The Santa Cruz County Grand Jury reviewed the process used by the Santa Cruz County Assessor’s Office to establish value and determine the reduced assessment on a business property.
The Grand Jury used information from a previously decided case of a large commercial entity that involved a collection of businesses, parcels and associated improvements. One of the key elements of this case was the use of an assessment methodology known as the “income method” for, at least in part, determining the fair market value of a business property.
The Grand Jury’s objective was not to validate or “second
guess” the assessor’s actual determination of the full cash value in the case
reviewed but to understand the process employed in making that determination
and to evaluate whether that process would deliver a fair and reasonable
property valuation. No attempt was made to review all of the assessor’s
An estimate of the “full cash value” of a parcel and improvements for the purpose of determining the property tax.
Converting regular income over a period of time to an equivalent monetary value.
Like properties, equipment and improvements having known market values that can be used to estimate the value of targeted properties, equipment and improvements.
A combined financial statement for a corporate entity which includes all of the profit centers in one combined financial statement.
Earnings Before Interest, Taxes, Depreciation, and Amortization — a measure of business income.
A property assessment methodology used to establish the value of business property in which capitalization of a net income stream is used as one approximation. That is to say, we estimate the capital investment that would be required to produce the net revenue stream. We must assume a reasonable rate of return commensurate with the risk. The resultant capital investment would include land and improvements. To arrive at a calculated land value, the value of the improvements would be subtracted.
Basic unit of real property subject to an assessment.
An amendment to the California Constitution passed by the voters in June 1978, governing the taxation of real property. Proposition 13 prescribed an assessment structure for establishing the base full cash value of a property and imposed limits on increases in the assessment above the base.
An amendment to the California Constitution that amended portions of Proposition 13 (see below) passed by the voters in November 1978. Proposition 8 permits property tax payers to request a reassessment of their property when they believe that their property has been reduced in value due to damage or other economic conditions. As Proposition 13 did not provide a mechanism for reducing the assessment, Proposition 8 was passed a short time later to incorporate a reduction mechanism.
Assessor’s Office Responsibilities
Property taxes are based on the assessed value of a property. It is the responsibility of the assessor to establish the full cash value of the property upon which the amount of property tax is calculated. The assessor does not collect taxes nor set the rules for how a property is assessed. In order to meet the responsibilities of the office, the assessor must:
The assessed value of real property is determined by law which includes the effects of Proposition 13. Proposition 13, passed in June of 1978, requires that the assessed value of real property be set at the 1975-76 full cash value (base year value). Real property is then reappraised only when a change in ownership occurs, or after new construction is completed. Generally, a change in ownership is a sale or transfer of property; new construction is an addition or improvement to a property. Except for these two instances, property assessments can be increased annually by the percentage increase in the consumer price index but by not more than 2%.
However, business personal property (non-land/improvements such as equipment) and certain restricted properties are reappraised annually. The owners of all businesses must file a property statement each year detailing costs of all supplies, equipment and fixtures at each location. This annual statement is required unless the property qualifies for direct assessment (appraised by assessor). Business inventory is exempt from taxation.
Proposition 8, passed in November of 1978, amended Proposition 13 providing clarifications and a mechanism allowing an assessor to reduce an assessment when a property has been substantially damaged or its value has been reduced by “other factors” such as economic conditions. A reduction to the base-year value under the auspices of Proposition 8 is not permanent. Assessors are required to track every reduction until the base year value is restored.
A number of factors are used in assessing or reassessing the value of business property:
It is the assessor’s responsibility to establish a value for each property subject to property taxation. Property owners who disagree with the assessor’s appraisal can present their case to the assessor and provide evidence supporting a claim for a lower assessment.
In the event that the property owner fails to convince the assessor, the property owner has the right to appeal to the Assessment Appeals Board, a three-person board of citizens appointed by the Santa Cruz County Board of Supervisors.
property owners who are not satisfied with a determination by the Assessment
Appeals Board can take their case to Superior Court.
The scope of this Grand Jury investigation
was limited to a review of the assessor’s process used to reassess a unique
commercial property owned by a privately held company. No attempt was made by
the Grand Jury to validate or “second guess” the assessed value determined by
The case studied involved one company having a large
number of parcels and multiple businesses. It was necessary for the assessor,
with the property owner’s eventual concurrence, to segregate the parcels and
associated improvements and other assets in order to determine which parcels,
improvements and other assets were related to the requested assessment
2. When the income method is used, thoroughly investigate the ownership structure of a business to assure that the Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) is not being reduced through expenses that principally benefit the owners or owner-related parties (e.g., excessive salaries, “consultancies,” travel and entertainment, gifts). If such expenses are found to have reduced the income of the business being evaluated, they should be added back into the stated EBITDA.
using a business property owner’s financial statements to determine the income
stream to be used in the assessment of business property, require that those
statements be audited and certified by an independent external auditing firm
for the applicable portion of the business.
Property owner’s financial reports — audited consolidated financial reports, breakout of financials describing the business associated with requested assessment reduction.
Assessor’s working documents — spreadsheets used in validating property owner’s breakout.
Settlement Agreement and Mutual Release (“Stipulation Agreement”).
Other legal documents — Assessor’s Office.
Proposition 8 (1978) — http://traynor.uchastings.edu/cgi-bin/starfinder/18364/calprop.txt
Proposition 13 (1978) — http://www.leginfo.ca.gov/.const/.article_13A
Santa Cruz County Assessor — http://www.co.santa-cruz.ca.us/asr/index.htm