WOULD YOU ALLOW THE IRS TO DO YOUR TAXES? WHY ARE YOU ALLOWING THE COUNTY ASSESSOR TO DO YOURS? PROPERTY TAX SAVINGS STRATEGIES FOR NEW CONSTRUCTION DEVELOPMENTS
DATE OF COMPLETION IS TYPICALLY THE DATE CERTIFICATE OF OCCUPANCY (COFO) IS ISSUED. Typically 8-12 months after the date of COFO, the Assessor receives information from the planning department. The Assessor then starts to enroll a value for the new construction. TIPS ON HOW TO SAVE MONEY ON PROPERTY TAXES FOR COMMERCIAL NEW CONSTRUCTION Paramount Property Tax Appeal has successfully fought to reduce the property taxes in over 10,000 cases with an over-assessed valuation of $900+ million resulting in over $90 million refunded to our clients. This booklet provides a general overview of some of our tax strategies we use to help our clients lower their property taxes due to new construction. The owner will receive a supplemental notice and will then have 60 days to appeal the new assessment or, in some counties it will be 60 days from the date of the bill. Take notice of every letter the Assessor sends you. If you miss the deadline to file an appeal on a supplemental notice, you still have 4 years to file only in the normal time filing period. Even if the Supplemental Notice seems to be fairly valued, we strongly recommend having it reviewed by a professional. UNDERSTANDING DATES FOR NEW CONSTRUCTION The Assessor is required to assess any new construction in progress as of January 1 st of any given year. Therefore if construction is 50% complete as of January 1 st then the Assessor will assess at 50% of the final value. OR Will base the assessment on the amount spent to date. In some cases, the Assessor miscalculates the percentage completed resulting in a higher assessment. Plus, they often use incorrect completion dates which can cause higher assessments. 01 CONTACT: 858.225.1200 WES@PPTAXAPPEAL.COM PPTAXAPPEAL.COM 02
TIPS ON HOW TO SAVE MONEY ON PROPERTY TAXES FOR COMMERCIAL NEW CONSTRUCTION Define Classification of New Construction TAX STRATEGY: INCREASE FIXTURES AND PERSONAL PROPERTY VALUE OVER REAL PROPERTY VALUE Personal Property Fixtures New Improvements Land Ground up new construction. Change in use. Repairs or tenant improvements. Expansion. Determine the New Construction Type and Class Real Property: -- Land and structures only. -- Subject to assessment under Prop 13. -- Can increase up to 2% annually from base year. Fixtures and Personal Property: -- Depreciates every year. -- Typically 5-15 year life depreciation. TO SAVE ON PROPERTY TAXES, VALUE DEPRECIATING ASSETS (FIXTURES) HIGHER THAN LIKELY APPRECIATING ASSETS (REAL PROPERTY) 03 04
HOW TO VALUE NEW CONSTRUCTION What is market value of property as of completion date before new construction started? Land Value or Base Value: Typically what was paid for the land is what your land assessed value will be due to Prop 13. If the Assessor uses the income or sales approaches, they are required to value the land or the prior improvements at the time of completion of the new construction. HOW THE ASSESSOR VALUES NEW CONSTRUCTION Cost Approach: To assign value, the Assessor will use your reported costs and the Marshall & Swift Cost Guide. If the Assessor believes the reported cost is too low, they will use the Cost Guide as a comparison tool. They will likely assess based on the higher value. Once the cost is determined, the Assessor will also add an additional 15-20% for Entrepreneurial Profit. As a result, the Assessor may enroll an improvement value much more than what you spent on the property. Sales or Income Approach: Revenue Taxation Code states that new construction must not exceed fair market value. This is difficult to quantify due to a high number of variables, the new construction value to economic market value upon full completion. Actual cost is not indicative of Actual market value. Due to increasing development costs, the cost to build can often be higher than the market value. Example: Land was purchased at the bottom of the market in 2011 for $1,000,000. In 2016, the land value has increased due to entitlements and market recovery therefore the market value of land has increased. Due to Prop 13, your Land Value Assessment can only go up a maximum of 2% per year. Entitlements are not assessable. Tax Strategy: The higher the land value we can prove at the time of completion the lower in property taxes you will pay. 05 CONTACT: 858.225.1200 WES@PPTAXAPPEAL.COM PPTAXAPPEAL.COM 06
COST VALUE This example shows that based on land value increases the improvement value would be less than actual costs. The simple approach would be to just add the cost of construction $5 million. The higher the new land value the better for reducing the new improvement value. TEST TO DETERMINE IF THE NEW CONSTRUCTION IS PERSONAL PROPERTY OR REAL PROPERTY: If the fixture or personal property is specific to the business process then it is should be assessed as such and depreciated each year and not included in the real property assessment. Examples of Fixtures and Personal Property: Assumptions Income Approach Sales Approach Market Value of Improvements Reduction from Actual Building Costs Property (Land) is purchased in 2011 for: Market land value date of completion (2016): Actual reported Costs of the new building: Income: Approach: Land Value = Fee simple value: Sales: Approach: Land Value = Fee simple: Average of Sales/ Income Approaches: Actual cost of improvement: Market value of improvements: Net Reduction: $1,000,000 $1,600,000 $5,000,000 $5,500,000 - $1,600,000 = $3,900,000 $6,000,000 - $1,600,000 = = $4,400,000 $4,150,000 $5,000,000 $4,150,000 $850,000 Key: The original land value only goes up 2% thanks to Prop 13 - Value increased from $1,000,000 to $1,104,081 Labs for research and development Server rooms Special HVAC vent systems or clean rooms Cold storage equipment and insulation Any tenant improvements built for the use of any business process Special electric in a processing plant that is not normal electrical service for that building New Assessment Land: Improvements: Total Assessed Value: = $1,104,081 $4,150,000 $5,254,081 Reduced Value: $5,254,081 VS. Assessed Value: $6,104,081 Refund/Savings: $9,350 per year for life 07 08
MAJOR MISTAKES THE ASSESSOR S OFFICE MAKES Utilization of a low capitalization rate (compared to fully leased properties). Failure to correctly estimate and apply lease-up rental loss. Incorrectly valuating the land value. Utilizes actual or Marshall and Swift book costs and failing to recognize costs does not always equal value. Does not consider functional or external obsolescence. WHY CHOOSE PARAMOUNT PROPERTY TAX APPEAL? EXAMPLE OF ACTIVITIES THAT ARE NOT ASSESSABLE AS NEW CONSTRUCTION REMODELING Painting Replacing floor or roof Total roof replacement Solar electric systems New fire prevention systems Earthquake retrofitting Sewer lines ADA compliance improvements to existing structures Normal maintenance & repairs in preserving or retaining the property condition. FOR MAJOR REMODELING PROJECTS, PRESERVE A LIST OF COSTS FOR THE FOLLOWING: 90% success rate in winning cases. Our staff comprises of former county assessors, senior real estate brokers, and commercial appraisers. Long established relationships with the County Assessor s decision makers. Experienced in how the assessor will argue the case against you. Access to specialized data used to prosecute your case to achieve a maximum refund. Contingency fee based you only pay if we earn you a reduction. FOR A FREE CONSULTATION CONTACT: WES NICHOLS MANAGING DIRECTOR Roof Solar electric install Sprinkler Earthquake retrofitting ADA Other maintenance Business personal property WES@PPTAXAPPEAL.COM 858.225.1200 PPTAXAPPEAL.COM 09 10
FOR A FREE CONSULTATION CONTACT: WES NICHOLS MANAGING DIRECTOR WES@PPTAXAPPEAL.COM 858.225.1200 PPTAXAPPEAL.COM CORPORATE HEADQUARTERS: 9845 ERMA DR #311 SAN DIEGO, CA 92131