In general it appears that many model various asset classes of CRE with fixed expense growth rate of, say, 3%, in a straight line. In California, we have pretty modest year over year property tax increases, even on investment property. Those who purchased in 2010-2012 and so on have probably not seen 3% increases annually. It's probably hovering near 1%.
I understand that in underwriting a deal there are certain things to avoid, one is being too generous to yourself with your cash flow projections.
I guess the question is this, is it too aggressive to model more realistic increase in California property taxes (1%) while other expenses grow at an assumed rate of 3%?
Obviously, I'm not a tax expert, and you should probably consult and advisor, but it's probably a little aggressive. This is all sort of local and municipality centric, but we typically model an increase in the reassessment value as some percentage of purchase price, and then assume 3% from there through the rest of our hold or up to the next reassessment year. Again, this is something I would 100% get tax advice on from somebody like Ryan.
In CA property taxes can only grow up to 2.0% per year - this is due to a law that was passed in 1978 called "Proposition 13" or Prop 13 for industry lingo.
Model taxes to grow at 2.0% for CA assets, and essentially all other expenses at 3.0%.
That's right, I forgot about Prop 13. Doesn't it kill you when you sell the property? I remember there being something odd when you sell.
If you're elderly and have an owner occ home with taxes based on 1986 assessment (say $500yr), when you sell and purchase a new home your new home is subject to current tax assessment. Prop 13 does not transfer I believe.
Rarely will you see any county reassess at that 2% level, again, for any type of RE. I've got clients with 50 unit MF buildings down here worth $200k+ a door and they're assessed at $2mil, pay about $25k a year in property tax. Generally speaking a solid 1.25% of acquisition cost covers most counties reassessment at time of purchase. Some lower, some higher. It goes up annually from this assessment but again, maybe 1-2% growth max. We do have a nice property tax structure in this state. I have no idea how Mello Roos applies to CRE. Never done a deal in those newer markets. Some SFR buyers have 3% tax assessments in these regions.
Prop 13 became law, yet we all mention it as a proposition, LOL.
Thanks guys. I think 1% is too aggressive as mentioned above. Might as well model for the max of 2% and all else at 3%.
Unrelated to your question, but I've always heard that Prop 13 is part of the reason that California is/ has been "broke" so to speak. Any truth to that? I'm not up to speed on the politics of it, but I think the argument was that it's property tax collections have been much lower that they could've been due to Prop 13 retarding assessment increases. I'm probably butchering the argument and the question too for that matter.
bolo up has a good summary. You can go to the county assessors website and search for the properties by APN or address. You will find the land and improvement assessments and the tax that is due. Forcasting I always grow Ad Valorem tax at 2% and special assessments at 3% b/c of Prop 13 discussed earlier.
All good info guys.
Regarding California and taxes in general, I believe tax revenue has gone every single year for generations. Minus maybe a year or two during the great recession. Yes, CA has plenty of revenue. No need to displace Grandma cause she can't afford taxes on her home. I see no need to raise property taxes on these people when they haven't made any money on the home yet. And that of course is a different set of tax implications.
Taxes are for profits in my opinion. While we need some property tax to handle local issues, lets let old folks keep those low rates. They shouldn't be forced to sell just cause of an increase in value has increased their taxes.
For US major markets, I think it's standard to use 2% in CA and 3% everywhere else. Focus on your reassessment value though. That's the most important piece. As Count_Chocula said, ask Ryan for a quote.
In some jurisdictions we have property in (not in California), we model at least a 4% increase in property taxes each year. If you have access to your prospective property's tax assessment records, I'd look at the most recent, say, 5 years to get an idea of the jurisdiction's behavior.
Where I'm at there are essentially no property taxes (EE) :)
What happens is that you'll get 4-6% per year and then one year you'll have an abysmal year and you'll challenge the assessment and they'll turn it back, say, 5-10%. So, over the long haul, it will approximately track rent growth.
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