California’s industrial tenants and business owners already have enough on their plates to worry about given the pandemic crisis, uncertainty over the election, and ongoing civil unrest. Unfortunately, there’s another potential crisis just know showing up on the radar screen. It’s called Proposition 15 on the November 3rd ballot, but it’s more familiar name is the split-roll property tax. “Split roll” means applying a different tax formula, either tax rate, reassessment frequency, or vote requirement, to commercial and industrial properties than that applied to residential properties.

For over 40 years, all property owners in California have been protected from sharp spikes in their annual property tax levies by a law known as Proposition 13, enacted in 1978 that sets base levies at 1% of market value at the point of acquisition, with a maximum increase of 2% in each fiscal year. The base levy is reset each time the property changes hands. Among its many benefits, the so-called Prop 13 Protection helps commercial property owners predict and control their single largest operating expense item: property taxes. If Proposition 15 passes in November that protection will be gutted for all but a narrow range of commercial and industrial properties, and allow for the reassessment of base levies to full market value every 3 years, beginning in the 2022-2023 tax year.

Proponents of the measure, mainly public sector employee unions, claim it will raise up to $11.5 billion in additional property tax revenue for the benefit of local governments, K-12 schools, and community college districts, all on the backs of commercial property owners. The proposition, as written, is a revamped version of another one that qualified for the November 2020 ballot back in October of 2019. That first attempt was severely criticized due to its potentially harmful impact on almost every business in the state. The current version does little to address that issue. Though backers claim to have solved the problem, all they really did was confuse the issue by adding further layers of complication and restrictions.

Here’s the bottom line: the only property owners who could escape reassessment are owner-users occupying more than half their building and whose aggregate commercial property holdings in the state don’t exceed the market value of $3 million. A further caveat is that all the principal owners of owner-occupied commercial property must be California residents. With those restrictions, the carve-out protects just a tiny fraction of properties in the state. All non-owner-occupied properties would be subject to full reassessment no matter what their value. So, the claim that this provision protects small businesses is disingenuous at best.

It gets worse. Consider the fact that the vast majority of tenants in commercial property pay all or a significant portion of property taxes for the space they occupy. That could mean an instantaneous and substantial increase in rent for almost all businesses small or large. It will also raise operating expenses for those property owners who share that responsibility. Any investor or business would be wise to pass along higher costs via higher prices for goods and services. That means the end consumer will also take a hit. It’s just not good for business no matter how you look at it.

Hardest hit will be long term owners and the tenants who occupy those properties. Imagine the owner who bought his industrial building in 1995 for $50 per square foot. That property has probably quintupled in value since it was acquired. Even industrial building owners who bought their properties as late as 2011 have seen their properties double in value. Whatever advantage they enjoy from having held their properties for a long time would be wiped out overnight.

There are many other potentially harmful effects of this draconian measure, but the list is too long to discuss them all in a single post. We would be happy to connect with you to discuss the specific impact on you. We are just a phone call away. In the meantime, we will be following the issue carefully all the way up to November 3rd and will keep you posted. Spread the word and make sure you vote no on Proposition 15 in November to protect California businesses from split-roll property tax!

 

This article was written by Joel Hutak and Phillip DeRousse of the Lee & Associates-Orange office.