SoCal Private Office Owners More Exposed to Prop 15

Private office owners are uniquely exposed to Prop 15, the split roll tax proposition on the November ballot. Private office owners make up a larger proportion of total ownership in California, according to research from JLL, and this group stands to incur an extreme increase in property taxes, should the proposition go through.

“The passage of prop 15 would impact all owners of commercial property in California, but private owners make up a larger proportion of total ownership in the state relative to corporate, public, or institutional ownership groups. Private owners include smaller mom and pop groups to large family-owned trusts,” Amber Schiada, senior director of research at JLL, tells GlobeSt.com. “Groups with $3 million in total commercial holdings will be subject to re-assessment like all other ownership groups but many private owners have held assets for a longer period and their tax basis is likely lower than assets that have sold more recently. This means that their assessed values will see a larger jump proportionate to the number of years since the asset last sold and the assumed fair market value of the asset today. This is true for all owners, but the scope of ownership among private groups is much larger in California.”

Southern California private property owners will see the largest increase in property tax through the proposition. In Southern California, private office owners stand to see a 32% increase in property taxes, and in Northern California owners stand to see a decrease of 28%. “The difference in scope is merely the result of the difference in size of the markets. The Southern California real estate market is about two times the size of the Northern California area,” says Schiada.

While private property owners are more exposed, because they make up a larger proportion of total ownership, all owners will incur an increase in property taxes. “I don’t think any ownership group is equipped to absorb the costs if this passes. Current Prop 13 protections ensure property tax obligations are capped at 2% annually based on the last sale price,” says Schiada. “If Prop 15 passes, taxes will be assessed at fair market value, regardless of sale date.”

However, institutional properties tend to trade assets more frequently than private owners, which could curb the costs. “Institutional owners tend to buy and sell assets more frequently, and across geographies throughout the U.S., so if anything, its passage might be less concerning to some institutional owners, especially those who’ve acquired assets more recently in the state,” says Schiada. “But as far as costs go, most owners will likely roll those on to the tenants, so the real cost impacts will be most felt by businesses leasing space.”

If passed, private groups could be pushed into selling assets if they can no longer bear the tax burden. “The smaller ownership groups may not be able to bear the added tax burden and may not be able to lease spaces at competitive pricing, given the increased costs this creates,” says Schiada. “We could see an influx of smaller assets come to market, and if it leads to a surge in investment offerings that could impact pricing. It will depend on the market and the asset class, of course.”