A proposition that could split the property tax rolls is headed for the 2020 General Election ballot. If it passes, the California Schools and Local Communities Funding Act would be the first significant change to the state’s property tax assessment process since 1978. Currently, proponents of the ballot initiative are back to collecting the necessary signatures to qualify a revised version they believe will have a better chance of passage in November.
Since Proposition 13 became law more than 40 years ago, the base property tax levy for any type of real property in California has been pegged at 1% of the value at the time of sale. That base levy is subject to a maximum of increase of 2% per year and is net of existing or future municipal assessments. Tax hawks have heralded the law since its inception, while opponents have maligned it as a threat to education and local governments, the primary beneficiaries of property tax revenue. Numerous attempts to change the law have failed in the California State Legislature through the years, but this is the first serious attempt to circumvent Sacramento and go straight to the voters.
The proposal leaves the Prop 13 rules in place for all residential property and agricultural land, but targets properties designated for commercial use. Industrial properties are specifically named in the proposed law. These properties would be reassessed to current market value every three years, whether they change hands or not, for the express purpose of adjusting the base levy to 1% of current market value. Roughly 60% of an estimated $11 billion per year in new property tax revenue would go to local governments, with the balance heading to public schools and community colleges.
Who will this new law hurt most in the short run? The answer is: owners whose properties have appreciated significantly since they were purchased. Tax bills on some assets could double or even triple after their properties are reassessed to full market value beginning with the 2021-2022 fiscal tax year. In the long run, all properties owners will be hurt as their properties are periodically reassessed.
Tenants would also take a hit. Since most industrial leases either require tenants to pay all real property taxes or any increases in taxes over the initial year of their leases, local space occupiers would be sharing the pain with their landlords under the new law. Owner/users who are both landlord and tenant, would have no one to pass tax increases along to.
If it becomes law, it will be a true game changer for any commercial property owner or occupier now or in the future. Real property taxes are an operating expense that impacts net operating income, which is capitalized at a market rate to determine a property’s value. So, every dollar in additional property tax paid by an owner (rather than his or her tenants) at today’s capitalization rate of approximately 5%, would reduce a property’s value by $20 ($1/.05=$20).
Sponsors of the proposition include several powerful public employee unions who have pledged to fund a major campaign to win voters over before they head to the polls. With so much potential revenue in play, we can expect significant backing of the proposition from city and county governments, as well.
Original story by Voit Real Estate Services