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County of Madera

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Bonds FAQ

  • Question: What is an Improvement Bond or Assessment Bond?
    • Answer: Improvement bonds or assessment bonds are synonymous terms for public financing usually associated with off-site land improvements, such as streets, curbs, gutters and underground sewer and water infrastructure that generally enhance land value and give land utility.
      When a developer finances such improvements through a bond, they sometimes pay-off the bond debt up-front and later recover that investment by adding it to the sales prices of the homes they sell. In other cases, developers simply pass on the bond debt to each home buyer as an assessment bond obligation specific to the buyer's lot and market the homes at a lower asking price.
      In simple terms, bonds are virtually identical to general construction loans, and really no different than a construction loan for a pool or room addition, for example.
      The most common forms of bonds are known as 1911 and 1915 series bonds (another infrastructure funding tool known as a Mello-Roos bond is a different animal and is discussed later in this document).
      And while there are other differences between 1911 and 1915 bonds, a principal difference is that 1915 bond payments are collected as part of the annual property tax bill, while 1911 bond payments are billed separately. In both types, there is a principal balance associated with each, and an amortization period over which principle and interest is paid by the property owner until the bond balance is completely paid (just as in any construction loan).
      Another distinction between the two bond types is that as a general rule, 1911 bond balances can be paid off at any point in their life, while as a general rule, 1915 bond holders do not allow the bond balances to be retired prematurely.
  • Question: Why is bond debt added to the sale price for assessment purposes?
    • Answer: The law requires that when calculating the sales price of a property, the Assessor must convert all non-cash items exchanged in a sale (i.e., debts assumed by the buyer from the seller, or items traded that the buyer accepts in lieu of cash) to their cash equivalent value. The Assessor must then combine the cash equivalent components of a sale with the cash that changed hands in order to derive a full cash value.
      Now why is the law structured that way, you ask?
      Well, it's structured that way to ensure that all property owners are treated the same, that like properties share the same property tax burden, and that all properties share the property tax burden in proportion to their true, full cash, market value.
      If debts and other non-cash consideration were ignored, and only the cash that changed hands was considered as the value of property, then there would be huge disparities of assessments between otherwise identical or very similar properties changing ownership at the same point in time. Assessments would vary depending upon the amount of debt assumed by the buyer and/or other non-cash items traded in lieu of cash. That is neither fair nor logical.
      For example, let's say two identical homes sitting side-by-side sell for the same apparent price. In this case, one is purchased entirely with cash, and the other is purchased with half the price paid in cash and with the buyer assuming the seller's first deed of trust (or a bond debt) equal to half the sales price. Would it be fair to assess one home at its full cash sales price and the other at one half that amount? Obviously the answer is no, both properties should share identical tax burdens based upon their full cash value.
      California property tax assessment is governed by the Revenue & Taxation Code (R&T Code). The State Board of Equalization (SBE) also provides clarification of the R&T Code and other forms of guidance to county Assessors in order to ensure uniform assessment practices throughout the state. For example, the Board issues Property Tax Rules, which are administrative law, and various other appraisal guidelines. In one of those guidelines, the issue of improvement bonds was addressed as follows:
      "If there are improvements bonds that are a lien upon a lot or site, their unpaid cash equivalent principle balance must be included in the value of the land. Bonds are a form of public financing usually associated with land improvements that generally enhance land value. To obtain this type of financing, land benefiting from the improvements must be pledged as security for the payment of the loan. When using the comparable sales approach in determining site value, the appraiser should include the unpaid cash equivalent principle of any bonds outstanding as a legitimate sales price adjustment."
      Therefore, whenever a buyer assumes a debt related to the property as part of the purchase price (such as an improvement bond), the cash equivalent value attributable to that debt must be added to the sales price in order to determine the cash-equivalent sales price of that property.
      Consider the following two examples (while keeping in mind that an improvement bond is really the same as any other construction loan):
      • EXAMPLE 1: Imagine that you are selling your house and after looking at all the recent sales in the area have determined that its market value would be $200,000 if it were completely free and clear of all debt.
        In your case however, although your original purchase loan has been paid-off, you did add a room addition several years ago and took out a big construction loan in order to finance the work. Today the remaining principal balance of that construction loan is now about $20,000.
        Before you sell the house, you have two options to consider: you could pay off the addition's construction loan before selling the house, or you could sell the house under the condition the buyer assume the outstanding balance of your construction loan.
        If you choose to pay off the loan before sale, then your asking price would be the $200,000 cash.
        On the other hand, if you decide to sell the house under the condition the buyer assume the $20,000 balance of your construction loan, then at sale you would accept $180,000 in cash to recover your equity and let the buyer pick-up the $20,000 you still owe on the addition. Certainly the buyer would not pay you $200,000 cash AND also assume your $20,000 debt when he could go anywhere else in the area and buy the same house for $200,000 cash.
        In both cases the market value of the house remains $200,000, its just that in one instance the value is all in cash, and in the other, it's just hidden in a mixture of cash and the valuable (to you) assumption of a debt. Under the law, no matter how the sale is financed, it's that $200,000 market value the Assessor is required to enroll for tax purposes.
        If that make sense to you, then imagine that instead of the construction loan in our example being a debt owed for an room addition, simply replace it with the outstanding bond debt owed at time of sale. The principles are exactly the same in both cases.
      • EXAMPLE 2: Let's presume you were the buyer in our example 1, and that after the purchase you filled-out a Change in Ownership Statement for the Assessor and reported that you'd paid $180,000 cash for the property (not realizing the bond debt was really a factor).
        Later, you receive an assessment notice that says the Assessor has assessed the property for $200,000, but you know you only paid $180,000! Something is seriously wrong, you think! Surprised and angry, you call the Assessor to complain.
        What you'll hear from the Assessor are the same arguments presented here and you'll also discover is that the Assessor tracks property bond debt electronically. Whenever a property sells, our computer systems tell us about any outstanding improvement bond debt, and the appraiser handling your change in ownership statement is alerted to its existence. The Appraiser then looks through your statement and, if bond debt was overlooked in the reported sales price, adds the cash equivalent value of the bond debt's principal balance to the other cash and non-cash components of the purchase price in order to determine its full cash-equivalent sales price.
        At that point, if the sales of comparable property in your area support the cash-equivalent sales price we compute, we are obligated under the law to assess the property for that exact amount.
        If the market does not support the cash-equivalent price you paid, the Assessor is obligated to enroll the property's actual market value no matter what you paid for it. That is, we may assess your property at either more or less than you paid, depending on what the real estate market indicates is the true market value should be.
  • Question: Isn't this just another gimmick used by local government to increase taxes?
    • There is certainly nothing new about the process. In fact, adding the estimated value of non-cash items (such as bond debt) to a sales price in order to derive an estimate of cash equivalency has been a standard practice in real estate appraisal industry since the profession began hundreds of years ago. Accordingly, in California it has also been a standard practice in property tax appraisal since the 1800's, and a standard practice for much longer than that in the older states of our union.
      It is also not a "gimmick" used to artificially exaggerate value, but rather a practice that attempts to accurately reflect true value and provide a logical, and consistent way for the Assessor to ensure that everyone pays their fair share of the property tax burden. Without this method of equalizing value to ensure fairness, identical properties selling at the same point in time would have a wide range of assessments depending on the nature of the financing and whatever non-cash items were exchanged in the sale.
      The Assessor has no concern that the value of your property be anything but its true market value as prescribed by law, and is obligated to ensure that all property be assessed fairly and properly.
  • Question: Where in the law does it say the Assessor must consider Improvement Bond debt when assessing property?
    • Answer: Property in California is assessed under Proposition 13 whenever it changes ownership and, under the law, must be assessed at its full cash value when that happens. Full cash value is defined in Revenue & Taxation Code Sections 110 and 110.1 as being "the price at which property, if exposed for sale on the open market with a reasonable time for the seller to find a purchaser, would transfer for cash or its equivalent under prevailing market conditions."
      Property Tax Rule 2, which is the administrative law of the State Board of Equalization, further refines this requirement by adding that:
      • "(a) In addition to the meaning ascribed to them in the Revenue and Taxation Code, the words "full value, "full cash value," "cash value," "actual value," and "fair market value" mean the price at which a property, if exposed for sale in the open market with a reasonable time for the seller to find a purchaser, would transfer for cash or its equivalent under prevailing market conditions between parties who have knowledge of the uses to which the property may be put, both seeking to maximize their gains and neither being in a position to take advantage of the exigencies of the other.
        When applied to real property, the words "full value", "full cash value", "cash value", "actual value" and "fair market value" mean the prices at which the unencumbered or unrestricted fee simple interest in the real property (subject to any legally enforceable governmental restrictions) would transfer for cash or its equivalent under the conditions set forth in the preceding sentence. "
        [excerpt of Rule 2, emphasis added]
    • In other words, under Property Tax Rule 2, bond debt is an encumbrance that restricts the fee simple interest and adjustments must be made to sales price to offset that encumbrance.
      In Property Tax Rule 4, the Board further refines how the Assessor must value property when using the comparative sales approach:
      • " When reliable market data are available with respect to a given real property, the preferred method of valuation is by reference to sales prices. In using sales prices of the appraisal subject or of comparable properties to value a property, the assessor shall:
        (a) Convert a noncash sale price to its cash equivalent by estimating the value in cash of any tangible or intangible property other than cash which the seller accepted in full or partial payment for the subject property and adding it to the cash portion of the sale price and by deducting from the nominal sale price any amount which the seller paid in lieu of interest to a lender who supplied the grantee with part or all of the purchase money.
        (b) When appraising an unencumbered-fee interest, (1) convert the sale price of a property encumbered with a debt to which the property remained subject to its unencumbered-fee price equivalent by adding to the sale price of the seller's equity the price for which it is estimated that such debt could have been sold under value-indicative conditions at the time the sale price was negotiated and (2) convert the sale price of a property encumbered with a lease to which the property remained subject to its unencumbered-fee price equivalent by deducting from the sale price of the seller's equity the amount by which it is estimated that the lease enhanced that price or adding to the price of the seller's equity the amount by which it is estimated that the lease depressed that price.
        [excerpt of Rule 4, emphasis added]
  • Question: Wasn't a law passed recently that forbids the Assessor from adding Assessment bonds to sales prices?
    • Answer: A new restriction was recently imposed, but it does not forbid the addition of bond debt to sales prices, except under very specific (and experience tells us, quite rare) circumstances.
      In 1998, Revenue & Taxation Code, Section 110(b) was amended to add a 'rebuttable presumption' that the improvements financed by an assessment bond are actually included in the total consideration paid for property unless the Assessor can be prove otherwise.
      In other words, the Assessor's Office can only add the value of any outstanding assessment bond balance to the assessment of a property if the Assessor has clear market evidence indicating that the consideration paid by the buyer did not adequately reflect the bond debt. The new text to R&T 110 (b) reads:
      • R&T 110(b) [portion of] "...There is a rebuttable presumption that the value of improvements financed by the proceeds of an assessment resulting in a lien imposed on the property by a public entity is reflected in the total consideration, exclusive of that lien amount, involved in the transaction. This presumption may be overcome if the assessor establishes by a preponderance of the evidence that all or a portion of the value of those improvements is not reflected in that consideration." (emphasis added)
    • One should understand that market analysis of literally tens of thousands of property sales assessed by this office over the last 30 years has demonstrated clearly that in the vast majority of cases, the value of the assessment bond balance does in fact affect the price paid for a property.
      Today there are numerous examples of properties and lots in the same subdivision that can be purchased with or without bond debt, at the discretion of the buyer. The sales price in each case clearly reflects either the inclusion or exclusion of that bond debt with two different price levels. As such, it is our position that the value of the outstanding bond balance should be added to the reported sales price to derive a proper cash-equivalent sales price in most instances.
      In any case, our appraisers must investigate the affect an outstanding bond balance might have on any sale, and can add the bond balance value to a reported sales price to derive a cash-equivalent sales price only if the evidence supports that action.
      Market evidence based on sales of comparable properties is not the only market evidence available to the Assessor. There may be other market evidence that can demonstrate that the buyer and seller were aware of the assessment bonds and that those bonds were considered in the sales price. For example, the Assessor may request copies of Title Reports, Disclosure Statements, Sales Agreements, and Escrow Instructions from the buyer. If the existence of a bond assessment is clearly evident in those documents, then it is reasonable for the Assessor to presume that the bond balance impacted the sales price and add that information to the evidence we use to overcome the rebuttable presumption in R&T 110(b).
      We think that it is also reasonable to presume that the larger the bond balance, the more likely it would have a significant impact on a negotiated sales price.
  • Question: But I wasn't aware of any bond debt when I purchased the property?
    • If it is true that you were completely unaware of a significant bond debt assumed as part of the purchase price, then the sale might not meet the test of an "open market" transaction. Under the law (R&T 110), part of the test a sale must pass to qualify as an open market transaction is that both buyer and seller must have been aware of all the advantages and disadvantages in a property prior to a sale.
      If one party or the other was not aware of a bond debt at sale, then its possible (but not a certainty) that the buyer may have paid more or less than the property's fair market value.
      In that circumstance, the Assessor must look to the market place for comparable sales to establish the value of your property. The Assessor would then consider the cash-equivalent sales prices of open market sales of similar properties in the same general area as your property, make adjustments to reflect differences between the sold property and your property, and then decide what your property's fair market value should be.
      The Assessor would still consider both the unadjusted and adjusted sales price you paid, and if either of those figures reasonably reflects the true market value of the property as evidenced by comparable sales, then that value will be enrolled. In other words, the cash equivalent sales price you paid for your property might accurately reflect the property's market value even though you weren't aware of the bond debt you'd assumed! That would often be the case where the seller markets a property fully aware of the bond debt a buyer would assume and prices it accordingly and fairly.
      In any case, the Assessor is ultimately required to assess the property at its fair market value no matter what a buyer may have paid for a property.
      Additionally, buyers often tell the Assessor they were not aware of bond debt when purchasing property. However, in our experience it is rare for a Preliminary Title Report or other disclosure documents to overlook reporting the presence of bond debt to the seller. If bond debt is clearly reported in title reports, disclosure statements, sales agreements and other documents signed or exchanged in the sale, then it becomes difficult for the buyer to assert they were unaware of bond debt and did not consider it in a sale.
      When purchasing real property, it is incumbent upon the buyer to closely examine all such documents before signing a binding contract. The law presumes a buyer acted responsibly if evidence in the documents received and acknowledged by the buyer clearly showed the presence of bond and other debts being assumed by the buyer in the sale.
      If in fact bond debt was not properly disclosed in legally required disclosure statements or was or overlooked in a title report, then there may be some liability on the part of sales agents or a title company for that failure. If that was the case, you might seek redress with those parties or refer the matter to your lawyer for resolution.
  • Question: Is there any benefit to improvement bonds?
    • Answer: Yes. Apart from the street and underground improvements they normally provide, there are other benefits.
      When a developer finances land development, all the costs they incur (plus developers' profit) will ultimately be passed on to the buyer in one form or another. In the past, many developers would pay improvement bonds off prior to the sale of individual lots and pass that cost on to the buyer in the sales price of the lot or home. Recently, it has become more common for developers to simply allow the buyers of their property to assume that bond debt for them. This may benefit the buyer in at least two ways:
      First, since the nominal asking price can be set lower to reflect the fact the developer does not have to shoulder the cost of some improvements, buyers may have an easier time qualifying for their home loan.
      Secondly, the interest on the bond is usually at a lower rate than that of first deeds of trust; thus, the overall cost of financing the home may be lower in the long run as well.
  • Question: What is the difference between Mello-Roos bonds and other bonds?
    • Answer: Mello-Roos and other community facility district (CFD) bonds are an annual charge levied against the property that normally have no fixed remaining balance which can be paid-off by the property owner. The Board of Equalization has declared that Mello-Roos Bonds are really just one form of taxation, and as such should not to be considered when computing the cash equivalent sales price of a property.
  • Question: Where can I look for other information about Bonds and their treatment for property tax purposes?
    • Answer: Apart from the Revenue & Taxation Code, the principles for dealing with bonds in an assessment are addressed in a number of guidelines and court cases:
      • Property Tax Rule 4(a), (b), and (d).
      • Assessors' Handbook AH-501 (9/97), at pages 69-71.
      • http://www.boe.ca.gov/proptaxes/pdf/ah501.pdf
      • Assessors' Handbook AH 501 (9/97), page 69 (whole section on assessment bonds)
      • Assessors' Handbook AH 501 (9/97), page 74 (bond cost as part of the cost approach, 2d paragraph of "Costs to Include" section)
      • Assessors' Handbook AH 501 (9/97), page 91 (Adjustments For Non-Real Property Components Of Value Included In The Purchase)
      • Assessors' Handbook AH-501 (8/82 version, superseded by 9/97 version, however discussion is still relevant), page 70
      • Assessors' Handbook AH 502 (12/98), page 39 of the (Cash Equivalence).
      • http://www.boe.ca.gov/proptaxes/pdf/ah502.pdf
      • Assessors' Handbook AH 502 (12/98), page 40 (Assessment Bond section)
      • Assessors' Handbook AH 502 (12/98), page 41 (Adjustments To Sales Prices))
      • Assessors' Handbook AH 502 (12/98), page 74 (Mello-Roos Bonds are tax, and should not be added to derive cash equivalency)
      • AH-510F, page 23. (Cash Equivalency handbook no longer published, however discussion is still relevant
      • SBE LTA 89/68, entitled "Mello-Roos Bonds," defined Mello-Roos Bonds as a form of taxation and concluded they were therefore non-assessable.
      • SBE LTA 96/52
      • SBE LTA 98/34 (superceded by 99/12)
      • SBE LTA 99/12 (supercedes 98/34)
      • SBE brochure entitled "Funding Infrastructure - Past & Present" published Fall of 1994. Bonds, Special Assessments, Special Taxes & Fees.
      • Mello-Roos Bonds are specifically discussed in Assessors' Handbook AH-501 (9-97 ed.), at pages 70-71. The AH-502 at page 74 And in LTA 89/68
      • LTAs 99/12 (generally)

Note: All current Assessors' Handbooks and LTAs (Letters to Assessors) are available for viewing on the State Board of Equalization's website at http://www.boe.ca.gov/proptaxes/ahcont.htm and http://www.boe.ca.gov/proptaxes/ltacont.htm, respectively.

The following court cases have relevance as well:

  • Prudential Insurance Co v. County of San Francisco, 191 CA3d 1142: Holds that Rule 4 is mandatory, and requires the Assessor to determine the cash equivalency of the property.
  • San Diego County v. Appeals Board Number 2, 140 CA3d 52: Holds that sales tax is included in calculating value.
  • Xerox v. Orange County, 66 CA3d 746: Same holding as San Diego v. Appeals Bd #2

These court cases reflect the general proposition that value includes all costs to the purchaser, and the assumption of bond debt from a seller is certainly a cost to the purchaser.

Revised 2-05-2001

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Contact the Assessor

Assessor
200 W. 4th Street
Madera, CA 93637
(559)675-7710
Fax: (559)675-7654
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Office Hours: 8:00am to 5:00pm


Assessor's Department Staff Spotlight

Jacquelyn Nieves - Assessor Staff Spotlight

J. SPOTLIGHT_20141009_140906 How long have you worked for the County? 7 1/2 years
What do you like most about your job? Serving the community and working with great people.
Why did you decide to work for the County? I saw an awesome opportunity for learning, growth and advancement.
What is your most memorable accomplishment during your County career? Becoming a valued employee and being entrusted with a wide variety of responsibilities.
When I'm not at work you can find me...Engrossed in some art project, cooking, sewing, and doing community work with my congregation.
What was your first job?  I was a waitress in a Chinese restaurant in Los Angeles.
What is your favorite food? Always chocolate!
What is your favorite kind of music? My husband and I DJ'd for a few years, so I love variety - especially good dance music in-the-mix!
What is your favorite sports team? I'm more into art than sports, but I enjoy watching a good game with great friends.
If you were to travel anywhere in the world for a dream vacation, where would it be? To Uruguay, South America with my husband to see where he grew up and meet his family.
Where do you see yourself in five years? Happily retired, close to my parents and family in Arizona.



General County Contact

General County Contact
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Madera, CA 93637
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