1. When a group of cotenants purchases a property together how are property taxes allocated?
The TIC Agreement should outline the price paid by each Cotenant and further, provide a formula determining the “Property Tax Percentage” obligation of each party. The Agreement should require that each Cotenant pays into a joint operating account on a monthly basis their portion of property taxes based upon their purchase price multiplied by the tax rate. This contribution amount should be required regardless of whether the group has received a new tax bill with the goal that when the increased tax bill arrives each party has adequate funds to pay their respective obligations. In addition, to the extent there is a subsequent reassessment of the property solely as a result of improvements made by one Cotenant their tax responsibility is increased by the entire amount of such reassessment.
One problem we have seen is the seller may allocate percentage interests which have no relation to the actual purchase price paid by each cotenant (i.e. they calculate title percentages based upon the expected sales price or square footage or another variable). It is our understanding the City uses the title percentages as its basis for tax allocation which in many instances can be inaccurate from the inception and ultimately will not work when the property is partially transferred. The TIC Agreement again should provide the agreement amongst the Cotenants as to how taxes should be allocated and the issue is how to convey this information to the City. This is addressed in more detail below.
2. What happens if someone sells prior to the City issuing a new tax bill reflecting the increase in taxes resulting from the original purchase?
At this point this has been a problem for groups as the departing cotenant has money in the joint account for unpaid/unbilled taxes and may wonder why such funds should remain. On the other hand, the non-transferring cotenants are at risk if they release the funds and subsequent to the sale receive a bill for increased taxes dating back to the original transfer date. The Assessor has a period of four (4) years from the triggering event to reassess the property. For example if John buys an interest for $500K which was previously valued at $250K and three (3) years later sells such interest, he would be required to leave his “excess” contributions for twelve (12) months to avoid a scenario where the City reassesses and the group is left financially responsible.
The alternative approach is the group can apply for Request For Notification of Individual Assessed Value for Tenancy-in-Common Units. The form requires all owners/cotenants complete the form and questionnaire. While receiving individual assessments does not create separate tax bills, it does reconcile amounts due for ownership interests as between the property and the City. If any owner failed to pay their portion of the property taxes, the entire property would be subject to a lien, but the form will create a consistent record between the property and the Assessor as to allocation of property tax basis by owner.
3. Is there a statute of limitations for reassessments as a result of improvements to the property?
As a rule the TIC Agreement should state each party has responsibility for any increases as a result of improvements, but since that amount is not definable they are not obligated to “self-impound” for this amount. The risk is that if the improvements are ultimately reassessed and the party in question does not have sufficient funds to pay the taxes, although the other cotenants have contractual rights to call the defaulting party in default, they will have to pay the taxes to avoid a lien. The same four (4) year statute of limitations applies to reassessment for improvements, but the trigger date would run from July 1st of the tax year of the date of completion of the project and is subject to extension if a property owner fails to provide all required information and transmittals to the Assessor in connection with the construction.
4. If two parties purchase a property and although one is contractually entitled to the upper unit which would theoretically have more value, he/she pays less, does the City have the right to assess value distribution and further, notwithstanding Prop 13 charge higher taxes due to the “theoretical value”?
If the parties have agreed upon price distribution and therefore allocation of responsibility for property taxes it would seem such agreement should be binding. So long as the City receives taxes based on the entirety the allocation should not matter. We have had a similar dialogue relating to allocation of taxes when a property is subdivided into separate condominiums. If the property is not being sold, the tax basis for each owner should remain (assuming each resulting condominium is not transferred at the time of subdivision). If the City assessed the value of each condominium Prop 13 would again be meaningless. If the approach is applied consistently when properties are multi-unit tenancies in common, it would be easily transferred when and if the properties are subdivided into condominiums.
NOTE: it is understood there may be scenarios in which the transfer value is at question for other reasons such as potential fraud.
5. If one party transfers a partial interest in the Property how will property taxes be impacted?
Per No. 1 above, if the TIC Agreement sets forth each cotenant’s purchase price, it would follow that any increase as a result of a supplemental reassessment solely triggered by the transfer would be for the purchasing cotenant. By way of example, if the building originally sold to four cotenants for an aggregate price of $1MM with each party paying $250K and three years later one cotenant sells his/her interest for $500K, the supplemental increase in property taxes to $1,250,000 would be allocated: $250K each for the original three non-transferring cotenants and $500K for the new cotenant. This ratio would then apply to any cost of living increases in taxes (40% for the purchaser who paid $500K and 20% each for the parties who paid $250K).
**NOTE any of the above is still subject to reassessment triggered by improvements made by an owner to the property**
Each owner should understand that they are obligated to pay based upon their price and that the City and County of San Francisco will in fact bill the property retroactive to the date they purchase the property. The allocation of property taxes is always difficult for groups to understand, particularly in the case of a transfer where there may be a delay in the reassessment (or in some instances, no reassessment). The Assessor has four (4) years from the event date to reassess, therefore it is important that a TIC Agreement clearly sets out each party’s obligation, explains how the tax assessments should work and that all parties should pay into the joint account based upon the premise that there will be a reassessment and it will be retroactive to the date of purchase.
6. How will individual owners understanding their respective obligations for property taxes change their joint and several liability for the whole?
Answer: It will not. Ultimately if the entire tax bill is not paid, regardless of whether one or more cotenants are responsible for the deficiency, the entirety of the property is at risk. However, it will help if all cotenants understand that the City has the information and the procedures are in place that will always result in a supplemental reassessment. Further, the fact that there is a definitive four year statute of limitations on reassessments will enable cotenants to contractually address the risk when one or more parties sells prior to a “catch-up” reassessment and a drop dead date for keeping available funds can be agreed upon.
With the current rise in fractional TIC financing this tax issue has become more apparent. Many cotenant/purchaser/borrowers feel that since their loan obligation is individual and secured by their TIC interest as specified in the TIC Agreement, their tax obligation is also segregated. This is not the case and having a clear understanding between the cotenants will provide more assurances for all involved that risks can be mitigated.