For the vast majority of owners and tenants, the answer is a resounding NO!
In our last two posts we have been highlighting provisions of Proposition 15, an initiative that California voters will be casting their ballots for or against on November 3rd. The so-called “split-roll” initiative would strip most commercial property from the protections afforded by Proposition 13, which has been in place since 1978.
This proposed law could have devastating effects on property values and occupancy costs if approved.
In this post we focus on a provision of the law that proponents of the measure claim protects small businesses from property tax increases. They make the simple claim that owners of commercial properties assessed at less than $3 million in value will not be subject to reassessment under the new law. This is largely false and we think it is very important that everyone understands the law as it is written rather than as advertised.
There is a small fraction of commercial property owners that will qualify for the exemption. They must meet all of the following criteria:
- They must be operating their business in the space and occupy the majority of space in the building
- They must own less than $3 million worth of commercial property in the state. So, if two or more properties are owned, the aggregate value of all properties must be valued at less than $3 million.
- All principal officers of the business operating in the space must be California residents
At current pricing levels these rules offer protection to a narrow slice of owner/users. Anyone who owns a single property over 10,000-12,000 square feet has property worth more than $3 million and the vast majority of industrial buildings are larger than that.
Furthermore, all non-owner-occupied commercial property is subject to full market value every three years. So, to say that Proposition 15 protects small business owners and small investors is untrue and deceptive at best. It is simply an attempt to make it appear that the proposition targets big investors who they say have been using the current 42-year-old law as a tax loophole.
Let’s take a look at the law from a tenant’s point of view.
Almost every tenant already pays for all or a significant portion of the property taxes on the property they lease in addition to monthly rent. In a NNN lease, the tenant pays 100% of the property tax bill. In a gross lease, the property taxes for the base year of the lease are paid by the landlord, and the tenant pays any increases after the base year. So, only those tenants who are in their base year when taxes spike would be protected. All others will take the full hit of a tax increase.
And, if their landlord has a low tax basis because he has owned the property for several years, that means tenants could see their share of taxes double, triple or even quadruple overnight. For owner-users who are essentially both landlord and tenant, there is simply no one to pass higher tax payments to.
To mitigate massive property tax increases for small businesses, the law calls for an elimination of the tax on up to $500,000 in personal property. This will do little to offset big property tax increases, but does make the law easier to sell to voters as one that protects small businesses.
Another provision that purports to mitigate the impact on small businesses (defined as those with fewer than 300 full time employees), property tax reassessments would be delayed until the 2025-2026 tax year, provided that more than 50% of a multi-tenant property is occupied by tenants who fit that definition. All this does is delay the inevitable rise in property tax payments, as whatever property those tenants go to once their leases expire will have already been reassessed to full market value.
It is clear to us that those who wrote this ill-conceived proposition do not 1) understand how the commercial real estate industry functions, and 2) has not considered the certain negative impact on property values throughout the state.
We urge your NO vote on Proposition 15.