Tuesday, October 20, 2020 / by Carol Glover
Proposition 15: Tax on Commercial and Industrial Properties
for Education and Local Government Funding
[AKA The 'Split Roll' – eliminates Proposition 13
for Commercial Property]
A YES vote for Proposition 15 means that commercial properties will no longer enjoy the benefits of Proposition 13 limitations on increases in property taxes and, starting in 2022, commercial property taxes will be based on the Assessor’s fair market value assessment in 2022 and moving forward with a reassessment every 3 years. Exempt from this change will be Agricultural property, Multi-family property and those who own commercial and industrial properties with a combined value of $3,000,000 or less. There is a delayed reassessment start date for smaller retail centers with a starting reassessment date in 2025. However, this 2025 start date only applies to centers with 50% or more “small business” [defined in the Proposition as independently owned and operated businesses with 50 or fewer employees].
An analysis done by the nonpartisan Legislative Analyst’s Office shows that the split roll measure would likely raise between $6.5 billion and $11.5 billion annually. The proponents of the proposition have framed this landmark tax increase as benefiting Education, which it does, but the actual distribution flow of the tax revenue is as follows:
“Money Set Aside to Pay Costs of the Measure. The measure sets aside money for various costs created by the measure. This includes giving several hundred million dollars per year to counties to pay for their costs of carrying out the measure. The measure would increase the amount of work county assessors do and could require changes in how they do their work. Counties could have costs from the measure before new money is available to cover these costs. The state would loan money to counties to cover these initial costs until new property tax revenue is available.
New Funding for Local Governments and Schools. Overall, $6.5 billion to $11.5 billion per year in new property taxes would go to local governments. 60 percent would go to cities, counties, and special districts. Each city, county, or special district’s share of the money depends on several things including the amount of new taxes paid by commercial properties in that community. Not all governments would be guaranteed new money. Some in rural areas may end up losing money because of lower taxes on business equipment. The other 40 percent would increase funding for schools and community colleges. Each school or community college’s share of the money is mostly based on how many students they have.” https://lao.ca.gov/ballot/2020/Prop15-110320.pdf [underline added]
What many people may not realize is that this tax does not exclusively burden the large “corporate” property owners. Many of these commercial properties are owned by individuals or smaller family office ownership groups. A dramatic and drastic increase, in many cases, will result in a crushing property tax bill. Under many triple net leases, it is not the “corporate” landlord that pays the taxes, it is the tenants. Neither the Landlord, nor the tenants, have priced this increase in their operations. It will likely force many to sell, businesses to close and ultimately the parties who will pay for this tax will be the consumer of the products and services that those buildings house.
Should there be change to Proposition 13 on the commercial sector? Perhaps. But to enact this change now, when businesses and owners are likely to be still reeling from the impacts of COVID-19 closures could be devastating.
Proposition 19 would make several changes to rules which allow Californians that are older than 55 or are disabled or are victims of natural disasters to transfer their below-market residential property tax assessments when they sell their personal residence and purchase another in the State of CA.
Note that Proposition 19 will be welcomed by qualifying homeowners who feel trapped in their homes as they cannot afford to pay new property taxes. Proposition 19 is also backed by the California Association of REALTORS® and would remove current restrictions on price, location, and one-time limit to propositions 60 and 90 property tax transfers.
However, the benefits of this Provisions for 55+, Veterans and Wildfire Victims comes with “strings attached” and that is the loss of the Parent/Grandparent transfer provisions under Propositions 58 and 193. Currently under Proposition 58 a Parent can gift or bequeath property to a child and the child can retain the parent’s low property tax basis on a personal residence (of any market value) and up to $1m of other real property. The same exemption applies under Proposition 193 for Grandparent/Grandchild.
This Constitutional Amendment eliminates Proposition 58 and 193 for a parent’s personal residence – unless the child actually moves into the property as their own personal residence and the value of the benefit is capped at the first $1,000,000 in value AND Prop 58 and 193 are completely eliminated on any other real property.
Supporters of the proposition argue that this critical measure contains many provisions that will help increase the stock of available housing. It will also offer protections to many vulnerable Californians in the property market and ensure that both local governments and counties get equitable funding. Supporters of Prop 19 say that it is time to loosen the chokehold on the real estate market.
Opponents claim that Prop 19 is designed to increase property taxes in California. They argue it is similar to a measure that was rejected by almost 60% of voters back in 2018. They also say that the measure increases tax savings for just one group of homeowners but limits savings for another. As a result, it exacerbates inequality and is also a poor substitute for effective and meaningful reform of California's property tax transfer rules.
Prop 21 is an initiative that adds additional rent control by allowing counties and cities to implement rent control for specific residential properties over fifteen years old. There are two additional aspects of this Proposition that are changes to the current rent control laws that took effect in January of 2020. First, the new rent control law will apply to ALL residential properties, except for properties owned by individuals who own a total of less than 3 properties in California. Also, this provision imposes vacancy control, whereby a Landlord is restricted on raising rents when a tenant vacates to 15% over a 3-year period.
The measure is designed to replace the Costa-Hawkins Rental Housing Act. Costa-Hawkins prohibits rent control for properties that were built after 1995 and for units like single-family homes, condos, and townhomes. The law also says that landlords can increase rents to market rates if tenants move out. And it is worth noting that California cities can set their own policies to rent control. However, several court rulings have ordered that they allow owners and landlords to earn a reasonable rate of return on the property.
There have been two important developments since 2018 that California voters may consider when they weigh the necessity and significance of a local rent control measure: the impacts of the Coronavirus pandemic and economic recession on the local real estate market and the adoption of statewide rent regulation that took effect in January 2020.
Supporters of the Proposition claim that they require more flexibility with rent control as it will protect tenants from eviction or potential homelessness. They identify that Proposition 21 does not mandate or create any new rent control policies; however, it allows local communities to decide what is most suitable for their unique situations.
Opponents say that rent control is not the answer to the housing crisis, and better policies are required to encourage housing affordability and access. The additional unintended consequence is upkeep and renovation of units. Many landlords update units as they become vacant. With rent increase restrictions on vacancy, it may cause landlords to carefully consider how much they can spend to improve a unit based on the cost recovery timeline. Additionally, further rent control does not promote development of new apartment housing. There is a significant housing shortage in California and rent control narrows the pool of individuals and companies who are willing to develop apartment buildings. In fact, the CA Legislative Analyst office indicated that the economic impact would result in “[o]verall, a potential reduction in state and local revenues in the high tens of millions of dollars per year over time.” https://lao.ca.gov/ballotanalysis/Propositions
A reduction in state and local revenues, a depressing effect on future development and a potential reduction in upkeep and improvements in existing housing stock will ultimately not benefit those who need affordable housing.
This is but a brief summary of the Propositions. We urge you to review the following sites for more information:
State of California – official voter guide: https://voterguide.sos.ca.gov/propositions/
California Chamber of Commerce: https://advocacy.calchamber.com/elections/ballot-measures/
State of California – Legislative Analyst’s Office: https://lao.ca.gov/BallotAnalysis