The California Teacher’s Association recently submitted a proposed initiative to create a “split roll” which would reassess all commercial real property at its current market value, with reassessments to occur once every three years. However, it is unclear if the CTA will actually pursue obtaining the approximately 800,000 signatures necessary to put the initiative on the November 2012 ballot. These signatures are due by June 28, 2012. The law firm that submitted the initiative to the California Attorney General’s Office was unable to comment on the status, and the CTA website contains no information about this initiative. It is possible that the CTA is considering whether to pursue this initiative, or other strategies, as there are a number of tax and budget related initiatives that have been filed with the Attorney General’s Office.
For years, certain interest groups have pursued amending Proposition 13, the landmark California constitutional amendment that capped annual property tax increases at 2% per year, based on the assessed value of the property, except when the property changes ownership or undergoes substantial renovation. A simple “google” search reveals scores of proposed pieces of legislation on this topic. Now, given the critical status of California’s budget, such proposals may receive more support from California voters. The CTA’s proposed initiative would only apply to commercial real estate. Residential real property would not be subject to these increases. Business real estate would no longer have the certainty of limited tax increases over time, and properties held for a number of years could face dramatic tax increases. Below is a closer look at some of the key provisions.
The initiative defines commercial real estate as any real property other than a single family or multifamily intended to be used primarily as a permanent residence, and nonresidential property used for commercial agricultural production. Other exemptions currently in place under California law would remain. Under this definition, apartment buildings would be exempt from reassessment, even though apartments are typically owned for “commercial” purposes. It appears that the drafters want to avoid any pass through of real estate tax increases on to renters, presumably to protect individual taxpayers and gather additional political support. Left uncertain is if “second” homes or vacation homes would be subject to the reassessment since they are not used primarily as a permanent residence.
If passed, the amendment would be implemented starting in fiscal year 2014-2015, at which time each county assessor would be required to assess commercial real property, as defined in the legislation, to its then current “full cash value”. According to the Legislative Analyst’s Office, counties are directed to begin with those properties that have not changed ownership for the longest period of time, with the remainder to be phased in over three years. Then, every three years, all commercial real property would be reassessed to its current fair market value. There would most certainly be a period of confusion and uncertainty as the County Assessors work out the reassessment procedures. Interestingly enough, depending on whether the commercial real estate market fully recovers, some property owners could realize a decline in value. For the most part, it is expected that revenues to the state would significantly increase, by about $4 Billion dollars. (California Legislative Analyst Office, January 4, 2012 Analysis).
The Legislative Analyst points out that the initiative could negatively impact state tax revenues due to loss of after-tax income and potential reduction in business activity due to less investment, fewer business expansions, reduced operations, and increased costs to customers. The business of real estate would change in that the comfort of knowing the amount of real estate taxes upon acquisition of property would no longer apply. Real estate owners would be subject not only to the ups and downs of the market, increases in the taxation rate due to other initiatives or statutes, but also to each county assessor’s methods and practices. The definition of “full cash value” or “fair market value” is often subjective, and cannot be easily pinned down without a sale of the subject property. Real estate tax appeals would certainly increase if the proposal is passed. Any new taxes would often be passed along to commercial tenants, which could also impact the market’s recovery.
The CTA has made the strategic decision of protecting residential property tax rates, at the expense of businesses. In fact, the name of the initiative, “Protect Homeowners and Close Corporate Tax Loopholes Act”, clearly highlights the marketing strategy. Other goodies are made available to homeowners, including increasing the homeowners exemption by 100% to $14,000 per year, and providing additional tax deductions for renters.
In exchange for the increased real estate taxes, businesses are given an exclusion of up to $1,000,000 for personal property taxes. This could help ease the tax burden on businesses in some cases. However, for most real estate owners, personal property taxes are a small part of the tax bill. This exemption is likely more helpful for businesses that lease space, rather than own their property. Also, the exclusion does not allow this benefit for boats and airplanes, unless used in day to day operations of a business.
It will be interesting to see how the real estate community reacts to the proposed initiative, if it in fact qualifies for the ballot. It is likely that there will be competing tax measures on the November 2012 ballot, so the upcoming election season will be exciting.
Special Thanks to Mark Ong, of Independent Tax Representatives, LLC, for providing some of the background information referred to above.
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, 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.
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