The defeat of SB 939 was certainly worthy of celebration, but that’s behind us now and another potentially catastrophic threat looms ahead. And, now it has a number: Proposition 15.
Formerly referred to as the California Schools and Local Communities Funding Act, this proposition, confirmed for the November 3rd ballot, threatens to end Proposition 13 protection for the vast majority of commercial properties in California.
For 42 years, Proposition 13 has kept property taxes for all types of real estate in check. Proposition 15 is the first real threat to the law championed by Howard Jarvis back in 1978. If it passes, commercial properties will be subject to reassessment to full market value every three years, with a few hard-to-qualify-for exceptions designed to give the appearance of protection to small businesses. More on that in a moment.
Proposition 15’s primary backing comes from several big public employee unions, but local governments throughout the state are also expected to back the measure. They all hope to get their hands on a share of up to $11.5 billion a year in additional property tax revenues. Local governments will be in for a 60% share, while community college and K-12 districts will divvy up the other 40%. First in line, though, will be the 58 county assessor’s offices, who will spend hundreds of millions of dollars each year just to conduct the property assessments. Then comes the reimbursement to the State of California for the loss in income tax revenues caused by the deductibility of higher property taxes. So, no one really has a clue how much local governments and schools will actually get.
Property owners who have held their property for a long time will be hardest hit. Their base property tax levies were set at the point of acquisition and have been protected by the current law’s 2% cap on annual increases. So, an industrial owner/user who paid $60 per square foot for his property back in 1980’s could see his property taxes quadruple overnight once the law goes into effect in the 2022-2023 fiscal tax year. If that owner chooses to challenge his new assessment, he will be in line with thousands of others, all of whom will be forced to pay the full increase while they process their appeals.
Just how county assessors are going to come up with their valuations is a mystery. It could take years to hire and train an army of tax assessors. We fear that they will be using algorithms that fail to account for the distinct differences of buildings and submarkets. That would certainly lead to an avalanche of appeals that would likely cause a significant increase in administrative costs, thereby reducing disbursements to the intended beneficiaries. The law of unintended consequences is sure to be in play, especially during a market correction when property owners line up to appeal for lower assessments.
Tenants are going to take a hit, as well. Most commercial property leases contain provisions for the tenants to pay all or a portion of property taxes in addition to their rent. So, occupancy costs, already one of their biggest expense line items, would rise substantially. That means they either take a profit hit or pass it along to their customers by way of higher prices. The latter is more likely, which ultimately means higher prices for consumers, not just the deep-pocketed property owners the promoters of the measure claim to be going after.
Proposition 15 does contain a provision the backers claim will protect so-called “small businesses”, but the protection only helps a small slice of owner/users who own less than $3 million worth of real estate in the state. To get the exemption, a property must be owner-occupied and all the principal officers of the business must be California residents.
All properties held for investment that are not owner-occupied receive no protection and are subject to full reassessment. This is perhaps the most disingenuous aspect of the campaign to pass Proposition 15, as the exemption will apply to a tiny fraction of property owners and is a blatant attempt to broaden its appeal to under-informed voters.
In another attempt to make the measure more palatable to the voters, the law calls for the elimination of the annual tax on up to $500,000 in personal property. That savings won’t even come close to covering the rise in real property taxes, but it will create the appearance of providing cover for small businesses, which the promoters believe will lead to more yes votes.
In part 2 of this series, we will look into the long term impact of Proposition 15 on commercial property values. Stay tuned….