Prospects for passage of the controversial proposition that would strip commercial property owners of Proposition 13 protection was not polling well. Last week, proponents of the measure decided to punt on second down and start over.
The measure would allow for the reassessment of commercial properties to their full market value every three years, which would mean massive increases in annual base levies.
To be sure, the proposal as written made clear the lack of understanding of how the commercial real estate business works. In its current iteration, it takes aim at all non-residential property in the state that is not owner-occupied with a value of under $2 million in an attempt to at least appear to protect small businesses. At best, that carve-out would protect only a small fraction of commercial property owners, as a $2 million threshold would include owner-occupied industrial buildings under 8,000 square feet and even less than that for office and retail buildings.
Add the fact that for larger buildings and those not occupied by their owners, Proposition 13 protection would disappear altogether. Those who lease space also pay all or a portion of property taxes in addition to monthly rent. So, the idea of sticking it to the rich property owners is misleading at best. Someone must have gotten the memo on this and realized that those opposing the proposal would be able to make clear to voters that almost every business in the state would be adversely impacted. The higher tax burden would have to be absorbed by businesses or it would force them to charge more for their goods and services.
Just yesterday we got hold of the text of the new plan and after reading it several times, we are convinced that it is even more confusing and ill-conceived than the current one. It raises the owner-user limit to $3 million, which would protect industrial buildings of up to roughly 12,000 square feet at today’s approximate price point, but that would be pegged to inflation and is an aggregate number, meaning that the total value of all commercial properties owned by an owner user would have to be less than $3 million to be protected from reassessment to full market value every three years.
To mitigate the tax pass-through for small business tenants, the new proposal contains a provision that we think may not even be legal. If we understand this very confusing document correctly, those properties that are more than 50% occupied by businesses with fewer than 50 full time employees will not be subject to reassessment until the 2025-2026 tax year. The reason given for this is that the delay will give those tenants time to move out of their current spaces before the tax increases are levied. Properties more than 50% occupied by businesses with greater than 50 full time employees will be reassessed beginning in the 2022-2023 tax year.
What sounds illegal about that to us is that it discriminates against property owners who have large companies as tenants and it creates motivation for smaller tenants to move out of those buildings. In other words, the new law would arbitrarily create new winners and losers in an otherwise free market system. Add the fact that tenants who choose to move to avoid higher taxes will have to bear the cost of moving and the disruption of their business operations that goes with relocating. Their former landlords will suffer loss of income and incur the costs of releasing that vacant space. We wonder if the proponents of the rebooted proposition gave any of this any thought. Our guess is no.
In essence, many property owners will be subject to higher property taxes sooner just because of who occupies their building when the law goes into effect. Sound crazy to you? It sure does to us. We are hoping it will sound just as crazy to the voters in November of 2020.
The new sponsors of the updated proposal, several big public employee unions, will have to reapply to put the new proposal on the general election ballot by obtaining over 1 million signatures at a cost of millions of dollars by next May 1st. You can expect that to happen and see the reboot on the ballot next November.
As we gain further understanding of this new development, we will get back to you. In the meantime, if you have any questions, just give us a call. We are here to help.