The New York Times: Silicon Valley Neighbors, Facing Vastly Different Tax Rates

Originally printed in The New York Times.


Some of the most valuable commercial real estate in Silicon Valley is just off the Amphitheater Parkway exit of Highway 101 in Mountain View, including Google’s sprawling campus and a suburban business park that is home to Intuit, the software company known for QuickBooks and TurboTax.

But even though one 12.5-acre piece of Google’s property was assessed last year for $65.5 million, much of the neighboring land is still taxed on values virtually unchanged from what they were three decades ago, when a nearby golf course and Shoreline Amphitheater had yet to be built and the area still served as San Francisco’s garbage dump.

While that portion of Google’s land is taxed at a rate of approximately 35 cents per  square foot, the land under Intuit’s corporate campus, which is just around the corner, has an estimated property tax burden of 3 cents per square foot. Meantime, tax rates on land under recently purchased neighboring single-family homes ranged from $1 to $1.25 per square foot, according to a Bay Citizen examination of assessments on 2010 home sales in Mountain View.

This is because in 1978 California voters passed Proposition 13, a ballot initiative that allows state and county government to increase the tax rate on commercial and residential properties based on the value of new buildings constructed, but forbids government to reassess a property’s underlying land to full market value without a change of ownership.

“You could not devise a more unfair property tax system if you tried,” said Larry Stone, the Santa Clara County assessor.

The result is that in a time of deep cuts to education, health care and other state services, valuations on commercial property are inconsistent and sometimes strikingly low.

For example, according to county records, the assessed value of one 13.7-acre tract underlying part of Google’s headquarters is $789,635, producing an estimated tax rate of 1.3 cents a square foot, far less than most neighboring properties.

In interviews, commercial real estate experts said that both Google and the property’s owner, Richard Peery, a septuagenarian Palo Alto real estate developer and billionaire, were saving hundreds of thousands of dollars. Commercial landowners often pass the cost of property tax on to their tenants.

“It’s a huge boon to both of them,” said Philip A. Mahoney, executive vice president of the firm Cornish & Carey Commercial Newmark Knight Frank.

Mr. Mahoney estimated the value of “just the dirt under the buildings” of the Google parcel at $41 million, meaning a savings of about $400,000 in unbilled property taxes every year.

The land, which Mr. Peery has owned for decades, has not been assessed at full market value since Proposition 13 passed 34 years ago, said David Ginsborg, a spokesman for Mr. Stone. The Peery family paid about $460,000 in property tax on the parcel last year, reflecting primarily the value of the buildings, which were assessed at $38 million.

County records show that Mr. Peery transferred ownership of the land to a family trust in 1978 and then entered into a 100-year ground lease with a company called Charleston Properties. Over the years, Charleston Properties has subleased the land to a series of technology companies, including Sun Microsystems and, most recently, Google.

This complicated legal arrangement will enable the property to avoid a fully valued property tax assessment until 2043, Mr. Ginsborg said, under the terms of state legislation that prohibits land values from being reassessed if a property is covered by a lease that runs at least 35 additional years.

By then, Mr. Peery, whose fortune is estimated by Forbes to be $1.9 billion, would be more than 100 years old. Multiple messages left at Mr. Peery’s firm, Peery-Arrillaga, went unanswered. A spokesman for Google declined to comment for this article.

“What you’re looking at is a total windfall to landowners without any benefit to anybody,” said Lenny Goldberg, executive director of the California Tax Reform Association, a nonprofit advocacy group that has been studying commercial property tax assessments in Silicon Valley.

Mr. Peery’s land is just one of many valuable Silicon Valley properties where land is assessed at a fraction of market value for tax purposes.

For example, a 38-acre tract that includes the Santa Clara headquarters of Intel is assessed at $7.5 million, producing an estimated tax rate of 5 cents a square foot, while 70 acres occupied by Hewlett-Packard at the Stanford Research Park in Palo Alto are assessed at $53.4 million, producing an estimated tax rate of 15 cents a square foot.

In South San Jose, a tract of more than 200 acres owned for decades by I.B.M. is assessed at $4 million, or less than half a cent a square foot.

In contrast, the land under the buildings recently bought by Apple in Cupertino and Yahoo in Santa Clara has been assessed at levels that produce a tax rate of more than $1 a square foot. Neither Apple nor Yahoo responded to requests for comment.

In interviews, representatives of the technology companies with low property tax rates said they saw no problem with the rates.

“Stability is always good no matter who you are,” said Chuck Mulloy, a spokesman for Intel. “Ownership will change and property assessments will change over time,” he said.

Tiffany Griego, a director at the Stanford Research Park, which houses Hewlett-Packard, said, “To the extent that companies can manage their property taxes to be predictable, it helps them justify them continuing to locate in high-rent districts.”

But some public-interest groups said such stability came at a cost, especially during lean budget years. Last year, California lawmakers closed a $26.6 billion budget deficit entirely with spending cuts. This year, the state faces an additional $9.2 billion shortfall, which Gov. Jerry Brown has proposed closing with more cuts combined with a sales tax increase and income tax increases on people making more than $250,000 a year.

The nonpartisan Legislative Analyst’s Office reported last month that bringing commercial property assessments up to market rates would raise about $4.5 billion for state and local governments, including $2 billion for public education.

“We have to say either we are going to dramatically cut back services that we have become accustomed to, to the level that will be sustainable, or we are going to have to rethink our whole system,” said Emmett Carson, the chief executive of the Silicon Valley Community Foundation, which along with another nonprofit group, Joint Venture Silicon Valley, released a report this month calling for major revisions to Proposition 13.

But polls have consistently shown Proposition 13 remains popular. Last September the nonpartisan Field Poll found that 63 percent of registered voters said they would vote for it if it were on the ballot today, while 41 percent said they thought it should be changed to allow business and commercial property owners to be taxed at a higher rate than owners of residential property.

“When the economy is in the doldrums, the public is really not that supportive of socking it to business,” said Mark DiCamillo, the poll’s director.

Mr. Carson said he understood that support for the initiative remained strong. “We have to at least start the discussion,” he added, “because the system now is not working.”


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