By David S. Calverley
What is Prop 15?
On election day this year, voters in California will be choosing between maintaining the existing Prop 13 which has been in place for 42 years (since 1978) and Prop 15, the first meaningful adjustment to tax laws with regard to assessing real estate in California for property tax purposes.
Proposition 15 is a constitutional amendment to require commercial and industrial properties to be taxed based on their market value, rather than their purchase price and will go no less than three years between assessments, where-as currently property is valued on the date of transfer and capped at a rate of 2% per year.
If passed, many commercial properties will experience significantly higher tax bills. That means less revenue flowing to an investor’s bottom line. And if you’re an office tenant paying triple net leases, you are going to see an increase in your expenses.
The ultimate goal of Prop 15 is to raise assessments to current market value, generating billions of tax dollars annually providing new funding to local governments and schools.
Who will Prop 15 affect?
Most commercial property types are affected while residential and multifamily buildings will remain exempt and protected under current Prop 13 law. Retail will have a delay in the enrollment and exceptions will be made on a rolling bases depending on occupancy and company sizes. The ballot initiative would also make an exception for properties whose business owners have $3 million or less in holdings in California; these properties would continue to be taxed based on their purchase price.
What can property owners do to prepare for Prop 15 if it passes?
California Hotel owners should hire a third-party consulting firm to review and minimize their assessments, based on available laws, that allow for intangible (non-taxable) asset value to be removed. An experienced property tax advisor can make sure you are being fairly assessed, especially given the current economic climate. With COVID, we expect assessments in general to come down in California, at least for the next 2-3 years.
The impact on more recent hotel purchases is minimal, and in fact some might actually see reductions, however properties purchased years ago at a much lower basis could see a substantial increase in taxes. The playing field will be leveled between competing hotels with significantly different property tax assessments that were based on when they were originally purchased. This has the potential to push some owners of Hotels out of the market as they will face a much larger tax burden then they initially anticipated in years past.
Are there other states proposing similar tax legislation?
Yes, however the State of California has very specific legislation from Proposition 13 that limits property tax increases to 2 percent or CPI, whichever is lower. The result is properties that have been held for extended period generally have a lower tax basis than properties bought more recently.
What are the arguments for and against Prop 15?
According to California’s official voter information guide: https://voterguide.sos.ca.gov/propositions/15/
Pros: Prop. 15 is a fair and balanced reform that: closes property tax loopholes benefitting wealthy corporations, cuts taxes for small businesses, protects homeowners and renters, requires full transparency and reclaims billions of dollars for schools and local communities. Supported by nurses, teachers, small business owners, affordable housing advocates and community organizations.
Cons: Prop 15 is a potential $12.5 billion property tax increase that raises our cost of living and makes everything we buy – food, gas, utilities, day care and health care – more expensive. Prop 15 repeals commercial taxpayer protections in Prop 13.
Summary
While we cannot predict the results of the voting on this issue, hiring a Property Tax advisor like JLL is highly recommended during times of change. It’s important to have someone with valuation expertise, so that if these assessments become uncapped you can still maintain an equitable fair market level valuation based solely on the real estate component of these operating properties. Hotel property owners in California should keep an eye on the results of this proposition and if we don’t call them first, they should call us if it goes the way of a yes vote. And (deleted) if it’s a no vote, we will be aggressively appealing assessments in California anyway due to current economic environment and other factors specific to each individual Property.
