By David Schey, VP HdL Coren & Cone
Fiscal year 2019-20 opened with such promise. Values were up. Sales were up. Sales prices were up. After the Christmas holidays, we were looking forward to sailing smoothly into the next fiscal year. Then came COVID-19, working from home, shortages of staples such as toilet paper, flour, eggs, milk and bread. The supply lines soon sorted themselves out, but a new reality was upon us.
The impact of stay-at-home orders severely impacted sales and use taxes as well as transient occupancy taxes. Already strained city budgets were under assault. One of the only bright points was that property tax revenues remained almost unaffected by the pandemic and its negative economic effects.
The Good News
At the time of the lockdowns, most property tax bills for FY 2019-20 had already been paid. As a result, there was no noticeable increase in delinquency rates anywhere in the state. The assessed values for 2020-21 were established as of January 1, 2020 and were largely unaffected by the pandemic. To be sure, the number of home sales declined by 30-40% in the second quarter of 2020 and this impacted the amount of supplemental assessment revenue being allocated to cities and other taxing entities. While the number of sales declined, however, the sales prices of homes that did sell rose at rates greater than what was seen for sales in 2019. Some areas of the State experienced greater increases than others and there were pockets where values did not rise, but these were the exceptions.
In most areas of the State, the number of home sales rebounded in the third and fourth quarters of 2020 and continue to rise in the first quarter of 2021. By the end of 2020, many areas of the State had seen increases in both the number of home sales and in the values on homes that were sold relative to 2019. These increases will be recognized in the tax roll values for FY 2021-22.
The side benefit to the growth in sales value is that the market value of homes continues to go up and this will prompt County Assessors to continue raising the value of homes that were reduced in value during the recession in accordance to Prop 8. Those homes that are still below their adjusted base value should be increased in value as market values continue to rise.
New home construction has found willing buyers in most areas of the state and this, too, results in value growth as we head into the new fiscal year.
The Not So Good News
The pandemic served to further suppress the level of inflation that has been stubbornly low for a decade. The consumer price index in California (the “CCPI”) from October 2018 to October 2019 was 2.98% and this caused the inflation factor that was applied to the 2020-21 tax roll to be the full 2% allowed by Prop 13. CCPI for the period of October 2019 to October 2020 fell to 1.036% and this resulted in the inflation adjustment to be applied to tax roll values for 2021-22 to be 1.036%, just over half of the rate for 2020-21. In many cities, the growth in assessed value attributable to the inflation adjustment is frequently the largest source of growth from one year to the next. The reduction in the inflation adjustment for 2021-22 will serve to suppress growth in values and, in turn, growth in property tax revenues.
Emergency legislation was put in place to take pressure off homeowners and renters that were economically impacted by the pandemic. There has been an ongoing debate about whether it will result in a wave of evictions and foreclosures. While the opinions on this subject have been mixed, an improving employment outlook, increasing home values and post-forbearance payment deferrals should help mitigate the number of foreclosures that might occur. As the effects of the pandemic ease and the economy begins to recover, an increasing number of homeowners that have availed themselves of forbearance legislation will be able to reinstate their mortgage by entering into repayment plans or by resuming payments and adding the missed payments to the end of their loans. At this time, we have seen no evidence of increased foreclosure activity.
It will be more difficult to determine if evictions will increase as legislation forbidding evictions caused by the impacts of the pandemic expire. The sale of multifamily properties at ever increasing values seems to speak to continued belief by investors in the strength of the rental market, but we will need to wait and see.
The impacts of the pandemic on commercial and industrial properties could be more problematic. The work-at-home orders have demonstrated to many companies that there may be less need to have as much office space as was once believed. This realization couldcause companies to contract their office spaces and, in turn, cause reductions in taxable values due to assessment appeals and reduced market values.
Values for commercial retail properties like shopping malls, shopping centers and strip centers may be impacted by busines closures that were the consequence of the pandemic. This will depend on how and if small businesses recover and if closed businesses are replaced by new businesses. In most of the larger counties in the state, there has been a definite increase in the number of assessment appeals and the value under appeal for 2020-21, but it is too early to tell to what extent these appeals will be successful.
Other Property Tax News
The election in November consisted of more than the presidential election; proposition 15 was on the ballot and called for the reassessment of commercial, industrial and non-residentially zoned vacant land based on market value. The revenue derived from the reassessment of these properties was to be to the benefit of schools and local governments. This ballot measure was, to say the least, controversial and was variously described as a boon for local government or as the first step in the dismantling of Prop 13.
The measure included the need for many of the decisions on implementation to be decided and passed by the legislature and thus impossible to adequately estimate the potential for added revenue. The measure was defeated.
Proposition 19 was also on the ballot and approved. This ballot measure expanded the ability for homeowners that are over 55 or that are the victims of certain natural disasters to transfer their current taxable value to a new property. This was already possible but with more restriction. The impact on local governments is unclear although the measure requires counties to maintain information on properties that have benefited from such a value transfer. As this data is made available over time, the impacts will be revealed.
Another provision of Proposition 19 was to restrict the retention of current taxable value on properties transferred from parent to child or grandparent to grandchild. Now, the ability to retain the taxable value is dependent on owner occupancy of the property. This may have some impact on the suppression of value increases in these transactions but the impact is not likely to be significant. Time will tell but we see it as unlikely that the impacts of this legislation will be noticeable in any particular community.
This has been an interesting and eventful year, but not one we would like to repeat. From the standpoint of property tax revenue, however, this aspect of city revenues has held its own. While growth in 2021-22 may be somewhat suppressed by the lower inflation adjustment, growth will occur and should increase annually as the economy settles into what will be the new normal in the post-pandemic California.
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