It was elderly widows who were being thrown out of their homes for unpaid property taxes in 1975 before Proposition 13. Now with Proposition 15 it will be mom and pop businesses in leased buildings, and Uber drivers who own their homes who are going to be displaced.
Proposition 15 – the so-called split commercial/residential tax roll – on the November ballot is being advertised as solely a commercial property tax. But there is a trojan horse contained in Proposition 15 that will unravel Proposition 13 property tax protections even for residential properties.
Single-family residential homes used for home offices or UBER drivers who park their cars at their owned residences will have their homes reclassified as commercial properties under proposed Proposition 15. Eventually, property taxes will be equalized by the legislature, and the mandates of Proposition 15 will apply to all owners who hold multiple homes and apartments, not just commercial properties. Moreover, small business owners will have the higher property taxes passed through to them in the form of higher rents and will not be able to stay in business after a couple of years. But it will be the consumers who will ultimately pay the so-called higher commercial property taxes.
This is why some 2,000 organizations are mounting a $70 million opposition to Proposition 15, including the Commercial Business Property Owners Association, the Howard Jarvis Taxpayers Association, apartment owners associations, the NAACP and senior citizen groups.
Prop 15 Full of Stealth Exceptions
Proposition 15 would require that commercial and industrial properties over $3 million in value would be reassessed every one-to-three years instead of when a property is re-sold (in about 10 years), as is now the rule under Proposition 13. Thus, there would be less lag time until a property is reassessed. Residential properties would initially be exempt, except in the case of the exceptions explained below:
- Immediately after any passage of Proposition 15, a task force shall examine and recommend to the legislature any “statutory and regulatory changes necessary for its equitable implementation.” In other words, the legislature can immediately revise the wording to equalize taxes as it sees fit without voter approval. So, even though Prop. 13 requires a two-thirds vote of the legislature to increase taxes, a simple 50% + 1 vote in the state legislature could amend Proposition 15 to extend to residential properties. As explained below, the process of equalization could extend to reclassifying some residential properties as commercial properties, then to all residential properties under the rationale of tax “equalization.”
- The $3 million minimum for commercial properties to be subject to the tax is cumulative, not based on each singular property. So, if a commercial property owner held, say, two or more commercial properties worth $3.2 million, all those properties would be subject to the higher reassessment. This would, in effect, raise property taxes on smaller commercial properties less than $3 million in value. Affected would be small family-owned commercial business franchises that lease building space from a large commercial landowner. Also included would be small mom and pop restaurants, a Taqueria, a Taco Bell, Popeyes Chicken, a medical or dental office, a laundromat, a non-profit child-care center, or any tenant in a commercial strip center.
Standard commercial-industrial leases provide for pass-through of any expense increases, including property taxes, to the tenant who, in turn, will have to raise prices on customers.
- A commercial-industrial property owner who believes his properties are worth less than $3 million must file for an exemption in the first year. An owner must certify that they have less than 50 employees, that their business is independently owned and the business owns real property in California. If a property owner fails to file the exemption this “shall be deemed a waiver of the exclusion for that year” and any higher tax is automatically due and payable. By requiring owners to file for exemptions in the first year, the state can claim they are protecting small businesses. But this only applies until 2025 and then all bets are off on any exemptions after that.
- If the owner of a residential property has a home office or is, for example, a Uber of Lyft driver who parks the business car at home, this may trigger reassessment of their personal owned residence as a commercial property. There are some 500,000 Uber and Lyft drivers in California. After the governor’s coronavirus emergency order to shut down small businesses and large office buildings, there are countless people working from home.
Commercial properties appreciate at about 5% per year on average, but under Proposition 13 property tax increased are capped at 2% per year. The lower 2% tax increase per year on properties under Proposition 13 was compensated for by higher sales taxes collected from the large number of small businesses in the state. This is why California has a 7.25% sales tax. But that tax won’t be reduced or phased out because of Proposition 15.
The key economic question is how much tax increase will small business tenants be able to absorb when the property tax increase is passed through to tenants each year? When rent increases cumulate each year to about 10% to 20% higher rents, many tenants will default on their leases or declare bankruptcy. So small businesses will initially suffer the most under Proposition 15 as well as owners of single-family residences who work out of their home. But eventually the protections of Proposition 13 will no longer extend to all residential properties.
The California non-partisan and impartial Legislative Analyst’s Office estimates that California will generate $6.5 to $11.5 billion in additional tax revenues based on the existing number of $3 million valued commercial properties in the state. But this does not consider the nearly incalculable rise in property taxes when Proposition 13 protections are lost to commercial properties for property owners owning multiple properties $3 million in value cumulatively. Nor does it consider how many cumulatively-owned residential properties are over $3 million.
In 1975 it was elderly widows on fixed income that were being thrown on the streets by rising property taxes that brought about Proposition 13. In 2020, it would be small business owners who will be filing bankruptcies to escape the high property taxes passed through to them in rent increases.
Rex Hime of the California Business Property Owner’s Association reviewed this article.
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