Bruce Norris is joined this week by Peter Aldana. Peter was elected as the assessor-county clerk-recorder for Riverside County in June 2014. He has been with the assessor’s office for over 25 years in a variety of appraisal, supervisory, and management positions. He is a lifelong resident of Riverside County. He earned his B.A. from Cal State University, Fullerton and his M.A. from Azusa Pacific University. He is a member of the California Assessor’s Association, the County’s Records Association of California, International Association of Assessor’s Offices, and the Appraisal Institute. He is also a member of the Inland Empire Hispanic Leadership Council. This week we cover lots if information to understand everything from Proposition 13 and rules for taxes and real estate.
Episode Highlights
- How is 2016 fairing in relation to 2008 regarding cycles?
- What area did the assessors see the biggest increase when evaluating the market?
- Are there any bright spots in new construction, specifically industrial?
- What is the tax assessor’s office looking at for its next project?
- Is there a connection between Prop 8 status homes and a short sale?
- What is Prop 13, and what rules fall under it?
Episode Notes
Bruce said it was his pleasure to walk into the recorder’s office for the first time in a long time and have a great experience. He met somebody named Kyome at the gateway office, and he asked her if she knew Peter Aldana. She did, and he promised to mention to Peter on-air that she did a really good job. She went over and above and caught a mistake that would have mattered. How she had read it and caught it so quickly was very impressive. Peter said a huge part of what they do is customer service and see 100s of thousands of customers a year.
Bruce and Peter went on to talk about the assessments. 2016 is on par with 2008, and if we had been sitting in 2008 saying we would break even 8 years from then, that would have been an unusual statement. Bruce asked how often it happened where there has been a down then an upcycle where you break even over an 8-year period. Peter said the first recession he was a participant in was back in the early 90s. He recalled when he first came in that there had been a lot of construction, and everywhere properties were changing ownership, and values were increasing incredibly. These were all things we would not see for a while. In the mid-90s we had a mini recession, and even at this time people wondered how we would even get back to the original value. We hit a peak again in 1999, and the assessed valuation around that time was at $100 billion. By 2005, we were up to $243 billion worth of value. This is an incredible change in valuation.
For the county assessors in the Inland Empire and Riverside County, the new construction is the area that increased their assessed valuation. This, in effect, increased the taxable revenue to the county more than anything else. There are changes in ownership that occur, and when this happens you may take a value of $100,000 to $150,000. When you have new construction, you are taking something from virtually nothing and seeing it sell for a couple hundred thousand within a year. Another change of ownership could happen a couple years down the road for another $50,000. This could seem like really extraordinary increases on assessed valuations when they are still under construction. We have not really seen this in the last couple years, but we are seeing property valuations increasing on the appreciation of real estate but not so much on the new construction side.
Bruce asked if there have been any bright spots in new construction, for example in the industrial area. Peter said yes and that there is no vacancy in industrial properties in Riverside County. Peter said we have seen some really impressive prices in the industrial market. This is a relatively small segment, although it is a big part of the commercial industrial segment. However, in regards to their valuation it is a relatively small segment. A lot of the increases in valuation are seen in residential construction, which has not really been kicking in during the last few years.
Since we have had the downturn, besides apartments being built in a fair amount Riverside construction did not see a large amount of single-family homes built. The commercial industrial segment of the valuation is about 20% of the overall assessed valuation. Even if you have a large increase in value on the commercial side, it would not affect the assessment rule as much as you would see on the residential side. They have had some apartments and warehouses built, and there is talk of a huge project occurring in Moreno Valley in the next few years. In the 215 corridor there is a lot of industrial space being built and occupied now. This has certainly helped the overall assessed valuation. Residential is not quite keeping up, although we have seen some big increases cumulatively over the last 5 years.
Bruce asked if a tax assessor office had its preference, what would be the next project. Bruce wondered if it would be commercial or residential construction just because of the tax revenue. Bruce wondered just based on tax revenue being the driving force if they would be better off building a commercial project or a residential. Peter started by saying as an assessor they do not concern themselves with revenue. If the values go up they reflect that, and if the values go down they reflect that as well. They act just as quickly on either side and really try hard to make sure their appraisal staff does not think about generating revenue since all they do is appraise property.
With that being said, the benefit to the county is when there is appreciation of real estate. This is beneficial to the county’s revenue as well as for individual property-owners. We all know the benefits of the appreciating real estate market and things equity can do for you. It is a bit easier for them to do residential properties, so when they see new homes coming up and a tract of 100 homes, they can see some similarities of properties. They are very good mass appraisal on residential properties, but commercial properties are an individual one-off valuation. This takes a lot of time and resources. They do not really have a preference over the other, but the commercial industrial appraisal side of things is a little more difficult than the residential side.
The real bump in existing real estate as far as assessments go is when the home is swapped. Bruce asked what percentage of the inventory is generally transferred. Peter said he sees thousands of documents recorded per year, although they are not all changes in ownership or assessable changes of ownership. The recorder side of the office takes that information on land records that are recorded and sends them over to the title department. They then determine whether or not there is a re-assessable change of ownership. Of those they have about 75-100,000 per year over the last few years. They are usually changes of ownership, and of that about 80% of them are residential properties.
Not all of them turn out to be large increases in value because they have had so many properties they review every year since the recession began. Because of this, they were on market value on a lot of properties already. It is not a situation where somebody bought something in 1978 and turned it over to where it is now a big increase in value. More often what they are seeing is something that somebody bought in 2005 and sold again in 2011. They have pretty much been keeping up on the market value, and this is why they did not see dramatic changes in value in the last year or two even though they could see that appreciation in value.
Because of 2006, we have had hundreds of thousands of properties referred to as Prop 8 status. This means they declined them for market conditions and have been reviewing them every year, gradually bringing them back up to market value. If something sells right now, there is a good chance it is close to its market value.
Bruce asked if there is any connection between doing a short sale or a loan mod and Prop 8 status homes. Peter said with a loan modification they are not going to reassess the property. This is the same owner but a change in title, and no change in ownership as far as accessibility goes. With a short sale, it does change hands from one owner to another. They would re-appraise the property at its current market value, which may or may not be the amount of the short sale. They will look at prevailing market conditions and comparable sales; and they are going to say particularly when that short sale is not the norm that they are not sold on it being the market value. They would have to find comparable sales that report that particular sale price as the current market value. If it does not, then by law they have to enroll current market value.
Bruce asked when Prop 8 was instigated, which Peter said it was within a year or two of Prop 13. You could essentially adjust the property value temporarily, and there has been a market value change attributable to either the market or disaster. You could reduce the property temporarily until it increases back up to its Prop 13 value. When they really saw Prop 8 take a hold on properties was in the early 1990s when they were doing 100,000 properties a year, which they thought was a lot to review. In this last downturn, they had over 400,000 properties in Prop 8. This was out of close to 1 million assessments they had. This is a significant number of properties that were in the property status.
In residential properties they had a little over 300,000 at the trough, and right now they are at 100,000 residential properties that are Prop 8. They have made significant progress in getting back to a normal market. It seems this would add an enormous amount of man hours to the department. This was the thought years ago that they would not be able to get the work done; but one of the great things his predecessor, Larry Ward, did was make sure they leveraged technology. Peter was the assistant assessor at the time, and they found some ways to do a mass appraisal and use the technology in much better ways. Even though the number of appraisals they had to do increased significantly, they actually were able to downsize and continue to get the tax role completed and on time.
This was a really big accomplishment. At one time they had 240 in the assessor’s office and had over 500 employees, now they have less than 400. Yet they continue to get all the work done that is mandated by the state, but with significantly fewer people. They did not really lay anybody off but rather carefully planned things out. The leveraging technology was the most important thing, especially industry-wide in real estate. Bruce said this has been a big benefit in the speed of accessing information of all kinds.
Bruce went on to talk about Prop 13, which has been around since the late 70s. Bruce asked what the rules are here as far as how fast the value of your home can progress. If you accomplished a purchase in 1990, Bruce asked what percentage the value can go up tax-wise. Prop 13 essentially says that once you are given base-year value, meaning your property valued as far as the change of ownership or new construction. This becomes a base-year value, or your Prop 13 value. The property value can only increase by an inflationary factor tied to the California CPI. In the last couple years we have not even had a 2% increase with the inflationary factor, but it has been 1 ½ or less than 1%. However, it can never go more than 2%. If you bought your home in 1990, you probably saw 2% increases until sometime around 2006-2007.
Prop 13 also says that with that 2% inflationary factor, if your assessed value is higher than the current market value as of January 1, then your title can be assessed at the lower of those two values. In a nutshell, Peter’s job is to make sure property owners are assessed at the lower of those two values. This could be the Prop 13 value, which is the original value, and increase your inflation. Or, it could be at the current market value as of January 1 each year.
In the past back in the 90s, Peter remembered being very reactionary and asked people to file something, whether it was for a deed of property or something else. The great thing they did in 2006-2007 was create ways to mass appraise properties without being asked. They started to review large projects in large neighborhoods and determined what the value would be, whether Prop 13 or current market value. They will then be given what you are entitled. This is what kept them ahead of the curve so they were not bogged down in a lot of assessment appeals. These take many more man hours than an appraisal.
Bruce was actually a benefactor of that policy. Larry had asked him very specifically about it since they were buying the properties that needed work. He asked Bruce what he thought of the fairness of the valuation, which Bruce thought at the time was an unusual question. However, since Peter just explained it, it makes more sense now.
Bruce asked if the same rules in existence for commercial and residential when it comes to Prop 13. Peter said the same rules are in place, although the way they execute the reviews of the process is a little different with commercial investor properties because they are from an individual approach and one-off appraisal perspective. It takes so many more resources, and they really rely on property owners on the commercial and industrial side to make people aware when the property is over-valued. It is much more direct and simple for them to look at a tract and have 4-5 different models and to have a lot of sales comparisons than to have a commercial investor property where they really have to look at income approach to value it.
There will not be the cookie cutter kind of properties. However, his hope is that as they continue to do better at mass appraisals and developer systems that it will be something they do each year. They are not going to wait for the commercial property owner to contact them each time the property is over-valued or they have questions about it. They can do a much more proactive job and look at segments of the marketplace and create models that allow them to appraise those properties in a more proactive way. For now, they do rely much more on the property owner to ask for an informal review, which they can then do and give their opinion of value. If they still disagree, they can go through a formal appeal process.
Bruce said most of his clients are in the rehab business. He asked what kind of improvement sets off a reassessment. Peter said these are a bit more complicated and there is a little gray area here when talking about the rehabilitations and remodels. The way Prop 13 is written, it is only when there is new construction that they and the assessor should re-appraise the property. However, it goes on to talk about when there is a rehabilitation of a property from its current state to the equivalent of new. There is then the requirement for the assessor to see what the difference is in value from what it was to what it is now. The question is then what makes up the equivalent to new. They try to keep it as simple as they can, but it is not a real simple answer. When somebody buys something, then tears it down or remodels the whole house then it would at least need to be re-evaluated based on the improvements.
With a typical remodel, somebody buys a home and only needs to replace the floors or the windows. With the typical maintenance repairs, that is not something that is re-assessable. When an investor makes those kinds of repairs or investments in a property, it is hoped they would keep at least those receipts or accountability of what they did. Then if the assessor’s office does have questions they can ask and have a good discussion about it. They can say it is really just a remodel, not a rehabilitation. In that case, it would not be re-assessable.
Peter has a couple projects he has been working on with the assessor’s office, one being the Crest project. Bruce wondered how this helps them do a better job and the customer who shows up to have faster results and less waiting time. Peter said the number one purpose for the Crest project was to create an integrated property tax system between the assessor, controller, and tax collector. They knew they needed to get up to date their old technology, which was the mainframe technology from the 70s. This was a very inflexible platform when you want to make improvements to your business processes. You really have to re-write code and do a lot of things that take a lot of time. You do not necessarily have time to do things you want to do in a quick way.
The other part is that there is not a whole lot of mainframe programmers available anymore since most are retired. Just having that ability to maintain the current system has become a struggle. They needed to get off of the mainframe technology, and the thought was to either rebuild what they had or re-engineer it. This was the desire and the commitment. They have been working on this ever since and believe they will go live with the new system next summer. They also think it will give them much more capability to do things more quickly and have the information more accessible to the public.
The bottom-line is efficiency, a lot of which comes through workflow. This means instead of an employee pulling the work out of the system, you will have a way for it to go to the next person to do the work once you do your share. Therefore, they think they will gain a lot of efficiency just in the workflow here. They will also have a lot more capability to take the things they do in the office and do them online. There will be many benefits on the county side as well as a lot of efficiencies gained. On the property-owner side, there will be the ability to access information and have a much quicker response. You will also have the ability to see how much they owe and be able to pay online. This will really benefit them.
MORE ON HARD MONEY LOANS
- Florida hard money loans or call (407) 706-9700
- California hard money loans or call (951) 780-5856
INFORMATION ON NOTE INVESTING
- Florida mortgage investing or call (407) 706-9700
- California trust deed investing call (951) 780-5856
REAL ESTATE INVESTOR EDUCATION & RESOURCES
- Upcoming real estate investor speaking engagements and training
- Real Estate radio show and podcast
- Weekly news and videos
- Free Investor Roadmap – How to get started in real estate investing
- Free access to our web portal for real estate investors