When is new construction assessed in California, and how is the supplemental bill computed?

The three layers, on one project

The setting used throughout this article is a developer's wholly owned LLC that builds a mid-size office and retail building on land it has owned for years in a California county. Construction runs about two years, and the building is completed and first occupied in the spring of a year this article calls the completion year. Construction cost is about $60 million.

California's property tax is an acquisition value system. Article XIII A of the Constitution, implemented by Rule 460 and section 110.1, fixes a base year value when property is purchased, changes ownership or is newly constructed, and lets it rise each year by an inflation factor of not more than 2 percent (section 51(a)(1); Rule 460). The land's base year value dates from its acquisition, and section 71 provides that the base year value of the remainder of the property, the part not newly constructed, is not changed by the construction. The building passes through three assessments that use three different numbers: a market value estimate on each lien date, which is neither a base year value nor a cap; a base year value on the date of completion, which need not equal cost; and a supplemental assessment, which is an increment, the base year value less the roll value, and so depends on how much construction in progress the assessor had already enrolled.

Layer one: construction in progress on each lien date

Tax liens attach annually as of 12:01 a.m. on January 1 preceding the fiscal year for which the taxes are levied (section 2192). Section 71 provides that new construction in progress on the lien date is appraised at its full value on that date, and on each lien date thereafter, until the date of completion, when the entire newly constructed portion is reappraised at its full value. Rule 463 repeats the rule, and section 110.1(b) states the consequence: uncompleted new construction receives no base year value until it is completed. The project crosses two lien dates while under construction, and on each the construction in progress is enrolled on the regular roll at the assessor's estimate of its value that day.

The assessor learns of the construction without being told: section 72 requires every permitting authority to send the assessor a copy of each building permit as soon as possible after issuance, and certificates of occupancy, or other documents showing the date of completion, within 30 days after they are issued or finalized.

The value enrolled is a market value estimate, and the Board of Equalization's handbook treats cost as evidence of it rather than as the value itself: construction in progress on any lien date is assessed at its market value on that date, the cost approach is used to determine the amount of costs in place, and the total of those costs may be higher or lower than the market value (Assessors' Handbook Section 410, chapter 4). An assessor who enrolls construction in progress below the owner's capitalized cost is applying that method, and the owner's accrual for that fiscal year is the enrolled value times the rate, not cost times the rate.

Each lien date value is a regular roll assessment for its own fiscal year and stands on its own; the supplemental assessment at completion does not reopen it, and whether a prior roll's construction in progress value was too low is an escape assessment question with its own limitation periods. Nor is there a supplemental assessment for construction in progress as such: the supplemental roll is triggered by a change in ownership or the completion of new construction (section 75.10), not by a lien date crossed with an unfinished building.

Layer two: the date of completion and the base year value

When new construction is completed, the assessor appraises it at its full cash value on that date, and that value is the new base year value (section 75.10; section 110.1(a)(2)). Section 75.12(a) deems new construction completed on the earliest of three dates: the date it is available for use by the owner; where the owner has given the required notice that it does not intend to occupy or use the property, the date it is occupied or used with the owner's consent; and, where the property cannot be functionally used or occupied when it becomes available, the date it can be. Rule 463.500(b) adds the conclusive presumption: unless the assessor receives the owner's written notice, given before or within 30 days after the commencement of construction, that the owner does not intend to occupy or use the property, the date the construction is available for use is conclusively presumed to be the date of completion.

Rule 463.500(c)(4) defines the operative phrase. Property is available for use when it, or a portion of it, has been inspected and approved for occupancy by the appropriate governmental official; where there is a prime contractor but no inspection process, when the contractor has fulfilled all of its contractual obligations; and where there is neither, when its outward appearance shows it is immediately usable for its intended purpose. New construction that cannot be functionally used or occupied is not available until the legal or physical impediment is removed.

Three refinements matter for an office and retail building. First, a structure built with the expectation that tenants will add improvements after signing a lease is available for use when it is ready to receive those improvements, whether or not a tenant exists (Rule 463.500(c)(4)); the date of completion of a shell is the date the shell is ready, not the date a tenant opens. Second, where a project is completed in stages, any portion ready to receive tenant improvements is available for use even if other portions are not, and each phase can be assigned a different base year and valued as of the date it is available (AH 410, chapter 2). A building whose retail floor is approved for occupancy months before its office floors has two completion dates and two base year values. Third, the date is a legal date, not an accounting one: the federal placed-in-service date and the first tenant's move-in date are evidence, but neither is the date of completion unless it coincides with the date the property became available for use.

The owner's notice is the only lever that moves the date. An owner that does not intend to occupy or use the property, and that gives the assessor written notice before or within 30 days after construction commences, defers completion from the date of availability to the date of occupancy or use with the owner's consent (section 75.12(a)(1)(A); Rule 463.500(b)). Occupancy or use includes a rental or lease and occurs on the earlier of physical occupancy or the start of the agreed term of occupancy (Rule 463.500(c)(5)), so the deferral ends when a tenant takes possession or, if earlier, when its lease term begins, and an owner that has given the notice must inform the assessor within 45 days of a lease, a rental, an unrecorded contract of sale, or occupancy or use (section 75.12(b), (e)), on pain of a penalty under section 482 (section 75.12(f)). After the 30 day window the notice is gone.

The base year value is a full cash value on the date of completion, not a cost figure. Rule 463 provides that the full value of new construction is only that value resulting from the new construction, and that increases in land value caused by appreciation or a zoning change are not enrolled. Once set, the base year value rises each lien date by the inflation factor, the change in the California Consumer Price Index capped at 2 percent, and the taxable value in any later year is the lesser of that factored amount or the full cash value on the lien date (section 51(a)).

Layer three: the supplemental assessment and the proration rule

Section 75.11 sets the arithmetic by the calendar. Where completion occurs between January 1 and May 31, there are two supplemental assessments: the difference between the new base year value and the taxable value on the current roll, the roll for the fiscal year in which completion falls; and the difference between the new base year value and the taxable value to be enrolled on the roll being prepared, the roll for the fiscal year beginning the following July 1, which was fixed on the January 1 lien date before completion and carries only construction in progress (for new construction, section 75.11(a) describes that second assessment as the value change resulting from the construction). Where completion occurs between June 1 and December 31, there is one supplemental assessment (section 75.11(b)), against the current roll, except that a June completion is presumed to occur on July 1 and is assessed only against the roll being prepared, at a factor of 1.00 (section 75.41(c)); the next regular roll, with a lien date after completion, carries the completed building at its factored base year value.

Only the new construction is in the computation. The handbook states that only the value attributable to the new construction is enrolled as a supplemental assessment (AH 410, chapter 3), and its case study of a house completed in April nets the construction in progress value on each roll against the new base year value: the assessment against the current roll subtracts the prior lien date's construction in progress value, and the assessment against the roll being prepared subtracts the more recent one (AH 410, chapter 4). The land's factored base year value enters neither computation.

The tax is computed by the auditor. Section 75.41(a) applies the current year's tax rate to the supplemental assessment to compute a full year's tax; if the rate for the roll being prepared is known, that rate may be used for the second assessment. Section 75.41(b) prorates the tax for the portion of the fiscal year remaining and fixes the event date by presumption: completion is presumed to occur on the first day of the month following the actual date. Section 75.41(c) states the factors for the current roll by presumed date: February 1, 0.42; March 1, 0.33; April 1, 0.25; May 1, 0.17; June 1, 0.08; July 1, no supplemental assessment on the current roll; August 1, 0.92; September 1, 0.83; October 1, 0.75; November 1, 0.67; December 1, 0.58; January 1, 0.50. The factor for the roll being prepared is 1.00 in every case. A supplemental tax of $20 or less may be cancelled (section 75.41(d)), and a negative supplemental assessment produces a refund computed the same way (section 75.41(e)).

"Property" for supplemental assessment purposes means real property and manufactured homes, other than fixtures that are normally valued as a separate appraisal unit from a structure (section 75.5). Fixtures of that kind receive their base year value on completion but reach the roll only at the next lien date. Personal property is never on the supplemental roll; it has no base year value and is assessed each year on the property statement.

A worked computation

The figures below are invented and round. The tax rate area carries a rate of 1.1 percent, the 1 percent constitutional rate plus voter-approved debt. The land has a factored base year value of $8 million, which does not change.

Construction starts in the spring of the first year. On January 1 of the second year, costs in place are $25 million and the assessor enrolls construction in progress at $22 million. On January 1 of the completion year, costs in place are $55 million and the assessor enrolls construction in progress at $50 million. The regular bills for those two fiscal years are computed on $22 million and $50 million respectively, plus the land, and neither is revisited at completion.

The building receives its certificate of occupancy on April 20 of the completion year. That is the date of completion, by conclusive presumption, because the owner gave no notice of intent not to occupy or use. The assessor determines a base year value of $62 million for the new construction as of April 20.

Because completion fell between January 1 and May 31, there are two supplemental assessments. The first is against the current roll, the roll for the fiscal year ending June 30 of the completion year, which carries $22 million of construction in progress: $62 million less $22 million, or $40 million. Completion on April 20 is presumed to occur on May 1, whose factor is 0.17, so the tax is $40 million times 1.1 percent times 0.17, or $74,800. The second is against the roll being prepared, the roll for the fiscal year beginning July 1 of the completion year, fixed on the January 1 lien date with $50 million of construction in progress: $62 million less $50 million, or $12 million, times 1.1 percent times 1.00, or $132,000. The two supplemental bills total $206,800. From the lien date following completion, the building sits on the regular roll at $62 million factored by the inflation rate.

The same project with a different completion date shows the proration rule at work. If the certificate of occupancy issued on June 10, the presumed date is July 1, there is no supplemental assessment on the current roll, and the one assessment is $12 million at 1.00, or $132,000. If the certificate issued on August 15, the current roll is then the roll that began July 1, carrying $50 million; the one supplemental assessment is $12 million at the September 1 factor of 0.83, or $109,560, and the next regular roll carries the completed building. The increment is the same $12 million in both cases; the calendar sets the factor.

The construction in progress value on the second lien date decides only the split: for the fiscal year beginning July 1 of the completion year, the owner pays tax on $62 million whether the assessor enrolled $50 million or $55 million, and the higher enrolled value moves value from the supplemental bill to the regular bill. An accrual that applies the rate to cost, that starts the supplemental in the month of completion rather than the month after, or that carries a supplemental for a June completion against the current roll will differ from the bills.

Notice, bills and the appeal window

The assessor mails a notice of supplemental assessment showing the new base year value, the roll value or values subtracted, the date of completion, the amount of the supplemental assessment, the date of mailing, and a statement of the right to an informal review and to appeal (section 75.31(a), (c)). Supplemental taxes are due on the date the bill is mailed. For a bill mailed July through October, the first installment becomes delinquent on December 10 of that year and the second on April 10 of the following year; for a bill mailed November through June, the first installment becomes delinquent on the last day of the month following the month of mailing and the second on the last day of the fourth calendar month after that, with a 10 percent penalty on an installment unpaid at its delinquency date (section 75.52). An unpaid installment goes delinquent whether or not an appeal is pending.

The appeal window is short. A supplemental assessment is treated as an assessment made outside the regular assessment period, and an application for reduction under section 1603(a) must be filed with the clerk of the assessment appeals board within 60 days after the date of mailing printed on the notice of supplemental assessment, or the postmark date, whichever is later (section 1605(b); section 75.31(c)(1)). In Los Angeles County, and in any county whose board of supervisors has adopted a resolution under section 1605(c), the 60 days run instead from the date of mailing printed on the tax bill, or its postmark, whichever is later (section 1605(c); section 75.31(c)(2)). A taxpayer that did not receive the notice at least 15 days before the deadline may file within 60 days of the tax bill's mailing date with an affidavit that the notice was not timely received (section 1605(b)). The appeal reaches the base year value itself, since the roll value being subtracted is already fixed. An owner that misses the window can still apply to reduce the base year value during the regular filing period for the year it is placed on the roll or any of the three succeeding years (section 80(a)(3); section 1603(b)), but a reduction obtained that way applies to the year of the application and later years only (section 80(a)(5)); the supplemental bills stand.

Practice notes

The sequence that reconciles to the bills starts with the permit and the certificate of occupancy, because section 72 sends both to the assessor and Rule 463.500 keys the date of completion to the second. An owner that will lease rather than occupy decides on the section 75.12 notice before the 30 day window after commencement closes. For each lien date during construction, the accrual rests on the value the assessor enrolls, not on cost, and that figure is the one netted against the base year value at completion. For the completion year, the calendar sets the number of supplemental assessments and the factor for each, and a phased project with separate occupancy approvals has a date of completion and a base year value for each phase. When the notice of supplemental assessment arrives, the 60 day clock runs from its mailing date, or from the tax bill's in Los Angeles County and the counties that have elected that rule, and the installments fall due on section 75.52's schedule regardless of the appeal. G&G State Tax Group provides new construction assessment review, supplemental assessment verification and assessment appeal representation alongside its state and local tax practice.