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Who is prospering from Prop 13?
Original post made
on Mar 16, 2010
Proposition 13 has been called California's "third rail" -- as in, untouchable. When billionaire Warren Buffet was serving as candidate Arnold Schwarzenegger's economic adviser during the 2003 gubernatorial race, he touched it.
Read the full story here Web Link
posted Tuesday, March 16, 2010, 11:28 AM
Posted by Jennifer Bestor
a resident of Menlo Park: Allied Arts/Stanford Park
on Mar 19, 2010 at 2:38 pm
UL, thank you for your question.
I am going to answer the first part -- what precisely does the shift look like for Menlo Park -- then go away and analyze SRI separately. That may take a few hours.
Looking only at the Menlo Park City School District (effectively central Menlo and West Atherton), from 1985 to the present, I found a shrinkage of commercial/industrial property in the secured tax rolls, from 21% to 10% of the total roll (including fixtures and personal property declared on the secured roll); or 19% going to 9% when I looked at land and buildings minus exemptions only.
Where did a shrinkage of half the commercial contribution to public services come from? This demands a thoughtful multivariate statistical analysis that I'm trying to find time to perform. For now I'm giving you my gut, based on various pivot tables of both residential and commercial parcel numbers and values.
There appear to have been five factors. In no particular order:
a) net conversion of commercial land to single-family residential uses (especially in the greater Linfield Oaks area)
b) lack of commercial turnover, hence an increased concentration of commercial properties at the low end of the assessment scale
c) a slower appreciation of commercial property compared to residential
d) net conversion of other land (either exempt [Seminary] or residential rental) to single-family residential
e) the decreasing value of the fixed $7000 homeowner's exemption
The first, (a) conversion of commercial to residential land, has contributed something over 1% of the change by reducing low 1978-basis commercial land by a little, but adding current-basis residential housing onto the residential side of the equation. Note that two previously exempt parcels have become high tax-paying commercial (Glenwood Retirement Inn and the modern office building at 1000 El Camino), as well as infill around the downtown, all of which reduce the net change.
The lack of commercial turnover (b) has been the focus of much of this discussion and the article. About half of the shift (5%) appears to be the effect of Prop 13/58 a proportional lack of turnover. Remember that residential is 31% pre-1985 basis, 33% from 1985-1999, and 36% from the last ten years. Commercial is 40% pre-1985, 40% from 1985-2000, and 20% from the last ten years. (Commercial is very pear shaped, while residential is cylindrical.)
For those reading from Palo Alto, Santa Clara County as a whole, which publishes its figures, also had a top-heavy SFR/condo at 48% for the last 10 years, while their commercial is more hourglass than ours, with 33% pre-1985, 26% in between, and 41% 1999-09.
Most interesting to me is (c) -- residential property selling in the last ten years is currently assessed (including many declines below purchase price) at 15.7 times 1978 assessed values. Commercial is at 9.1 times. So, the 20% that turned over in the last decade did so at 60% of the appreciation on the residential side. Which damped the commercial contribution of recent basis property, though had a net effect of less than 1%.
Why? (Yes, yes, business-unfriendly California, etc.)
My first other thought was is the uneven playing field playing a role in this? Why pay full value for an asset when the competitor next door has a permanent, growing $10,000+ tax advantage over you? Natural risk aversion with ones money would make one think long and hard about offering the same amount as one might if, say, the tax basis moved with the property. I wonder if, while Prop 13 seems to have driven residential prices up, it has damped commercial sales prices down by insinuating a tax barrier to entry. If so, removing it would have the unexpected consequence of raising commercial property values.
A second thought (thanks, GvG) is that property is, in fact, changing hands and for higher prices, but is doing so within the shells of LLCs. For a standard 5000 sf Menlo commercial lot, a tipping point would exist at around $1,200,000 where it would be more financially advantageous for a purchaser to take a 1978 tax basis than to put the building (often 50% of the total) on the books and depreciate it over 30 years for an income tax savings $10K or less.
The only proof I see of this in the data is that about 20% more parcels in Menlo Park are LLCs or other potential investment vehicles than in 1978. This could be just the nature of how things are held these days, but it's plausible that at least a few have legally changed ownership without a change in assessment. And certainly suggests a future trend.
The (d) net conversion of exempt (Seminary) land to residential was good for another 1%.
And the final 1% appears to be the result of the declining value of the homeowner's exemption. $7000 compared to the average assessed value of a home in 1985 in our district ($144,000) was about 5%. Today, that would be the equivalent (average assessment of $1.1M) of $50,000.
Hope this wasn't too much info. Do note that it means, for the area covered by the school district, that my proposal for change would only increase overall property tax collections by 5%, unless more land changed hands at higher (assessable) prices. Thanks for asking.