"Partitioning or rezoning a property can increase property taxes"

Oregon's Constitution, amended by ballot Measure 50, holds down property taxes by limiting increases in the assessed value of real and personal property to no more than 3 percent per year in most cases. This limit is referred to as the property's "maximum assessed value," or MAV.

Unlike Proposition 13 in California, Oregon's Measure 50 features limitations that remain in place even if the property is sold to an unrelated third party at a price substantially above the property's MAV or assessed value.

However, Measure 50 does contain traps for the unwary. A number of exceptions to Measure 50's limitations allow an assessor to increase substantially a property's assessed value.

Partitioning can increase taxes
One of the exceptions is if property is partitioned or subdivided.

Measure 50 allows the assessor to ignore the property's existing MAV and assess the newly partitioned or subdivided property based upon the real market value of the property as new, separate parcels.

Typically, this substantially increases the total property taxes for the property.

Size or purpose of partition irrelevant
Measure 50 neither specifies the size of the partition or subdivision to which this exception applies nor the purpose for which the partition was made.

In one case, a private property owner donated a small portion of its privately owned 27-acre parcel for a city park. When that small portion was partitioned and title passed to the city, the owner of the remaining 27.5 acres found that his property was reassessed at a much higher value because of the partition.

Condominiums call for new market values
The Measure 50 exception for partitioning or subdividing is not limited to just the revaluation of land. Upon the legal subdivision of an apartment building into condominium units, each individual condominium unit will be revalued and a new real market value will be determined.

The new real market value will generally be based upon the asking or sale price of the individual units.

Rezoning can lead to revaluing
If a property is rezoned - or if a change is made to restrictions affecting the authorized uses of the property - the assessor may revalue the property at its current real market value for purposes of determining its new assessed value.

However, before the property can be revalued, the property must be used consistently with the rezoning.

This last condition prevents a local government from increasing its property tax base simply by rezoning property. If property is partially rezoned, only that portion of the property that is rezoned may be revalued.

Lot line adjustment could trigger
Finally, an adjustment to a property's lot line may trigger a revaluation of the property.

However, unlike with partitioning and rezoning, the new valuation of the property shall not exceed the MAV for the total property before the lot line adjustment.

Changed property ratio applied to new real market value
There is a saving grace in Measure 50 for property that is partitioned, subdivided or rezoned.

The property's new real market value is adjusted by the changed property ratio applicable to all of the property in the same class and in the same area to arrive at a new MAV for the subject property.

In essence, the changed property ratio reflects that percentage difference in value between the real market value and the MAV of similar property.

For residential and commercial property, that percentage has been 60 percent to 70 percent. This means the new assessed value of property that has been recently partitioned, subdivided or rezoned is calculated at 60 percent to 70 percent of that property's new real market value.

For industrial property, that percentage is 100 percent because the real market value of similar industrial property is equal to or below the MAV for that class of property. There are various reasons for this fact including that the real market value of industrial property takes into account substantial depreciation, including functional and economic obsolescence, affecting the improvements that are a part of the industrial property account.

Nevertheless, even with the application of the changed property ratio, the new MAV that is calculated as an exception to Measure 50 limitations likely will be substantially higher than the MAV for that property that existed prior to the partition, subdivision or rezoning. Therefore, property owners contemplating a partition, subdivision or rezoning of property are well advised to factor the potential increases in property taxes into their costs before undertaking the development, whether it be a new subdivision or a new condominium project.

David L. Canary has specialized in state and local tax litigation for the past 18 years. He has worked for the past 13 years as an owner in the Portland office of Garvey Schubert Barer and prior to that was an assistant attorney general representing the Oregon Department of Revenue. He has the distinction of trying several of the largest tax cases in Oregon's history. He is the Oregon member of American Property Tax Counsel and an active member of the Association of Oregon Industries Fiscal Policy Council.