Commercial Real Estate

Does Proposition 13 Favor Orange County Commercial Real Estate Investors?

California Proposition 13 Help or Hurt Commercial Real Estate Investments

Progressive people in California have long complained that Proposition 13 contains a loophole. Specifically, they feel that those who own commercial real estate are unfairly favored compared to those who own residential real estate. The mainstream media has accepted that there is a loophole in Proposition 13, but it seems they have not researched what it is at all. In fact, real experts agree that Proposition 13 is solid and has been since it was first implemented.

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% per year as long as the property was not sold. Once sole, the property was reassessed at 1% of the sale price, and the 2% yearly cap became applicable to future years.

Tax experts agree that the Proposition does not have a loophole. What it does have, however, is a degree of ambiguity. Specifically, the ‘change of ownership’ regulations are quite confusing and can be misconstrued. However, this could quite easily be resolved if a statutory amendment was made that would not alter the rest of Proposition 13. This is a change that the Howard Jarvis Taxpayers Association (HJTA), as well as the business community, are now pushing for.

The Howard Jarvis Taxpayers Association is dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights, including the right to limited taxation, the right to vote on tax increases and the right of economical, equitable and efficient use of taxpayer dollars.

The amendment, if successful, could be presented in Senator Patricia Bates’ House Bill 1237 (2017).

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Specifically, what the bill would address is the technical issues surrounding tax in which fictitious entities are involved. These include complex partnerships and limited liability companies. The bill would not, however, alter Proposition 13, thus remaining consistent in its content.

Making Sense of Proposition 13 and Senate Bill 1237

When people sell their property, Proposition 13 dictates that the value is reassessed to put it in line with market value, which affects the new buyer. The 1% rate cap will remain in place, however, and they also have the guarantee that there will be no more than a 2% yearly increase on the property’s taxable value. The issue, however, is that certain properties have been owned by the same individual or entity for many decades, which means that the taxable value of that particular property is often far below the actual market value. It is for that reason that Proposition 13 includes the stipulation that, when a property changes hands, it must be taxed, even if just initially, at market value. It isn’t until after it has been purchased that the 2% rate increase cap comes in place, which is the same as with all properties. Doing so means that the taxable value is in line with market value whenever there is a change of ownership.

However, it seems that it is possible to avoid the intent stipulated in Proposition 13 if fictitious entities are created, transferring those with the sale. This is what has been referred to as the loophole in Proposition 13.

For homeowners, when a property is sold, a new name is put on the deed and the property is reassessed. But for commercial properties with complex ownership patterns – publicly-traded corporations, real estate investment trusts, limited liability companies, partnerships and trusts – change of ownership is difficult to define in law, nearly impossible to enforce in practice, and subject to endless manipulation.

The biggest problem is that Proposition 13 was implemented to make the entire system, for residential and commercial property alike, fairer, ensuring people weren’t burdened with unmanageable tax bills while at the same time properly contributing to the community. The fact that this unfairness exists in the Proposition means that those who oppose it can also use it to fight against the proposition in its entirety.

Thankfully, the business and tax community are now coming to agree that the Proposition itself is fair, just poorly worded. This has resulted in new bills, such as House Bill 1237 as described above, from being developed. Another important potential alteration to make the Proposition fairer is Proposition 218.

In general, the intent of Proposition 218 is to ensure that all taxes and most charges on property owners are subject to voter approval. In addition, Proposition 218 seeks to curb some perceived abuses in the use of assessments and property-related fees, specifically the use of these revenue-raising tools to pay for general governmental services rather than property-related services.

Public employee unions, for instance, currently oppose SB1237, because agreeing to it would mean they can no longer take on the rest of Proposition 13. In fact, it is believed that at the 2020 statewide ballot, a motion will be put forward to completely remove the protections that Proposition 13 offers for commercial properties.

Tax affairs are incredibly complicated. However, the HJTA currently represents millions of tax payers, including homeowners, who want to protect Proposition 13 and preserve it because it works tremendously in their favor. At the same time, they agree that the business community should take greater responsibility for the tax burden on Orange County, which could be addressed through SB1237. Losing Proposition 13, they feel, would be a huge threat to Orange County’s business interests and it would indeed affect all of California. What is needed instead, is a law that makes it entirely clear that commercial properties should have their value reassessed when they come under new ownership, regardless of the entity that owns it. The saga will undoubtedly continue for some time yet and it is not yet clear what the most likely outcome will be.

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