Sunday, March 31, 2024

The Property Tax and Golf Clubs in California

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



                             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




                             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





                             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




                             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.






 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.

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