August 13, 2020

Support Still Mixed For $10B-Plus Tax Hike On CRE Properties In November

Dean Boerner

The debate over California's long-standing limit on commercial property tax increases is heading to the finish line after years of contentious jockeying on both sides.

In November, California voters will decide whether to repeal part of Proposition 13, a 1978 state ballot measure that put property taxes on residential and commercial properties at 1% of the purchase price and caps reassessment increases at 2% per year. In its place, Proposition 15, otherwise known as "split roll" or, officially, the California Schools and Local Communities Funding Act of 2020, will reassess commercial and industrial properties valued at more than $3M to fair market rate.

The measure, which would generate a tax windfall of at least $10.3B, according to a study by the University of Southern California released earlier this year, pits much of the CRE industry against advocacy groups like Schools and Community First, the measure's main backer, and the Chan Zuckerberg Initiative.

The debate has reached a fever pitch amid the coronavirus pandemic, with advocates saying the need for Prop 13 reform has been intensified and critics saying the timing has made it worse.

Last week, a California judge ordered changes to California's voter guide over its inclusion of "false and misleading" language implying that Prop 15 would be applied to homeowners and not just commercial and industrial property owners.

“We’re expecting them to continue using a lot of these false and misleading arguments, so we’re just going to hold them accountable and still push our message as much as possible," Schools and Communities First Communications Director Alex Stack told Bisnow.

No On Prop 15 campaign spokesperson Michael Bustamante said in a statement that elections aren't won or lost by ballot arguments.

"This one will be won once voters know that this is a $12.5B tax increase they can’t afford," he said.

A survey of likely voters from earlier this year showed neither side with a clear advantage. The Public Policy Institute of California's most recent survey on split roll, which was conducted in April, found 53% of likely voters would support the measure.

Stack, who said the need for Prop 15 "is even more dire" as a result of the pandemic, said the campaign sees the outcome as far from inevitably in their favor. The campaign's internal polling of the ballot title and summary that voters will vote on registered 58% support, he said.

“We’re talking about big corporate properties that are not paying fair market value in the midst of a pandemic," he said. "Schools and local communities need funding desperately, and it’s just not a good excuse that it’s going to be hard to implement.”

He cited analysis commissioned by the Yes On 15 campaign and conducted by Blue Sky Consulting Group that found that 10% of the largest commercial and industrial properties would generate 92% of the measure's revenue. The poll had a margin of error of 3.3 percentage points.

Critics of Prop 15 like Meridian Senior Vice President Awais Mughal, a Bay Area office acquisition expert, say the negative impact will be widespread.

“We all acknowledge and recognize that the state is going to be facing some pretty significant fiscal hurdles coming out of COVID," he said. "Tax revenues are down, business activity is down, and it’s a difficult period for lots of municipalities and governments across the country."

"[Prop 15] would really hurt business," Mughal said. “We don’t think it is inevitable that it’s going to pass."

Mughal said a hike in property taxes won't just hurt property owners but will also be passed on to tenants, driving more businesses out of California.

Allen Matkins Associate Jared Kassan, a California property tax specialist based in Los Angeles, said he thinks "the pandemic probably hurts the measure." The argument made by opponents that a partial repeal of Prop 13 will lead to a full one, and thus homeowners will eventually be taxed more, is an effective one, he said.

"People are probably going to be a little more apprehensive about voting for something that’s going to likely increase their taxes," Kassan said.

Even so, most commercial property owners and investors will be able to adjust, he said. Those who had modeled only small property tax increases into their buying decisions are prone to be hurt, but Kassan said transactions could continue fairly normally.

“I would expect some downward pressure on prices because of [Prop 15]," he said. "But at the same time, people are buying and selling land today, and when they do that, the property tax increases to its fair market value and people are happy to pay that fair market value property tax."