Opportunities to find property tax savings in California with 2024 appeals

California’s unique approach to determining assessed values for property taxation

Since Proposition 13 (“Prop 13”) was implemented in 1978, values for assessment purposes are generally set when properties are purchased or constructed. The California Constitution mandates that once the base assessment is established, it may be increased by no more than 2% each year.  For the 2024 tax year, a property purchased or newly constructed in 2018 will be taxed based on an assessed value that is 12% higher than its 2018 value. A property purchased or completed in 2022, on the other hand, will be assessed 4% higher in 2024 – while the market values of most commercial properties have dropped. In some cases, a property may be worth even less in 2024 than when it was acquired six years ago.

Commercial real estate transactions screeched to a halt in response to the Fed raising interest rates, and have only recently started to resume, with market participants expecting rates to drop this year. No rate cuts have happened as of the posting of this article, and uncertainty around future cuts remains. Office properties across the state continue to sell at significant discounts with sale prices a fraction of the assessment values set five years earlier.

A review of valuations since 2018, prepared by Altus Group, indicates that average values per square foot determined for each property category have declined, with some falling below 2018 levels.  

Figure 1 - Average values per square foot in Los Angeles – Long Beach- Anaheim  CBSA, 2018-2024 

Figure 2 - Average values per square foot in San Franciso-Oakland-Hayward  CBSA, 2018-2024 

Note: Values are based on aggregated data from NCREIF ODCE index data and are not necessarily representative of individual properties or the population as a whole.

Do you have an opportunity to reduce your property tax? 

While properties purchased or completed a decade or more ago are likely still benefiting from assessments that are well below market value, those with base assessments set more recently should consider a thorough review of values.

A review was completed of 1,066 commercial properties sold between January 2023 and July 2024, at a price greater than $10,000,000. It found that for more than 15% of properties, Proposition 13 had resulted in an assessed value that was higher than the purchase price. While the base assessments for these properties will be reduced to the market value, as represented by the sale, this suggests that many properties which have not changed hands may be eligible for an assessment reduction because of the decline in value.

Below are a few examples of property types where opportunities for appeal may be present: 

• Income-producing properties: Property tax experts can demonstrate rising interest rates generally result in higher capitalization rates. Higher vacancy rates are increasing pressures to provide significant tenant incentives, resulting in lower net effective rents.   

• Special purpose properties: Rising construction cost and declining values may have led to economic obsolescence. Changing markets and technologies may be creating functional obsolescence.  Property tax experts can identify and quantify these losses in value.  

• Business personal property: When buildings are experiencing a decline in value, the value of the building contents may be impacted as well. County Assessor Offices and Appraisal districts use reported costs and trend tables to value fixtures, equipment, and other personal property. The rising interest rates in 2022-2023 have caused a spike in adjustment factors used to set assessments.  Combined with improving technologies, these factors often result in assessments that are higher than replacement costs.  

In addition to the general sector-by-sector impact of market conditions, individual properties may also be underperforming. The continuing impacts of remote work, in addition to layoffs in the tech sector, have had dramatic impacts on CBDs. According to reports by CBRE office vacancy in downtown Los Angeles grew to 28.8% in the first quarter of 2024, while San Francisco’s downtown office vacancy closed out Q2 2024 with a vacancy rate of 36.8%.

Recent sale prices can also be used to support arguments for reduced values. Although a limited number of transactions are available for analysis, these sales do provide a benchmark for analysis of current market values.

Unlock value with a property tax appeal

Where a property has considerable vacancy, or where lease agreements are based on a “gross” rent basis (inclusive of taxes), a reduction in property tax liability can have an immediate impact on net operating income (NOI). Where lease agreements are primarily net/net, property tax reductions decrease the gross costs to tenants. This can assist in retaining or attracting tenants, while also providing room to increase future base rents. All these outcomes contribute to increasing value.  

 A 10-20% reduction in the assessed value of your property can increase NOI by 2-4%, even in a state with tax rates as low as California’s. 

Figure 3 - Potential impact of property tax reduction on NOI/rent 

Source: Altus Group

Action you can take right now 

California law provides the opportunity to appeal your assessment if the market value drops below the assessed value. To protect your rights to a lower assessed value, you must file an appeal prior to the deadline. If the value is not found to be less than the assessment, the appeal can be withdrawn.  

There are two deadlines to file assessment appeals in California, which vary according to county. Eleven counties, including San Francisco, have an appeal deadline of September 15th. The deadline in the rest of the state is November 30th. As those dates fall on weekends in 2024, they have been moved to September 16th and December 2nd for this year.

Figure 4 - California Assessment Appeals Filing Deadlines 2024

Source: State Board of Equalization 

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