Real Estate Tax Update

Tax

Deadline to File Real Estate Tax Appeals for the 2020/2021 Tax Year

For property owners that disagree with their property valuation for the 2020/2021 tax year, the deadline to file an appeal is Tuesday, September 15, 2020. For property located in other counties, owners should check with the local Assessment Appeals Board. Unfortunately, these appeals would relate to the property value as of January 1, 2020, so the economic impact of Covid-19 is not likely to be considered. If you have questions about this, please contact Kevin Rose at krose@reubenlaw.com.

Commercial Properties May Lose Proposition 13 Protection

After many years of planning and political maneuvering, the opponents of Proposition 13 have settled on a ballot initiative, Proposition 15 (also known as the “Split Tax Roll”), to drastically overhaul California’s property tax structure. Proposition 13 is California’s landmark law, embedded in the Constitution that protects owners from increases in real estate taxes in excess of two percent per year. As a compromise to help ensure passage, residential property would be exempt from the tax increase.

The Basics

If passed in this November’s general election, Proposition 15 would require commercial and industrial properties to be reassessed every three years at the full fair market value of the property, as determined by County Assessors. This new assessment would be used to calculate property taxes based on the statutory tax rate, which is also limited to 1% by Proposition 13 and would remain unchanged. There would be no limit on reassessment, so many property owners could experience significant increases in real property taxes. This would wipe out the ability of property owners to plan for stable property tax increases of no more than 2% per year, and authorize County Assessors to exercise their discretion in determining the “fair market value” of real estate. Residential property, including multi-family structures (apartments), is specifically excluded from reassessment, as is commercial agricultural property.

Why Increase Taxes?

The proponents of Proposition 15 argue that commercial and industrial properties are underassessed and avoid over $11 Billion in local property taxes, which should be used to support schools, local governments and affordable housing. Advocates cite an unnamed University of California study claiming that such reassessment of commercial property will have a “net positive benefit” on jobs and the California economy. There was little discussion in the findings about the potential impact on tenants of commercial properties due to higher rents and expense pass throughs, other than the deferment for properties with at least 50% small business occupancy, discussed below. The opposition argues that this is the first step in completely dismantling Proposition 13.

The Process and Procedures for Reassessment

Starting with the 2022-2023 tax year, each County Assessor would be tasked with reassessing commercial and industrial properties to determine the value for property tax purposes. This process would be phased in over two years. Proposition 15 requires the creation of a task force comprised of different interests to recommend the statutory and regulatory details for implementation. Taxpayers would be given a “reasonable” timeframe during which to pay any tax increases. Such time frame is not defined and would have to be determined by the Legislature.

Proposition 15 imposes the burden of proof on the taxpayer with regard to any valuation disputes. Under current law, escape assessments (assessments for tax years later than the tax year the reassessment event occurred) or increased assessments due to change of ownership that are different than the purchase price require the Assessor to prove that the reassessment is justified. Property owners will likely be concerned that, due to political pressure to increase revenues, the Assessor will favor increases in value when there is any conflicting or disputed information. Local assessment appeal boards will almost certainly see a major increase in real estate tax appeals.

Some Properties Worth $3M or Less May Be Excluded

Small property owners are exempt from future reassessments if their property is worth $3 Million or less, but only after one reassessment under Proposition 15. This $3 Million threshold would be adjusted every two years for inflation, starting in 2025. This exception excludes “wealthy” property owners. This means if any owners of such low value property also own other property worth more than $3 Million, then the exception would not apply. The taxpayer has the burden of making this claim with the applicable County Assessor. The decision of County Assessors with regard to these exceptions are deemed to be final, and not subject to appeal to the local assessment appeals board, and judicial review of this exception is limited to “abuse of discretion.”

Small Business Temporary Exception

Properties that are used primarily (50% or more) for a small business, are exempt from reassessment, but only until 2025-2026. Small businesses are simply defined as businesses with less than 50 full time employees, provided that such business owns real property in California (not necessarily the same property) and is independently owned and operated. It is unclear if franchises are excluded, but it seems that the intent is to exclude franchise businesses from the exception.

The Personal Property Tax Exemption

As an incentive to the business community for support (apparently focusing on technology companies), up to $500,000 of tangible personal property and fixtures are exempt from taxation. This excludes airlines and boats. Also, small businesses (as defined above) would be fully exempt from taxation of personal property.

Use of Funds and Administration

Proposition 15 requires that all funds generated by these tax increases be distributed to community colleges (11%) and to school districts, charter schools and county offices of education (89%). There are complicated formulas and reporting requirements included as part of the administrative provisions. Each county and city is required to be compensated for additional costs incurred due to implementation of the reassessment requirements. Apparently, the payments are from the general fund, not the new tax revenues. The spending limitations in the California Constitution would not include any revenue generated by Proposition 15.

The Fight

While normally any proposed change to Proposition 13 would be highly contested, Covid-19, social unrest and the divisive presidential election may limit the publicity and focus on Proposition 15. The California Democratic Party, Bernie Sanders, and the San Francisco Board of Supervisors support Proposition 15. Opponents include the Howard Jarvis Taxpayers Association, The California Business Roundtable, the NAACP, and the California Business Properties Association. According to Ballotpedia, Proposition 15 had a 6% lead in the polls as of April 2020, with a 3% margin of error. Typically, new taxes need a large lead prior to the election as many voters become skittish when actually voting. It will be interesting to see how the voters feel about increasing taxes during recessionary times.

 

Authored by Reuben, Junius & Rose, LLP Attorney Kevin H. Rose.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

San Francisco Tax Update

Tax

Homelessness Gross Receipts Tax Upheld

On June 30, 2020, the First District of the California Court of Appeal upheld the legality of the City and County of San Francisco’s “Homelessness Gross Receipts Tax.” This tax ranges from 0.175% – 0.690% of taxable gross receipts (depending on the industry), and is 1.5% for administrative offices. This tax is imposed on companies that earn more than $50M per year in the City and County of San Francisco. In upholding the tax, the Court of Appeal found that the Constitutional right of California voters to pass laws by initiative and a majority vote, is superior to the limitations on new taxes or special taxes which require a supermajority, 2/3 vote. The Court agreed with the City that because the tax was initiated by the people, and not the government, then only a majority vote was required. The Howard Jarvis Taxpayers Association has filed a notice of appeal to the California Supreme Court, so this may not be the last word on the issue.

A copy of the court’s decision may be found here. Prop C Appellate Opinion

Commercial Rent Tax Appeal Remains in Process

The challenge to the San Francisco Commercial Rent Tax (funds for early childhood education) remains active in the First District of the California Court of Appeal. The Commercial Rent Tax is 3.5% for offices and 1.5% for Industrial space. Retail is generally excluded.

Appellants’ arguments include (1) that politicians cannot use the citizens’ initiative process as a loophole to avoid the 2/3 vote requirement, (2) voters cannot exercise power that the Board of Supervisors does not have (i.e., a majority vote standard), and (3) that the requirements of Propositions 13 and 218 should apply because the decision in the Cannabis case cited by the City related to a procedural requirement, not the actual approval of the tax at issue. The appellants’ reply brief is due July 23, 2020. Given the decision on the Homelessness Gross Receipts Tax, it seems likely that the Commercial Rent Tax will also be upheld, and there will be a showdown in the State Supreme Court. Stay tuned.

A copy of appellant’s brief may be found here. Appellant’s Opening Brief

Protective Refund Claims

In order to protect their rights to refunds, San Francisco taxpayers that are subject to the Homeless Gross Receipts Tax or the Commercial Rents Tax and wish to preserve their rights should file a protective request for refund with the San Francisco Tax Collector. Once the request is rejected, a Claim for Refund should be filed with the San Francisco Controller. Otherwise, refund claims may not be honored if the Supreme Court strikes down the tax.

The following is a link to the request for refund form and filing information. Refund Form

There may be other basis for challenging the taxes, including potential equitable arguments, that should be referenced when filing these requests/claims. You should consult with legal counsel or a tax representative to verify the process.

 

 

Authored by Reuben, Junius & Rose, LLP Attorney Kevin Rose.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.

San Francisco Tax Battles Continue

San Francisco

Much has been written about the social ills facing the greater San Francisco Bay Area, what solutions have potential to make an impact, and to what extent the business community should be required to fund them.  Debate raged in advance of the November 2018 election, when approximately 61% of San Francisco voters passed a gross receipts tax on some businesses to fund homelessness and mental health services.  The arguments were revisited in June of 2018, when competing commercial rents tax measures were proposed to provide additional funds to housing and homeless services or fund childcare and early education.  The latter measure passed with approximately 50.87% of the vote.

The validity of both voter-initiated tax measures has been subject of litigation filed in the Superior Court for the City and County of San Francisco.  The actions claim that the initiatives cannot lawfully impose the special taxes because they received only a simple majority of the vote, in violation of the California Constitution’s requirement that taxes imposed by local governments receive a two-thirds supermajority.  The measures were also challenged under the San Francisco Charter.

On Friday, July 5, 2019, San Francisco Superior Court Judge Ethan P. Schulman upheld the validity of both initiatives, and determined that a simple majority of the vote was sufficient to support their passage.  The rulings are well summarized by the following comment from the order on the June 2018 measure:

the procedural two-thirds vote requirement . . . of the California Constitution that limit[s] the Board of Supervisors’ authority to impose new taxes does not apply to the voters’ initiative power, either directly under those provisions or indirectly under the San Francisco Charter.

The Court evaluated claims that the June 2018 measure was placed on the ballot by a member of the San Francisco Board of Supervisors in an effort to end-run the requirement of a supermajority vote.  The argument invited the Court to view the initiative as a legislative initiative rather than a voter initiative.  The Court rejected the arguments, based on a variety of earlier rulings regarding voter initiatives, including a 2017 decision by the California Supreme Court regarding an initiative that imposed licensing and inspection fees of medical marijuana dispensaries.  Similar analysis appears in the order regarding the November 2018 initiative.

Given the magnitude of the Court’s decisions, appeals are expected.

Coincidentally, the decision on the tax measures was issued on the same date on which the 2019 San Francisco Homeless Point-in-Time Count & Survey was released by the San Francisco Department of Homelessness and Supportive Housing.  The report concluded, that as of January 2019, there were over 8,000 homelessness people living in San Francisco, a 17% increase over the 2017 count, and a 14% increase between 2013 and 2019.”  It comments: “Unstable living conditions, poverty, housing scarcity, and many other issues often lead individuals to fall in and out of homelessness . . . [i.e.,] the experience of homelessness is part of a long and recurring history of housing instability.”  Although there has been suggestion that the survey actually undercounts the homeless population in San Francisco, there can be no question that homelessness is a problem that is getting worse.

There are myriad differences of opinion about how to address homelessness and other social ills facing San Francisco and other California jurisdictions.  However, the Court’s decision on the June 2018 and November 2018 tax measures will likely yield more efforts by state residents to tax the business community in an effort to fund possible solutions.

Commercial property owners should consider the financial risks associated with voter-initiated tax measures, and may wish to include provisions in their lease agreements that allow such special taxes to be passed through to commercial tenants as operating expenses.  As the characterization of such taxes continues to evolve – from payroll taxes, to gross receipts taxes, to commercial rent taxes – limited definitions of “operating expenses” may prevent property owners from recovering property-related expenses from commercial tenants, resulting in diminished property values.

Stay tuned.

 

Authored by Reuben, Junius & Rose, LLP Attorney, Corie Edwards

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.