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Property tax reform slows real estate sales
By Molly Parker
Staff Writer
California businessman Ray Ruaif says he’ll think twice before making another major investment in South Carolina.
Earlier this year, he closed on a $2.2 million shopping center in Summerville, only to find out later that his property taxes will be a lot higher than, probably close to double, what the previous owner paid.
That’s because the new state tax law created to ease the burden on property owners in rapidly appreciating areas does the complete opposite when real estate changes hands.
As of January 2007, all property that is sold is reassessed the following year and taxed based on the full sale price regardless of when the sale falls in a county’s five-year reassessment cycle.
Further, there is also no limit on how much the sold property can increase in value for the purpose of taxation, even though the law arbitrarily caps property value increases at 15% for all real estate that does not change hands.
Big bang
“When (new buyers) get their tax bills later this year, there will be a bang like you’ve never heard it,” Ruaif said.
Investors and commercial and residential real estate agents are clamoring to the General Assembly to rewrite this particular element of the law, arguing it is dragging down home sales and altogether halting some commercial deals.
In early April, state Rep. Bill Cotty, R-Columbia, introduced legislation aimed at addressing the point-of-sale flap. The measure, H.B. 4942, would keep properties on the tax rolls until the regularly scheduled county reassessment, and extend the 15% cap to all properties regardless of whether they are sold.
Nick Kremydas, CEO of the South Carolina Association of Realtors, called the bill a “Band-Aid,” albeit a desperately needed one, for what he considers the state’s defective tax codes.
“We’re bleeding out of our necks in some parts of the state because of the impact this is having,” he said.
Recouping revenue
Passed to appease coastal homeowners with exponentially increasing tax bills, the new law eliminated school operating budgets from personal property taxes and capped assessment increases for tax purposes at 15% for all property owners. The point-of-sale reassessment was implemented to help counties recoup lost revenue.
The S.C. Board of Economic Advisors estimates the state’s 46 counties would reap a combined $52 million a year in additional revenue from properties that are sold and placed on the tax rolls the following year at full market value.
Considering the 15% cap, about $8 million of that would be made up by the counties in their normal reassessment cycle.
Still, passage of this bill would yank away about $44 million in revenue yearly that counties could expect from the reassessment of sold properties.
Charleston County’s share is roughly $2.5 million to $3 million, said Assessor Toy Glennon.
“But you are always required to roll back your millage to make up for any windfall,” Glennon said, noting her office does not have a stance on the legislation.
Kremydas’ main concern is that the point-of-sale reassessment will put South Carolina at a competitive disadvantage for business deals. At a recent Realtors’ meeting in Myrtle Beach,
Kremydas said he asked 200 real estate agents how many had lost a sale because of the property tax change.
“Every hand in the room went up,” he said.
The stakes are even higher in large commercial transactions, particularly those involving out-of-state investors who can just as easily take their money elsewhere, Kremydas said.
Commercial stalemate
Woody Moore, president and broker-in-charge of Colliers Keenan in Charleston and executive vice president of Columbia-headquartered Colliers Keenan Inc., said the new law has left both buyers and sellers in a stalemate.
The potential for a dramatic increase in taxes over what the previous owner paid hampers the cash flow and thus the value of the investment, Moore said. Because costs cannot immediately get passed on to tenants with lease agreements, sales of rental properties has nearly halted, he said.
“We’ve had several investment sales come apart for that very reason,” he said. “Once the buyer realized the taxes would go up immediately, he was not willing
to pay the same price, and the seller’s saying, ‘Why should I take less?’ It creates an impasse that to date a lot of people haven’t figured out how to get around.”
Sticker shock
Chuck Salley, the senior industrial broker at Colliers Keenan Inc., pointed to a recent Lexington County sale of a 250,000-square-foot distribution center that is rented to a company there.
It was assessed at $2.7 million but sold for $8.1 million, he said. The taxes will increase from about $38,000 per year to $142,000 per year, he said, a cost that will most likely be passed on to the tenant.
“It’s going to catch them completely unaware,” he said of the business that he declined to name. “It’s going to be a shock to them. Wouldn’t it be to you if you had $100,000 in extra expenses coming off your bottom line with no way to recoup it?”
Molly Parker is a staff writer for the Business Journal. E-mail her directly at mparker@scbiznews.com.
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