We support Proposition 15 on this November’s ballot because it would right an egregious wrong when voters passed Proposition 13 in 1978. That measure was sold on the premise it would limit property-tax increases for older homeowners. But the ballot measure did not distinguish between commercial and residential property, which allowed commercial property investors to surf the cresting wave of tax-revolt in California to a big score. Commercial property owners saw tax assessments rolled-back to 1975 levels and annual increases capped at 2%. It was a gift that’s been giving for four decades. Proposition 15 would force owners of commercial property to pay their fair share while shielding residential property owners from big increases.
Update:Statewide voters in their infinite wisdom sent Proposition 15 down to defeat by only a 4% margin. Opponents carried the day with 52% against it and proponents are wondering now if Proposition 13, called the ‘third rail’ of California politics, can ever be dismantled.
About Proposition 15
Proposition 15 if passed by voters in November would enact the California Local Schools and Communities Funding Act of 2020. These are the key provisions according to the Secretary of State’s voter guide:
- Requires frequent reassessment of commercial and industrial properties beginning with the 2022–2023 fiscal year and require affected commercial and industrial real property to be reassessed based on market value at least once every three years.
- Phases-in the new taxing regime by reassessing a yet-to-be-determined percentage of commercial and industrial real property each year within every county over a three-year period.
- After initial reassessment all commercial and industrial property would be periodically reassessed at market value at least every three years.
The California Local Schools and Communities Funding Act of 2020 would ‘split’ the property tax rolls into two separate tax rolls: one for commercial/industrial property and one for residential property (including residential rental property). Commercial property would be initially assessed at market value and then reassessed at least every three years.
No longer would commercial property owners be able to pocket potentially vast property tax savings as under Proposition 13; instead that revenue would go to state and local governments and school districts. The State Legislative Analyst Office estimates the additional tax revenue to communities under Proposition 15 to be between $6.5 billion and $11.5 billion each year.
The Problem: Proposition 13
The Proposition 13 rewarded — and continues to reward — residential and commercial property owners by setting the maximum property tax rate at 1% of assessed value and establishing the assessed value (the tax base) at the cash value of property on March 1, 1975 (or whenever the property changes ownership). New construction is assessed at present value but over time that assessment falls farther behind market value. Consequently the property tax paid diminishes relative to the market value of the property.
Other key tax-revolt provisions include a required two-thirds vote of the electorate to enact any new city, county, or school district tax and a required two-thirds vote of both houses of the legislature to enact a new state tax. Those are high hurdles that make it very difficult for localities to raise revenues.
The benefit of Proposition 13 to property owners is that the too-low assessment (tax base) and the cap on the annual increase in that assessment means the property tax paid rises very slowly relative to the increase in the value of the property. Unpaid property taxes means less revenue is available for public services.
For commercial and industrial property owners in particular there are two significant advantages of the Proposition 13 tax regime. The tax savings can be productively invested elsewhere. And the revenue from the property increases as the property tax diminishes. Practically speaking that means the property owner keeps an increasingly large percentage of the commercial tenant’s rent dollar. Commercial leases typically require the tenant to pay the landlord’s property tax. If the tenants’ tax bill rises appreciably due to Proposition 13, leases will likely be renegotiated and the landlord will take a ‘haircut.’
Proposition 13 vastly benefits commercial landlords as large as Douglas Emmett, Inc. (which has cornered the market for commercial space in our business triangle) and as small as longtime mom-and-pop residential landlords who have reaped big tax savings.
Proposition 15: A Much-Needed Correction
We support Proposition 15 on this November’s general election ballot because we believe the California Local Schools and Communities Funding Act of 2020 would return a measure of fairness to property tax collections by assessing all commercial and industrial real property at current market value. Today Proposition 13 greatly favors longtime owners at the expense of newer market entrants.
Proposition 15 would also effectively close the creative-accounting loophole that commercial property owners use to avoid triggering a reassessment when a property changes hands. All commercial properties would be reassessed regardless of a change in ownership. There would be no need for accounting legerdemain to ensure that the big tax break continues even as the ownership structure changes.
We also support Proposition 15 because it would return an important ancillary benefit: policymakers will be able to make more prudent land use decisions. Policymakers have been forced to rely on sales-tax generators like auto malls and shopping centers to fill the hole that Proposition 13 blasted in local budgets. That was a perfectly rationale approach to maintain services like fire and police; however we have paid the price by prioritizing tax-generating development over urgent but tax-consuming land uses like housing.
Proposition 15 supporters claim that “40 years of under-funding of public services have hurt communities across California” and “wealthy corporations need to pay their fair share.” We agree. Read the California Budget and Policy Center study or watch CalMatters reporter Ben Christopher explain what Proposition 15 means for Californians in just one minute and then you decide.
Proposition 15 Does Not Go Far Enough
Proposition 13 was the fevered product of the California tax-revolt movement and Proposition 15 remedies its greatest flaw by ending the whopping tax break to commercial property investors. But it does not go far because residential rental real estate (which is an investment asset class) is spared. Those investors receive plenty of tax breaks already and they get a big upside when they sell. They too should pay their fair share.
Thanks to Proposition 13, many Beverly Hills landlords do not pay their fair share in property tax. Rental properties here sell infrequently; many remain in the hands of family trusts decade after decade. On many occasions we’ve heard a longtime mom-and-pop landlord defend high rents because Beverly Hills provides excellent services. But an examination of the tax rolls show that many aren’t paying for their share of those services.
Take for example the Kelman family. It built a 16-unit apartment building at 201 North La Peer in 1960 and the family has owned it ever since. We don’t have a current market value for the property because it hasn’t sold, but recent sales of comparable 16-unit rental buildings around the same size (19,000 square feet) show buyers are paying $600–700 per square foot. At that rate, the Kelman property would be valued at $11.5 to $13.5 million.
But the Kelman family is not paying property tax on an $11.5 million building. They are paying a dime-on-the-dollar. According to the county tax assessor, the assessed value of the property is less than $1 million. That includes both the land and the improvement. The double-sized lot alone is worth a small fortune. Proposition 13 ensures that the assessed value of that land is kept low: today it is valued for tax purposes at only $262,278.
As the Kelman family pocketed the tax savings thanks to Proposition 13, their rents continued to march upward. Today a recent one-bedroom ground-floor vacancy is listed at $2,200. We toured that unit and found deferred maintenance and sloppy repairs. Whatever the family pockets in Proposition 13 savings it is clearly not reinvesting in upkeep.
Back in 1978, residential rental property owner associations were in the forefront to support Proposition 13 with claims that tax reform would lead to lower rents. Of course it didn’t. However the backlash did contribute to a cresting wave of rent control that reached Beverly Hills with Chapter 5 of our rent stabilization ordinance in 1978. Nearly years later Chapter 6 was added for all rental tenants.
Proposition 15 should be the first step down the road of property-tax-reform reform. Next voters should decide whether the Kelman family, and all other investors in residential real estate, should reap the same property tax break as the senior homeowner who was the face of tax-reform in 1978.