Prop 15 Seeks to Increase Property Taxes on Commercial Properties
Prop 15 Seeks to Increase Property Taxes on Commercial Properties
By: Tony Mekari, 2L
October 13, 2020
One of many propositions offered for voters to consider this election cycle, Proposition 15, also known as California Initiative Number 19-0008, will be on the California Ballot this November as an effort to generate revenue and reverse part of the famous Prop 13 passed in 1978. Proposition 15’s stated purpose is to provide additional funding for local education and communities through an increase in commercial and industrial property taxes. These tax revenues will occur by a reassessment of the property’s taxable value to reflect the current fair market value. Proposition 15 purports to provide tax exemptions for small businesses and only target property owners with aggregate interests in commercial and industrial property that exceed a fair market value of $3 million. Although the modification of properties’ taxable value would naturally increase property tax revenue, as many properties have a taxable value based upon their previous purchase price, this change would significantly affect the owners of properties that were purchased years ago with the expectation of Prop 13 to protect their investments.
One small positive note, under this initiative, there are some exemptions built into the text of the initiative. Agricultural property, either residential or commercial, appear to be excluded from the reassessment. For commercial and industrial properties, an owner will be required to pay the reassessed tax if the properties, in the aggregate, are worth $3 million or more. Although this may seem to be a high threshold to meet, any property owner knows the high price of real property in California and it is not very difficult to exceed the $3 million threshold. Further, if the property is mixed use, commercial or industrial zoned properties utilized in this manner will be subject to the reassessment while vacant land or land used as long-term residential will not be subject to the reassessment.
Reassessments will begin with the 2022 fiscal year on a three-year phase-in schedule, which means reassessments will begin as early as January 1, 2022. Commercial/industrial properties that contain at least 50% of small business occupants will be affected by the tax in the 2025 fiscal year. Under Proposition 15, a small business is defined as a business which has less than 50 employees, is independently owned, and located in California. Small businesses are exempt from paying taxes on tangible personal property, and those that do not qualify as a small business have a $500,000 tangible personal property tax exemption.
A reassessment would occur within every three years thereafter. Due to potential misevaluations of fair market values, an appeal process has been established, but the specifics have not yet been determined.
Due to the probable outcome of many properties being taxable at the much higher market value rate, it is likely that property owners would develop their properties in an effort to justify the unavoidable monthly rents needed to be charged or abandon commercial property and build residential where possible.
Although Proposition 15 appears on its face to be an effective way to generate revenue for the state and only affect those with substantial property ownership, the passage of this proposition would likely result in detrimental outcomes for business owners. Most landlords pass taxes through to tenants as part of the rent and have additional charges added for tax increases. With higher taxes, most of those increases will be passed on to small businesses who are often tenants of commercial landlords. This will result in higher rental costs for small businesses who have already been significantly impacted by COVID, some of the highest taxes in the nation, and most onerous business regulations in the nation.
The attorneys at BPE Law Group, P.C. have been assisting commercial property owners for more than two decades and have significant experience in planning and risk mitigation.
The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are facing a legal issue of any kind, get competent legal advice in your State immediately so that you can determine your best options.
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Prop 15 Seeks to Increase Property Taxes on Commercial Properties
By: Tony Mekari, 2L
October 13, 2020
One of many propositions offered for voters to consider this election cycle, Proposition 15, also known as California Initiative Number 19-0008, will be on the California Ballot this November as an effort to generate revenue and reverse part of the famous Prop 13 passed in 1978. Proposition 15’s stated purpose is to provide additional funding for local education and communities through an increase in commercial and industrial property taxes. These tax revenues will occur by a reassessment of the property’s taxable value to reflect the current fair market value. Proposition 15 purports to provide tax exemptions for small businesses and only target property owners with aggregate interests in commercial and industrial property that exceed a fair market value of $3 million. Although the modification of properties’ taxable value would naturally increase property tax revenue, as many properties have a taxable value based upon their previous purchase price, this change would significantly affect the owners of properties that were purchased years ago with the expectation of Prop 13 to protect their investments.
One small positive note, under this initiative, there are some exemptions built into the text of the initiative. Agricultural property, either residential or commercial, appear to be excluded from the reassessment. For commercial and industrial properties, an owner will be required to pay the reassessed tax if the properties, in the aggregate, are worth $3 million or more. Although this may seem to be a high threshold to meet, any property owner knows the high price of real property in California and it is not very difficult to exceed the $3 million threshold. Further, if the property is mixed use, commercial or industrial zoned properties utilized in this manner will be subject to the reassessment while vacant land or land used as long-term residential will not be subject to the reassessment.
Reassessments will begin with the 2022 fiscal year on a three-year phase-in schedule, which means reassessments will begin as early as January 1, 2022. Commercial/industrial properties that contain at least 50% of small business occupants will be affected by the tax in the 2025 fiscal year. Under Proposition 15, a small business is defined as a business which has less than 50 employees, is independently owned, and located in California. Small businesses are exempt from paying taxes on tangible personal property, and those that do not qualify as a small business have a $500,000 tangible personal property tax exemption.
A reassessment would occur within every three years thereafter. Due to potential misevaluations of fair market values, an appeal process has been established, but the specifics have not yet been determined.
Due to the probable outcome of many properties being taxable at the much higher market value rate, it is likely that property owners would develop their properties in an effort to justify the unavoidable monthly rents needed to be charged or abandon commercial property and build residential where possible.
Although Proposition 15 appears on its face to be an effective way to generate revenue for the state and only affect those with substantial property ownership, the passage of this proposition would likely result in detrimental outcomes for business owners. Most landlords pass taxes through to tenants as part of the rent and have additional charges added for tax increases. With higher taxes, most of those increases will be passed on to small businesses who are often tenants of commercial landlords. This will result in higher rental costs for small businesses who have already been significantly impacted by COVID, some of the highest taxes in the nation, and most onerous business regulations in the nation.
The attorneys at BPE Law Group, P.C. have been assisting commercial property owners for more than two decades and have significant experience in planning and risk mitigation.
The information presented in this Article is not to be taken as legal advice. Every person’s situation is different. If you are facing a legal issue of any kind, get competent legal advice in your State immediately so that you can determine your best options.
Recent and Popular Articles From Our Blog:
- March 30 – The CARES Act Stimulus Package Guidance
- April 23 – Pending Legislation in the Wake of COVID-19
- April 28 – A New Reality – Temporary or Permanent – Virtual Showings and Disclosures
- May 12 – Executive Order Creates Worker’s Comp Liability for Small Business
- May 18 – Planning for Bankruptcy
- May 22 – Servant Leadership
- June 8 – Paycheck Protection Program Flexibility Act is Enacted
- June 10 – Impact to Credit Score After Filing Chapter 7 Bankruptcy
- June 26 – SBA Rolls Out Updated PPP Loan Forgiveness Application
- July 2 – Understanding the Home Equity Sales Contract Act 2020
- July 14 – Governor Rolls Back Re-Opening