Summary and Introduction – Club CX (CX is as pseudonym) )is one example of how property taxes are assessed in California. In 2021, CX was purchased by the Homeowner’s Association (HOA). The HOA believed the transfer of ownership to the HOA would guarantee a property tax exemption. The County Assessor ruled the Club would not be tax exempt. This paper examines the question of whether a tax exemption should or should not have been granted. (A further history of the property tax at CX is presented in the Appendix.)
The Assessor argued that the
value of CX ownership was not embedded in the sales price of homes in the development and
therefore not in the assessed values of those homes. Therefore, CX was taxable to the HOA. That
argument was found to have merit.
The question of whether homes
bought after the sale would have CX ownership embedded in the sales price is
also examined. If so, the homebuyer could be subject to double taxation. It was concluded that if the market operated
freely, there would be no double taxation.
Is the Value of Club Ownership
Embedded in the Assessed Value of Current Homes?
– If the CX development was a
planned unit development that included the golf club, CX would be tax exempt. In that case, homebuyers would include the
value of CX embedded in their purchase price.
An example should make this clear.
Assume there are two developments each with N homes valued at H and a
golf course valued at V. In
Development1, the developer retains the ownership of the golf course. The property taxes paid in Development1 are
shown in Eq. 1
1) Property Taxes in Development1 =
(N∙H + V)∙T
Where,
T=
Tax rate
In Development2, the developer
cedes initial ownership of the golf courses to the HOA. This increases the value of each home by V/N.
The property taxes in Development 2 is shown in Eq. 2.
2) Property Taxes in Development2 =
N∙(H +V/N) ∙T = (N∙H +V)∙T
Both developments generate the
same amount of property tax. The HOA at
CX is patterned after Development1. If
an exemption was granted CX, HOA property taxes would fall by V∙T to the
benefit of homeowners. It would also
open a Pandora’s box as other private golf clubs might try the same ploy to
reduce taxes by selling to an HOA and leasing the facilities in return. It is clear why the Assessor has not granted
the exemption.
An examination of how homes are
priced at CX also shows an exemption is not warranted. Home prices at CX depend on three
variables. First is the construction
value, CV, of a home. CV would be based
on such things as square footage and the quality of finishes. Second, would be the value externalities, EV,
supplied by surrounding properties.
Examples of externalities would be easy access to golf and tennis
facilities, open space provided by a golf course, and proximity to shopping and
restaurants. Third, would the business
value, BV, of an ownership interest in CX.
In equation form the sales price would be:
SP
= CV + EV + BV/N
Where,
SP
= Selling price of a home
CV
= Construction value
EV
= Externality Value
BV
= Value of an ownership interest in CX business (golf, tennis, food, and
beverage)
N
= Number of homes in the development.
Previous to the sale of CX,
there was no ownership interest, so BV was equal to zero. The value of living on a golf course was
substantial and was embedded in the sales price. It was this externality that allowed the
developer to make a profit over and above the cost of building the golf course
and related facilities.
The homeowner would pay property
taxes on SP which did not include any embedded value for CX property (i.e.,
BV/N). The Assessor was correct in
denying the exemption for CX.
Is there Double Taxation on
Homes purchased after the sale to the HOA? The concept
behind exempting community property owned by an HOA is to eliminate double
taxation. Double taxation is taxing the
value of community property embedded in home prices and taxing the community
property itself. A simple model will
show that is not the case at CX.
The selling price of homes after
the sale, SPA, would be:
3) SPA = CV + EV + BV/N + VHOA
Where,
SPA
= Selling price of a home after the sale to the HOA
VHOA
= Benefits or Costs of HOA ownership of CX
The value of the CX business,
BV, is estimated as the current assessed value of CX. The value of HOA ownership is probably
negligible for the following reasons:
1. Previous to the sale of CX, HOA dues covered
racquet sports and clubhouse services (i.e. a social membership) provided by
the developer. Golf membership was
optional. After the sale, HOA dues
covered the cost of the same services provided by the developer. Golf membership was still optional. If the
service level is the same, it is doubtful HOA ownership created any value
added.
2. Proponents of the purchase
implied the previous owner, siphoned off profits and neglected to maintain the
club to the standard that was promised. Ownership would give the HOA rights to
any profits that could be spent on capital improvements. If there was a profit to be made, it is not
reflected in the budget. Since 2022, HOA
dues have risen 27 percent in two years.
Golf club dues have increased by 15 percent in that same time frame. And there have been no major improvements to
the golf course or club facilities.
3. HOA ownership could actually
dissuade prospective members from joining.
Golf members are a minority at CX.
A golfer who is a prospective buyer must consider if he wants major
decisions affecting the golf club to be made by non-golfers who could control
the Board. He must also consider
whether he wants to pay compulsory dues to support the tennis facility which he
would not use. A non-golfer might be
troubled by being financially responsible if the golf club cannot break even.[1] Before the sale, the previous owner did not
have the power to assess homeowners.
After the sale, the HOA has broad assessment authority. It is unlikely that the non-golfer would see
value in HOA ownership as opposed to private ownership.
Assuming VHOA is equal to zero,
the new homeowner would pay a property tax equal:
PTA
= (CV + EV + BV/N) ∙ T
Where,
PTA
= Property tax Paid on home purchased after the sale
T
= Property tax rate
The new homeowner would also be
paying his portion of the tax on BV which would be paid through HOA dues. Therefore, his total tax burden would be:
Tax
Burden = (CV + EV +BV/N) ∙ T + BV/N∙ T
It appears the new homeowner is
subject to double taxation. This
assumes, however, that the buyer is irrational.
The rational buyer would realize his benefit (BV/N) is being paid for by
the HOA and he need not include it in his offering price. The price of housing
after the sale should be the same as before the sale. Therefore, there is no double taxation.
The implication of this analysis
is that amenities such as golf courses should be taxed at the HOA level. Taxing
amenities at the HOA level has a significant benefit as it creates a level
playing field for HOA and privately owned clubs. Currently, HOAs can build lavish clubhouses
and face no property tax consequences.
The value of a new HOA clubhouse is not immediately embedded in the
assessed value of homes because of Proposition 13, and that means existing
homeowners do not have an increased tax burden.
Privately owned clubs would have a clubhouse taxed upon completion.
Different tax treatments for the same type of asset should not be part of an
equitable tax code.
Appendix
Property
Taxation at CX
Non-profit golf courses are not assessed on the highest
and best use of the land, but only on the use of the land as a golf course (See
article XIII, Section 10 of the California State Constitution). The previous owner of CX was a private
developer. That developer never filed
with the California Secretary of State as a nonprofit corporation and therefore
the golf course could have been assessed at its highest and best use. It appears that the Assessor treated CX as
if it was a non-profit. Once it was
assessed, the assessed value was protected under Proposition 13. CX’s new owner, the HOA, is a, is a nonprofit
corporation. In order to qualify as a
nonprofit golf course, however, the property must have been used exclusively
for that purpose for at least 24 successive months prior to the lien date.” When the property was purchased by the HOA,
the Assessor could have reassessed the property under Article XIII or
Proposition 13. Either option would have
been financially harmful to CX.
The Assessor made two decisions regarding the assessment of CX. First, the property was not reassessed and
the assessed value of CX remained at approximately $15 million. This appears to
be a bargain for the HOA since the replacement cost of club facilities far
exceed $15 million. Second, the
Assessor rejected the HOA’s argument for an exemption, ruling there was no
evidence that the value of the Club was embedded in home prices. In essence, the HOA bought a business and
with it the obligation to pay property taxes.
[1] Two
examples are Morningside CC where the HOA now subsidizes the golf club, and the
Springs CC where the HOA members were assessed to enable the purchase of the
golf club. See Barks, Joe, “Tensions
Rise Over Suit Against the Club at Morningside’s HOA,” Club and Resort
Business, December 28, 2015, and Bohannon, Larry, “This could be it: The
Springs Club is trying something new: get golfers and HOAs working together,” Desert
Sun, May 26, 2029.
