Prop. 13 - Who's Getting the Shaft?

News reports indicate that the "split roll" initiative to split commercial Prop. 13 tax policy from residential policy has submitted enough signatures to be on the November ballot.  I guess we should be thankful that California law about new taxes says it has to go to a vote of...the people instead of just the politicians.   The whole Proposition proposition is a mess, but that is a discussion for another day.  This day we have to assess whether reevaluating the market value of commercial property on a frequent interval and taxing it accordingly is a good thing or not.

I touched on this after hearing our assumed new state senator, Josh Becker, throw his weight behind the idea here.  But is there more to the story?  And does the hidden story involve the Law of Unintended Consequences?  Care to guess?  Well, the Law of Unintended Consequences is a bit like the Law of Gravity.  The SacBee, no enemy of new taxes, just reported this interesting consequence:

County tax collectors are reiterating their opposition to a proposed “split roll” initiative that could raise tax revenue from commercial and industrial property, calling the measure “problematic” and difficult it to implement.  The California Assessor’s Association in a letter to lawmakers says tax collectors don’t have the resources to execute the plan, which calls on them to more frequently assess commercial properties worth $3 million or more.

“In my opinion, the property tax measure as written will be impossible for assessors to implement — not just difficult but impossible,” Santa Clara County Assessor Larry Stone said.

Assessors project the changes would cost just over $1 billion to put in place over three years, and would “overwhelm” county assessors’ capabilities.  For example, according to an attached analysis commissioned by the Association, Santa Clara County would experience a 12-fold increase in the number of commercial and industrial properties it reassesses annually.   “It is expected that similar increases would result in all counties,” the analysis states.

While we might have sympathy for all the tax collectors having to massively grow their empires to implement the law, what about the people paying these new taxes?  Most people who have never rented a commercial space or run a small business don't know how that world works.  That apparently includes our next state senator.  The term to learn is a "triple net lease".  I'll let Wikipedia explain it here.  If you don't know what it is, you have no business voting for this initiative.  Suffice it to say the very same shop owners and restaurants that I have been fretting about (more than usual) for the last two months are the ones who would get shafted by this ballot initiative.

You are going to hear a lot about the budget shortfall, the evil commercial landlords who have been skating by for years, the school budget cuts and whatever else gets thrown against the wall in hopes it sticks.  Now is the time to understand who will actually be hurt by the latest tax grab.   Full disclosure:  I do not now, nor have I ever owned commercial property.  That doesn't mean I don't recognize a train wreck in the making.

Comments

[Just Visiting]

I'm curious Joe, regarding triple net leases and landlord's rent pricing, are you assuming that landlords aren't currently charging market rates for their commercially zoned properties? It seems like triple net lease agreements are a function of what the market will bear. They certainly aren't the result of government mandate. Is there some other non-market force that dictates triple net lease terms?

[Joe]

No, I'm sure most landlords are charging market rates. Those that aren't may have a reason like stable tenants, long leases that escalate slower, etc. If this passes, it will just raise the price floor for all tenants from where it is now. The most hurtful flaw is the $3M and higher provision. If they really wanted to go after the big boys they should have added two zeroes.

[Joe]

The Big Lie begins courtesy of the SF Comicle. Here is their descrption of Prop 15:

Proposition 15: Limits on property taxes. Would rewrite Proposition 13, the landmark 1978 measure that limits property tax increases and allows residential and commercial property to be reassessed only when it is sold.

Prop. 15 would boost property taxes on large commercial and industrial property by allowing it to be reappraised more frequently. The added money would go to school districts and local governments. Prop. 13 rules for residential property would be unchanged.
--------------
Here's the rest of the story from CalMatters

Prop. 15: Split roll

Who put it there: Citizens. Campaign largely funded by the California Teachers Association, SEIU California and the Chan Zuckerberg Initiative.

Type: Constitutional amendment

What it would do: Tax some commercial property based on its market value, rather than the price at which it was purchased. This would raise property taxes on many large businesses across the state, increasing funding for schools and local government.

In 1978, California voters passed Proposition 13, placing a cap on property taxes, kicking off a nationwide anti-tax revolt and placing city and county budgets in a generation-spanning straitjacket.

By tying a landlord’s property tax payments to the original purchase price, Prop. 13 has been the gift that keeps on giving to property owners, particularly those lucky enough to have bought cheap real estate decades ago. There’s been bipartisan reluctance among lawmakers to touch it ever since, lest they incur the wrath of irate homeowners.

This initiative attempts to divide and conquer that political problem by repealing the property tax protections only for commercial landlords with more than $3 million in holdings. If this measure passes, those landowners would have to make tax payments based on the current value of their properties — a tax hike for most — resulting in an estimated $6.5 to $11.5 billion more for cities, counties and school districts.

https://calmatters.org/explainers/california-november-2020-ballot-propositions-final-list/

$3 million isn't a "large" commercial or industrial property. I wonder if there are any properties on the Ave worth less than $3m?

[Peter Garrison]

“placing a cap on property taxes, kicking off a nationwide anti-tax revolt and placing city and county budgets in a generation-spanning straitjacket.”

Has any government or union gotten smaller or less invasive?
Nope.
No more taxes for awhile.

[Joe]

Here are some bits of local info from today's Chronicle:

County assessors had until July 1 — the start of the 2020-21 fiscal year — to finish computing the assessed value as of Jan. 1 of all taxable property in their county, including land, homes, commercial real estate, business equipment, boats and airplanes. This is called “closing the roll.” The assessed value is the amount subject to property tax. It’s what property owners will see on their 2020-21 tax bill in the fall.

The average tax rate in California is around 1.2% of assessed value, including voter-approved local taxes. A $1billion increase in assessed value generates about $12 million in additional taxes.

The main things that boost a county’s tax revenue are commercial and residential construction, properties changing hands at higher prices and the inflation rate. This rate is based on the annual change in the California Consumer Price Index each October. It can be less than 2% but can’t exceed that amount.

In San Mateo County, two big contributors to this year’s roll were the Facebook campus expansion in Menlo Park, which added $561 million, and the Burlingame Point Project just south of San Francisco International Airport, which added $544 million. The Burlingame project, which includes four office buildings, was envisioned as a life sciences campus, but Facebook decided to lease the entire complex. It will move its Oculus virtual reality division into it next year.

This time around, assessors expect to see a flood of requests for property tax cuts from businesses, not homeowners.

“The value of commercial property is the income it generates. If your tenants moved out, went broke, stopped paying rent, or all of the above, then we are going to see significant reductions,” Santa Clara County Assessor Larry Stone said. “I predict the negative impact on commercial property values as a result of COVID-19 will be greater than the impact that occurred in the (previous) recession, which was a residential-triggered recession.”

He added that the inflation factor next year could drop below the 2% cap, as it did five times since 2003. In 2010-11 it dipped below zero. In April, the California Consumer Price Index was slightly below where it was in October.

https://www.sfchronicle.com/business/networth/article/Bay-Area-property-tax-rolls-are-up-6-8-this-15400712.php