Proposition 13 Overhaul Qualifies for November Ballot
A revised initiative entitled "The California Schools and Local Communities Act of 2020" has officially qualified for the November ballot. If passed, the initiative would establish a "split roll" where the retail, office, commercial, and industrial real property would be taxed based on their market value, while the residential property would continue to be assessed based on its purchase price. Below we list what the current Prop 13 tax regime entails and what the new proposed Split Roll would do if the initiative passed this November:
The current tax regime under Proposition 13
Real property is taxed at one percent of its fair market value, which usually is the property's purchase price.
Unless there is a change in ownership of the property such as a sale, this "base value" can only increase by an inflationary rate that cannot exceed two percent per year.
As property changes ownership, it is reassessed and the property's base value is reset to its then-current fair market value.
A property's base value can be lower than its current fair market value, which in turn can reduce the amount of property tax that might otherwise be owed.
The Split Roll Initiative
Properties of $3M or less are excluded unless there is direct or indirect ownership of properties totaling $3M or more.
Commercial and industrial property with a fair market value of more than $3 million would be reassessed at its current fair market value at least every three years.
The process of administering this new tax regime will be determined by the California legislature, which will include, among other things, a process for reassessment appeals.
The taxpayer will have the burden of proving that the property was not properly valued. The legislature also will determine a process by which to allocate mixed-use property between its commercial and residential uses for purposes of implementing the split roll.
NNN rents will be impacted if it placed into law and will lower all commercial real estate values in California.
If 50% or more of the square footage of a commercial or industrial property is occupied by a small business, such property will not be subject to the new regime at least until the 2025-26 fiscal year.
The split roll would become operative beginning January 1, 2022, and the tangible personal property tax relief would become operative on January 1, 2024.
Tangible personal property tax relief
Small businesses would be exempt from property tax on all of its tangible personal property. A small business is a business that: (1) has fewer than 50 annual full-time employees, (2) is independently owned and operated such that the ownership interests, management, and operation are not subject to control, restriction, modification, or limitation by an outside source, individual or another business, and (3) owns real property located in California.
For all other taxpayers, an amount up to $500,000 of combined tangible personal property and fixtures (other than aircraft and vessels) will be exempt from taxation.
Kostas Kavayiotidis, a principal in our LA office stated, "This split roll will affect values and not be a positive change. Ultimately, for the vast majority of properties that are NNN, the tenants are going to bear the weight of it at least temporarily until they state that their cost of renting has gone up and are opposed to paying higher rents. What we'll see is rent stagnation." If it does pass, it'll mean a higher cost of goods being passed onto the consumer. A shopping center, for example, whose leases are NNN, would have tenants paying higher occupancy costs, leading to higher service costs. The long-term effect of this split roll will mean an impact to rent growth until there is an equilibrium reached in 5-10 years, where property values would have found some footing and adapted to this new norm. It'll take a long time for these changes and valuations to absorb into the market.
Contact us today if you are looking for additional market intel or to discuss any of your individual projects.
