How Proposition 13 Feeds the California Luxury Rehab Market

First, credit for the observation in this blog post goes to my partner Greg Hebner. Yesterday he and I were looking at a Bel-Air home that hadn't been updated since the 1960s. Shag carpets everywhere. Kitchen appliances exactly like the ones I remember in our house when I was in elementary school. The home will sell for $2.4 million, get a $350,000 renovation, and then sell in the $3.3-$3.5 million range. Proposition 13 means that the family that just sold this house were paying $4,300 per year in property taxes because Prop 13 limits the annual tax increase to just 2% or so, while values have risen much faster in California since the 1960s. This is especially true in the most desirable areas, since our increasing income disparity as a society has created a wealthy group who can afford to pay a large premium for convenience and status.

Here's the key point: even if the family that owned this home wanted to sell the home 10 years ago and move into a much smaller home nearby, their taxes would have skyrocketed. If they bought a condo for $1 million, their taxes would have gone to $13,000 or so--possibly much more than this family could afford given their income. Equity trapped in a home that has appreciated is very hard to tap into, so many older California couples are house-rich and cash-flow poor.

So families like the one that owned this home stay put for much longer than they might otherwise do. This creates a large supply of homes that badly need updating. This in turn creates a solid long-term opportunity for professional renovators who buy the house and transform it into a like-new luxury home. And this in turn creates a great opportunity for Arixa Capital and others like us, who provide financing to these professional renovators.