A little research and careful
planning can save you big when triggering a tax assessment.
Not all new construction is an assessable event. There are a variety of exclusions that property owners should know to properly communicate with the Assessor’s Office. Good communication with the Assessor’s Office can avoid a time consuming and costly assessment appeals process. Furthermore, it can maximize the yield to the property owner.
An assessment of an apartment property by the San Francisco Assessor’s Office can be triggered by a variety of events. While this includes the sale or partial sale of a property, a re-assessment can also be triggered by any substantial improvement of the property. The Office of the Assessor Recorder reviews each construction, remodeling, or repair permit to determine whether the proposed construction will add substantial value to the completed project.
The San Francisco Department of Building Inspection requires that each permit filed include an estimate of the construction cost for the work completed. New construction and new additions, or “any projects that consist of erecting a new building, increasing the square footage of a property or adding improvements to a home that didn’t previously exist are all considered assessable.” This is because the new additions—like a new accessory dwelling unit—have substantially added value to the current improvements. New construction/additions are typically assessed via the cost approach, and as per the Assessor-Recorder’s Office: “only the portion that is being remodeled or added to the existing home is assessed. The final assessment resulting from the new construction is then added onto the factor base year value.” Likewise, construction necessary to bring a property into compliance with safety and ADA laws are likewise not a taxable event. The addition of ADA-compliant elevators, restrooms, and ramps are exempt, as is most foundation work and structural upgrades. Necessary soft story work, for example, does not qualify.
However, not all work is considered assessable, such as normal maintenance or “repair in kind.” Examples include roof repair, fixture replacement of a similar quality, dry rot or termite repair, or any other work necessary to prolong the usable life of the property. For example, a partial kitchen remodel is not considered assessable, as long as most of the cabinets, counter tops, floors, plumbing/electrical work, appliances, and fixtures are not replaced. Any remodel that includes the addition of cabinets; major structural changes; upgrading of plumbing/electrical systems; changing the floor plan; or upgrading to higher quality fixtures are considered to be assessable.
How does “repair in kind” apply to historical properties? Properties listed on the Planning Department’s List of Historic Resources are subject to higher scrutiny and oversight when applying for construction permits. In the case of the Forest Hill Clubhouse—a neighborhood clubhouse designed by architect Bernard Maybeck and constructed in 1919—the Forest Hill Association focused on preserving the original architectural details and styling of the property, while significantly upgrading it to prolong its useful life. The scope of the project was extensive and included the discretionary structural upgrade of the foundation; the renovation of the two restrooms to make them ADA compliant; a new roof; upgraded mechanical and electrical systems; renovated kitchen; and the relocation of an apartment entrance. According to the Department of Building Inspection, the reported construction cost exceeded $500,000. However, the assessed value did not increase in kind. This is because most of the work completed was tax exempt: the structural/seismic upgrades; the ADA compliant restroom upgrade; and the replacement in kind of all
fixtures to keep them historically consistent with the property. While the actual cost of renovation was higher due to the difficulties in repairing a historic property, most of the work completed for such a project will not trigger a reassessment due to the nature of historic properties, which require a replacement in kind.
Things can get tricky when considering the reality of construction. Often times, the estimated cost of construction originally filed with the Building Department can change due to unforeseen issues or other necessary repairs. One such example would be a change order. A change order can occur for a number of reasons and will usually incur a higher cost than originally estimated. But most change orders are not considered to be assessable. Change orders add cost to the project, but do not necessarily add value. For example, changing the layout of your kitchen or switching out the fixture in the bathroom midway in a remodel do not add quantifiable value to a property. However, a change order in which higher quality and more expensive cabinetry is used would be subject to assessment.
Costs also widely vary depending on the contractor and the source of the materials. Owner-builders, for example, can save significantly due to their ability to purchase wholesale goods and fixtures, and by completing the work themselves. While it may seem that this gives owner-builders a significant advantage, the Assessor-Recorder is concerned with the value of the property, not the cost. Assessments are not based just upon the actual cost estimate, but also upon the market rate costs for a similar project, due to the significant increase in value, despite the low actual cost to construct. This goes back to one of the core tenants of property assessment that posits that cost does not always equate to value. While it may have cost you $4 million to build your dream home, it will not always sell for that amount. And the cost to construct, even with new construction, does not equate with assessed value. Property values are determined based on a variety of factors, including unchangeable variables such as location, views, and the greater property market. At a certain construction price point, the returns on your investment can significantly decrease.
In summary, not all new construction is an assessable event. Property owners need to understand what is assessable and what is not to maximize returns on their investment. High quality fixtures may attract more affluent tenants and a higher rent; however, the real cost will be reflected in your tax bill.
Mark Watts is a partner in the real estate appraisal firm of Watts, Cohn and Partners, Inc. He served on the San Francisco Assessment Appeals Board from 2011 to 2016. He can be reached at firstname.lastname@example.org or 415-777-2666.