Removing Commercial Properties from Prop 13 Protection is Misguided and Dangerous
Nov 14, 2018
On June 6, 1978, nearly two-thirds of California’s voters passed Proposition 13, reducing property tax rates on homes, businesses and farms by about 57 percent. Under Proposition 13 tax reform, property tax value was rolled back and frozen at the 1976 assessed value level.
Property tax increases on any given property were limited to no more than 2 percent per year, as long as the property was not sold. Once sold, the property was reassessed at 1 percent of the sale price, and the 2 percent yearly cap became applicable to future years. This allowed property owners to finally be able to estimate the amount of future property taxes and determine the maximum amount taxes could increase as long as he or she owned the property.
Today, as we move towards the 2020 election, there’s a movement to remove commercial properties from proposition 13.
The beliefs by voters on the left is that commercial properties and commercial property owners are not paying their fair share of a potential property tax revenue and that the original intent of proposition 13 was to ensure the people that own their home would not be taxed out of their home by property tax reassessments.
This is particularly true with property value increases throughout the state. An example of how this would play out would be a retired couple that owned a home in the San Francisco’s Sunset District. If they purchase their home in 1970s, they probably paid around $100,000 for their home. Their property taxes today would roughly be several thousand dollars a year. However, with the current values of homes being over $1 million in the Sunset, that same couple would be required to pay well over $17,000 per year for property taxes.
The same scenario would happen to commercial properties. It’s true that the large skyscrapers are primarily owned by institutional corporate players. However, the majority of commercial properties in San Francisco (and California) are actually owned by individuals or small family partnerships and trusts. Many of these properties are the sole income and livelihood for these property owners.
What state legislatures and the backers of this proposal don’t understand is that commercial property owners through their lease have the right to pass any property tax increases onto their tenants. Therefore, the majority of any reassessment property tax increases will actually be paid by the tenants, making it even more expensive to house your business in California.
The impact of such increases could have serious financial consequences on businesses and affect their ability to even survive.
The Embarcadero was originally built in the late 1970s and when they sold for the first time in the late 1990s, it was one of the first commercial property portfolios to be sold for over $1 billion dollars.
A local attorney firm that had full floors at the Embarcadero received a new property tax bill, which was over $250,000 per partner. These costs actually caused the firm to go bankrupt.
The bottom line is that the proponents of this bill would cause a mass exodus out of the state and/or businesses simply because they cannot afford the additional tax. With the already high costs of doing business in the state, we don’t need to burden businesses and property owners with more added expenses.
Photo Credit: OldOnliner Flickr via Compfight cc
Written by: Hans Hansson
Hans Hansson is President of Starboard Commercial Real Estate. Hans has been an active broker for over 33 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, hanshansson.com.