If you own commercial real estate in Santa Clara County, you recently received a mailing from the Assessor’s Office notifying you of the assessed value of your property. With your receipt of that notice, the clock is now ticking on your right under California law to challenge that value assessment. My goal here is to offer some guidance to investors on how to proceed given the current state of the market.
For starters, keep in mind that we aren’t in uncharted waters, although it has been over a decade since the last time something like this happened. Following the subprime mortgage crisis and the Great Recession, property values fell sharply (though in contrast with the current environment, those declines varied based primarily upon location) and many taxpayers considered challenging their tax assessments. In the early days of this blog, I put out a post on how to seek a temporary reduction in assessed value in the aftermath of those events.
Fast forward to today, and we can see some familiar themes. California real estate investors have become well acquainted with the volatility of the market over the last few years. Some industry sectors (e.g., office, entertainment) and some residential locations (urban downtowns) have experienced drastic reductions in value, as reflected by the following examples:
- Significant declines in San Francisco office occupancy rates have translated into plummeting values—the 350 California Street office building was valued by brokers in 2019 at $300 million but is now expected to sell for $60 million, while the 124 Townsend Street office building purchased for $135 million in July 2020 is now being sold for $90 million.
- My clients’ movie theater building was under contract in early 2020 for $7.8 million; that buyer backed out due to the pandemic, so they are now contemplating selling at auction with a reserve price of $3.5 million.
- Goldman Sachs expects housing prices in San Jose, among other markets, to fall by up to 25% in 2023 from their 2022 peak.
With office buildings in particular, rising vacancy rates due to remote work in the wake of the pandemic and the resultant decrease in rental revenues have triggered substantial, hopefully transitory, reductions in value, while significant environmental impacts (e.g., fires, floods) have also temporarily depressed the worth of property in other economic sectors. Due to these falling valuations, there may be a discrepancy between a property’s current market value and its assessed value, depending on its value when it was acquired. This variance could signal the opportunity for property owners to obtain a temporary reduction in property tax assessment under Proposition 8.
The Assessor’s Office has historically taken an active role in identifying falling values and lowering assessments. I spoke briefly with Santa Clara County Assessor Larry Stone at the San Jose State University Economic Summit in June, and he told me that, similar to what was done after the Great Recession, his office would be taking the initiative in reducing assessed values if the value of commercial property on the lien date of January 1 was lower than the assessed value. Still, your own property may remain overvalued, so if you believe the value of your real estate has fallen below the assessed value shown on your notice, you have two options to seek a temporary reduction in assessed value.
First, you can contact the Assessor’s Office and request an informal review. At this review, you can present all factual information relevant to the determination of the property’s market value as of January 1, 2023. But don’t delay: The deadline for requesting this informal review is August 1, 2023.
Second, you can file a formal assessment appeal with the Clerk of the Appeals Board; in Santa Clara County, the Clerk of the Board of Supervisors serves this role. For each tax period that you challenge, your appeal requires the submission of a signed appeal form. You can file this formal assessment appeal between July 2 and September 15, 2023.
Whichever option you pursue, you should submit the most persuasive information available to convince the Assessor’s Office of your opinion of your property’s value. Remember, the Assessor’s Office has access to all sales information in the county, and its opinion of value is presumed correct unless you have sufficient evidence to show it to be in error. Professional appraisals are the most effective evidence, with realtors’ opinions carrying somewhat less weight. Less persuasive forms of information include newspaper articles and websites, as well as your own opinion of value.