In prior updates, we informed you about pending legislation and regulations that would impact the real estate industry. A few of these laws and regulations are now being implemented or will be voted on in November.
The San Francisco Gross Receipts Tax will be on the November 2012 ballot. If passed by San Francisco voters, the existing payroll tax will be phased out over the next 5 years and replaced with a progressive tax based on the annual gross income received by the taxpayer. The tax rate is determined by the type of business generating income. The tax is intended to be revenue neutral, as a whole, but will have a disproportionate impact on the real estate industry. The following is a summary of the tax rates for real estate leasing and related services.
0.3% Gross Receipts between $0 and $1,000,000
0.325% Gross Receipts between $1,000,001 and $25,000,000
0.4% Gross Receipts over $25,000,000
And for other industries, the range of tax rates is:
Retail: 0.075% to 0.175%
Food and Manufacturing: 0.125% to 0.45%
Hotels: 0.3% to 0.4%
Construction: 0.3% to 0.45%
Professional/Financial/Tech: 0.4% to 0.55%
Private Education/Health: 0.525% to 0.65%
In our previous update of July 12, 2012, we summarized the proposed tax in more detail, but a few clarifications to the legislation are important, including: Gross Receipts do not include distributions to “pass through” entities; Rental receipts are taxed only for San Francisco properties; and Special tax rate of 1.5% of total payroll is imposed in lieu of gross receipts tax for businesses that are primarily “administrative offices” (limited to companies with more than 1,000 employees and income over $1,000,000,000, so only large companies are benefitted by this exception.)
Beginning January 1, 2013, any property owner that sells,ground leases, or finances a commercial building over 50,000 square feet must disclose certain data regarding the building’s energy consumption. This information can only be obtained by registering the building with the EPA’s Energy Start Portfolio Manager website and opening an account. The disclosures will include a statement of the building’s energy performance, the property’s physical and operating characteristics, and a comparison of energy use to national averages. As of July 1, 2013, the requirements will apply to buildings above 10,000 square feet. All buildings with at least 5,000 square feet must comply as of January 1, 2014.
It is interesting to consider that the owner’s only means of compliance with the regulations is to register the building with an agency of the Federal Government.
On the bright side, according to the State of California Energy Commission, the EPA’s Portfolio Manager system is free to use, and allows building managers to efficiently track energy consumption in a secure, online environment, which could help owners identify the inefficient use of energy resources. Owners that plan to sell in the coming years should prepare to meet these disclosure obligations.
We previously wrote about the proposed overhaul of California law regarding condominiums and other common interest developments. This bill was passed on August 17, 2012 and takes effect on January 1, 2014, giving condominium projects and consultants over a year to digest the new rules. Our update of February 24, 2012 (available on our website in the archived articles) summarizes the key changes. Property managers, boards, and condominium developers should update their documents and procedures to account for these changes.
The proposed initiative to amend Proposition 13 to create a split tax roll and reassess commercial properties every three years failed to qualify for the November 2012 ballot. It appears that the sponsors did not actively pursue the necessary signatures. Perhaps they felt that the initiative would have been too much to take on this year, given Governor Brown’s proposed initiative to increase the sales tax and personal income tax (Proposition 30). Nonetheless, some commentators feel that it is only a matter of time before commercial property is reassessed more frequently to catch more tax dollars for governments that desperately need the money.
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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