in control laws so there could be a pass
through some the extra taxes with this point looks like they're not gonna go after
apartments just go after the commercial properties
the probably gonna attempt to get this potential change in the next election
ballot
now why would the population both for this change? of course
everyone wants better schools 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 the bribe the voters by increasing the $7,000
homeowner exemption to $70,000
that's what's on the drawing board before you cast your vote lets think this
through
first let's look at an example of what an annual reassesnent could look like
under PROP 13 the property was acquired 2010 for $400,000
it would go up to $408,000 in 2011
$416,160 change in 2012 and if it was sold a new assessment would be based on the
acquisition price
if it's reassessed annually then
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, $520,000 in 2012, and again be taxed on the sales price
if sold
this of course assuming that an appreciating market now what's the big
deal in removing commercial properties from PROP 13
bottom line is you can generate income but at what cost. Any potential buyer
would need to analyze expense numbers
to determine if an investment in a property is valid
removing the reliability of knowing with the tax is going to be
adds uncertainties 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 standard residential loans it's not like
qualifying for commercial loans is easy right now
but lenders will tighten their criteria even more because an
unknown element in future tax expenses the majority commercial loans are based
on
3, 5 or 10-year balloons not 30-year loans like residential
making commercial laons more difficult will add more properties to foreclosure
roles because many owners wont be able to refinance
as their loan comes due. This year we have about $60 B in
commercial loans maturing
come 2016 2017 that's gonna jump way up to around $135 billion a year
that's a huge quantity alone is going to have to be dealt with one way or the
other
commercial property owners are gonna try and pass through the property tax
increases to tenants
which are businesses using net leases, as going to put more financial pressure on
local businesses
increasing the property taxes and make it into unpredictable amount may not be
a business deal breaker on its own
but it's going to be like death by a thousand cuts added on top of all the
other negative business elements especially in Los Angeles.
The unintended consequences more negative economic environment lower
local employment
and less investment in our region. It's interesting that they're talking about
this
since 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, but because of tight budget
they've had a scale back to 1500. The Assessor's Office
estimates still need another 1000 assessors to handle the annual
reassessments
ironically John Noguez indicated that because a budgetary reasons they would have
to do with other regions in the country
had to do... Outsource the work to India
Go figure, take more taxes from local business and send it overseas
I'm not crazy at all but more taxes but if we had to adjust PROP 13, just add
.1 or .2% to the inflation factor
and avoid all the extra cost to implement animal reassessments
and the uncertainty of the year over year tax increase
we avoid a lot of problems but I doubt if anything logical is
going to come out with us because it's all political not practical we'll just
have to see how it all pans out.
If you have any specific questions always feel free to contact me through my
website
MRES.com or the email address or phone number shown below
till next time, Take care.