Alert - Real Estate Update: Efforts Continue to Create "Split Roll" and /or to Increase Taxes on Business

June 25, 2013
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California voters passed Proposition 13 in 1979, mandating reassessment of property taxes only when a property changes ownership. Since 1979, the rule has applied to residential and commercial properties alike. Over the past year, we have seen an increase in the efforts, both by the California Legislature and by non-governmental entities, to exclude commercial properties from this protection. The proposals involve generally either more frequent reassessments of commercial property, increasing the tax rate on commercial properties, or both. Since only the electorate can directly repeal or amend Prop 13, these efforts are ultimately directed at either a constitutional initiative or an amendment placed on the ballot by the Legislature.

Legislative efforts to date include:

 

AB 188 (Ammiano) - calls for reassessment of a commercial parcel if 100% of the ownership interests change hands over a 3 year period. [The bill is currently stalled in committee.]

 

AB 561 (Ting) - changes the definition of when a commercial parcel is "sold" for purposes of imposing a transfer tax to include a transfer of ownership of shares in a corporation that owns the commercial parcel. [Also currently in committee.]

 

In addition, the California Democratic Party last fall included in its convention platform a resolution entitled "Close the Corporate Loophole" in which the party supported changing the tax laws to require commercial properties to be regularly reassessed while maintaining the status quo for residential properties (Resolution 13-04.39). More recently, the Party voted to make Prop. 13 reform a top priority in 2013.

 

Non-governmental organizations pushing for creation of a split roll include:

"Educate Our State" (www.educateourstate.org), which describes itself as a "grassroots, parent-led organization educating and uniting Californians to advocate for systemic change that will provide all students with a high-quality public education." This group is sponsoring a "Yes4Ed Initiative" calling for commercial properties to be assessed and taxed at fair market value while maintaining the protections of Prop. 13 for residential properties.

 

"Evolve California" (evolve-ca.org) describes itself as a group of Bay Area activists seeking to hold politicians accountable through grassroots issue advocacy and smart organizing. The lone issue that the website addresses is reform of Prop. 13 to remove its application to commercial real estate.

 

The common thread running through all of these efforts is "making corporations pay their fair share." The split roll proponents do not address the facts that:

 

- Many commercial property owners are either small investors in real estate investment trusts or other forms of collective ownership;

- "Commercial property" includes the neighborhood family owned restaurant as well as the small building that the local dentist bought for her practice;

- Commercial property owners already pay taxes at a rate much closer to "market" than do residential tax payers;

- Because increased taxes will raise the costs of leasing, the net effect will be to reduce the amount that commercial tenants spend on goods, services and/or personnel.

 

A 2012 study by the Pepperdine University School of Public Policy concluded that introduction of a split roll in California would cost the State $71.8 billion of lost output and 396,345 lost jobs in the first five (5)years alone. The study also concluded that a split roll would result in increased instability of government finances, because government funding would become more directly susceptible to the rise and fall of real estate prices. Additionally, the study concluded that a split roll would undermine further the attractiveness of California's business climate, and would impact disproportionately small businesses, especially those owned by women and minorities.