What Split-Rolling Prop 13 Will Mean for CRE Owners

A new measure to split-roll Prop 13 is set to appear on the November 2020 ballot. If passed, the measure would remove some of the tax protections and limitations for commercial and industrial property owners. The intention behind the measure is to increase tax funds for in-need services.

“The movement is driven by the notion that Prop 13 reform will result in a more equitable tax structure for businesses and raise revenue for education and state services,” Michael Diaz, managing director and western regional leader of property tax services at Newmark Knight Frank, tells GlobeSt.com. “Teacher and various labor unions are supporters of the proposed reform.”

Of course, this would have significant implications for property owners. Because commercial properties don’t trade hands for several decades in some cases, the new measure provides for tax reassessment every three years, resulting in billion more in property tax. “In 2018, the University of Southern California estimated that if commercial properties were taxed at their market value, the result would equate to roughly $11.4 billion in additional revenue per year,” says Diaz. “The report found that almost 80% of the $11.4 billion in lost revenue comes from only 8% of properties, which are valued at more than $5 million each, while half of all commercial properties are already assessed at fair or near fair market value.”

While the split-roll will have a significant macro impact, the impact on each owner will depend on the property and portfolio. “The impact on specific commercial property owners will vary based upon when the asset was acquired,” says Diaz. “Property owners who have held property a decade or longer will be impacted significantly as the assessment basis increases to a market value approach, while owners of recently acquired real estate assets will feel less impact as their assessed value is likely already at or near market value levels.”

While there is strong support for the measure—about 46% of voters support it with 9% undecided—the industry is working hard to defeat it. “NAIOP of California is actively mobilizing support to defeat the measure. According to President of NAIOP of California James V. Camp, NAIOP of California is actively raising money and has joined the Californians to Stop Higher Property Taxes in order to defeat the measure,” says Diaz. “It is organizing a statewide campaign to educate voters on the damaging effect that split roll would have across California. The campaign is expected to cost $100 million.”