Prop 15 Could Dramatically Change Property Tax Collections for CRE

It has officially arrived—the final language on the split-roll tax ballot measure that has been expected and dreaded among California property owners. Prop 15, as it has been called, would remove the property tax limitation protections promised by Prop 13 for commercial properties, effectively splitting the tax roll. The prop was expected, but an official ballot number and clarity give more information about the measure.

“A passing of Proposition 15 would eliminate Proposition 13 protection from apartments, office, industrial and retail properties,” Vicky Hammond, a principal at Coreland Cos., tells GlobeSt.com. “It would ‘split’ commercial and residential tax policies, requiring reassessment of all commercial properties at current market value every three years. Currently, property tax rates are established at 1% of purchase price when sold and restricted to no more than 2% annually thereafter.”

In addition, the final ballot measure came with a few new positions. It adds a tax to commercial and industrial properties used for education and includes a local government funding initiative. “Most notably, the burden of proof, which was initially in the hands of the assessor, has been reversed,” says Hammond. “Now the burden will be in the hands of the property owner, making it incredibly difficult to challenge an unfair assessment. To prevent being taxed at a higher value, the owner would have to prove that its property has not increased in value.”

If passed, Prop 15 will more than double the current property tax collections, with that bill entirely falling on commercial property owners—residential property owners will still see limitations on property taxes. “The repercussions will be significant for property owners, small businesses, and consumers,” says Hammond. “More than 75% of all small businesses lease commercial space and will be directly impacted by this reassessment as a pass-through expense per their lease terms. No hair salon, veterinarian, grocer, or sandwich shop will be able to bear the burden of the perpetual increase, especially not today when most are trying to stay afloat. It will trickle down significantly, increasing the cost of everything we buy.”

Hammond adds that asset quality and management could also be impacted by the ballot measure. “The quality of ownership and management will also be impacted. With a focus on keeping common area maintenance costs low, properties will decrease in value due to the decrease in operating income and market uncertainty,” she says.

With such strong repercussions, it is no surprise that there is also strong opposition to the measure. “An aggressive campaign strategy is in place, backed by strong statewide organizations,” says Hammond. “The California Business Properties Association shared that all efforts are on target, most importantly fundraising and building support among key organizations. There is no reason this should pass if voters are informed of the negative effects this will have on California’s economy for all.”

However, if the measure does pass, Hammond says the long-term impacts will be significant. “The most significant impact will be that it will leave the door open for the elimination of Prop 13 protection for single-family homeowners as well,” says Hammond. “California already bears some of the nation’s highest tax rates, significant barriers to entry for new businesses, and a massive housing shortage. Raising taxes on commercial or residential property creates even bigger obstacles to growing the state’s economy.”