California Proposition 13 (1978) caps property tax at 1% of assessed value with a maximum 2% annual increase. Reassessment triggers only on change of ownership or new construction.
Prop 13 protects long-term owners by freezing assessed value near its 1975 baseline (or acquisition date for post-1978 purchases) with only modest annual increases. The result: owners who bought decades ago pay property tax far below current market would suggest.
At sale, the buyer's assessed value resets to the purchase price. Their property tax obligation often triples or quadruples from what the seller was paying.
Prop 13 is the hidden value and hidden cost in most LA multifamily deals. Hidden value: the seller has benefited from decades of capped tax. Hidden cost: the buyer's new basis increases operating costs, reducing the NOI they'll underwrite. This shows up as a lower offer price.
From the Sterman LA Multifamily Glossary — defined the way a broker with $1.41 billion across 254 closed transactions actually uses these terms.
Michael Sterman, Senior Managing Director Investments, Marcus & Millichap.
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