Property Tax Increase is a Job Killer
Nov 02, 2011
There are two property tax increases that could happen in the near future, both of which could have devastating effects on our weak economy. Both taxes are being sold as 'taxing the rich' but if enacted, could send ripples down to every housing and commercial marketplace sector.
The first tax is a move to eliminate Prop 13 protection on commercial properties, which would affect California commercial property owners. The theory is that commercial properties do not sell as often as homes and therefore commercial properties that are kept in portfolios long term are getting special tax breaks. However, what typically happens is that users such as banks or drug store chains will buy and develop a piece of property and in turn sell that property with themselves as a user based upon a fixed rate of return for the future buyer. Property taxes are typically passed through to the tenant in the form of NNN charges, but for these deals to work from the beginning all costs have to be determined. Banks, for instance, build the store and create an investment for the future buyer by locking in set rental rates; this guarantees a set return for the future buyer while also setting the cost to operate that building at a set price. If taxes all of a sudden go up, tenants will be faced with a tremendous increase in property taxes at a time when businesses in California are just hanging on.
Commercial properties of all types typically transfer ownership on average more than residential homes; on average the typical commercial property will change hands every ten years. The segment of long-term holders is a small percentage of commercial properties overall and these investments only work because a set return was established by the rents that were signed up for originally. Also, most major corporations do not own their own properties. Typically, they build their sites then sell them when their operations are up and running so that they can move their cash and build more stores. If California did take away Prop 13 protection it would not only hurt the owners of the buildings but all of the tenants that occupy these buildings. Property taxes are passed through to tenants in the form of an operating expense so in the end this would be another tax on businesses at a time when we already have over 12% unemployment and businesses still have not recovered from this deep recession.
The next tax is the interest deduction on second homes and vacation rentals. NAR officials are becoming increasingly concerned that the current administration will have interest rate deductions on second homes and vacation rentals eliminated. Again, on the surface it appears to be a tax break for the rich; however, second homes and vacation rentals support numerous local communities that would die if the second home market further erodes. Today there is virtually no competitive financing for second home purchases therefore prices of homes are tumbling and foreclosures are already high.
I have a home in Truckee, California at Lake Tahoe where a community of 15,000 residents survives off of second homebuyers. All of the area's construction workers, service workers and retail stores survive off of a second home marketplace. Truckee has become devastated by this economy as housing jobs have disappeared; vacant storefronts are now the norm in downtown Truckee. The largest growth in homes in this marketplace occurred from 2000 to 2007. Most of these homes, like primary homes, were leveraged and home values have dropped fifty percent. If you take away the interest deduction, a homeowner that has been able to save his house (barely) may just lose his home if his deduction is taken away. This would lead to further foreclosures and will kill a major incentive to buy second homes, thereby killing communities like Truckee throughout the United States.
I understand the current administration's plan to shift the deficit reduction onto the rich but in both cases what looks like a tax on the rich is tied to the entire housing and commercial market lifeline. To now tax this sector in these difficult times will cost more jobs and further erode our lives rather than help reduce the deficit.
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Written by: Hans Hansson
Hans Hansson is President of Starboard TCN Worldwide Real Estate Services as well as a member of the Board of Directors for TCN Worldwide Real Estate. Hans has been an active broker for over 26 years in the San Francisco Bay Area and specializes in office leasing and investments. If you have any questions or comments please email email@example.com or call him at (415) 765-6897. You may also check out his website, http://www.commercialspacefinder.com/.