I'm quite interested in what your relative thinks might be the impact of the looming property tax reform in CA; if the ballot initiative passes next month then commercial real estate will no longer be able to enjoy the prop13 caps by using pass-through entities to own the buildings, and changing the beneficial owner of the real estate holding corporation instead. Plunging rents plus escalating tax liabilities seem like a perfect financial storm.
Best case it will apply to commercial properties. I dont foresee changes to prop 13 for residential. They would also have to undo rent control, which is sort of like non-owners prop 13.
The biggest issue with Prop 13 is the allowance for commercial properties.
Prop 13 for protecting individual residential property owners on a fixed income from escalating "assessed" property values makes a good deal of sense. Especially in a state like California, if left unchecked, would be raising all sorts of taxes and fees for failed experiments.
(Note - born/raised/ life long Bay Area resident)
Prop 13 needs a revision to exempt commercial property...
There a pretty weak reform for 2020 in Proposition 15. It will tax at realistic values (i.e. exempt from Prop 13) certain commercial properties. I'd like to see much stronger reforms so that second homes are realistically taxed etc, but at least it is a start.
This is the real answer in my opinion. Prop 13 does make some sense (especially in its current form now that the other measure passed that limits prop 13 for homeowners over 1 million in value).
But for commercial real estate ? That seems totally ridiculous. There is so much tax that could be collected there!
Whenever CA's prop 13 is brought up, I find it interesting when the article doesn't mention that commercial properties are also covered. They can be owned eternally by a corporate entity instead of paying property taxes anything near resembling current commercial values. This one at least mentions it, but the odd part is that this was used as the justification of extending inherited tax rate grants to families, instead of removing it from commercial properties.
My grandparents own a home in Livermore they've had from 1925. Livermore is now a very costly place to live in, and modern property taxes would make it impossible for them to live in a city they saw grow up around them.
I do think Prop 13's protection should be eliminated for businesses - most definitely.
If you're a landlord, perhaps it would make sense to allow up to 2 x Prop 13-protected [low-density] properties, and all those after would have unfixed property tax.
The problem here is landlords will simply pass this along to renters, so it seems 'sane' to just eliminate Prop 13 for commercial and not residential properties.
We lose billions of dollars in tax money from corporations because of Prop 13. :(
Yes. Proposition 13 is famous for triggering sweeping tax changes across the country.
In CA, Prop 13 effectively caps how much the assessed value of your home can increase each year to 2%.
So over time, the tax burden of long term property is much less than the current property value.
When the house changes hands (generally) the house is reassessed to the market.
There was also new laws passed a few years ago where a family can bring their current tax basis forward to a new home.
There’s also the phenomenon of businesses buying other businesses, but leaving them formally intact so that their assets don’t “change hands” thus maintaining the inherited tax basis.
It would have to be a statewide ballot proposition, and you'd be up against the entire real estate industry, which has large parts of the California State Legislature in its hands. They would spend enormous amounts of money to mis-market it in poor political advertising.
Perversely, two-thirds of the financial benefits of Prop. 13 and its tax freeze went to commercial interests even though it was sold as a way to keep homeowners in their homes. One only-third of its foregone revenues benefit homeowners. A lot of California policymakers have wanted to change this for years, since it really screwed with public school and city finances for decades.
One issue with prop 13 has been a major shift in (property) tax burden from large commercial to residential owners.
Also, a big shift in overall revenue from property tax to income tax. This is less stable source and tends to benefit the investor class over W2 earners.
The problem with Proposition 13 is that it also applies to commercial real estate.
A personal residence can only be about 30 years out of date in terms of assessment. And, when the owner dies, that assessment corrects.
Commercial real estate will get buried behind layers and layers of sublease agreements in order to avoid triggering a reassessment. At one place I worked, we had to find the actual original building owner because someone drove a car through a support beam and the rework was going to cause everything to come up to code. We moved out because nobody could actually get through all the layers of subleases (11 layers when I last checked) and guarantee a completion date.
The solution is to remove the Proposition 13 protections from commercial real estate. Good luck. Every company with real estate on the books in California is going to fight you tooth and nail.
Prop 13 has distorted the market of residential, but, at this point, it's baked in. Individual residential housing will turn over--the owner will eventually die.
Where Prop 13 has been terrible is on commercial real estate. Most office complexes in Silicon Valley have dozens of sublease layers in order to avoid triggering a reassessment. Forcing those to unwind would be a gigantic boon.
Unfortunately, those people have a LOT of money to throw around. The last time this popped up on a proposition, the commercial real estate owners spent a FORTUNE to defeat it.
In case you were unaware, there were two proposed constitutional amendments that would reduce Proposition 13 benefits this past November:
Proposition 15 (which would have eliminated commercial property tax breaks) failed 48%-52%. I think its biggest political flaw is probably the fact that it would apply July 1, 2022, with no phase-in for small businesses whose lease passes through the property tax. So hopefully in November 2022 another attempt can be made that addresses the political shortcomings.
Proposition 19 (which eliminated tax breaks for inherited investment property in exchange for increased tax portability for the elderly) only barely passed 51%-49%, and that was after it received overwhelming support from the legislature, and a $45 million advertising campaign from the California Association of Realtors that some people criticized for only highlighting the goodies for old people and not the costs for inheritors.
No one is attempting a full repeal of Proposition 13 including residential property.
It could also be attacked judicially; see this episode of the Henry George Program for a discussion of Nordlinger v Hahn and whether different legal arguments could be tried (e.g. does Proposition 13 impinge on the American freedom to migrate under the US Constitution?) http://seethecat.org/ep/2017-07-11.html
You’re probably thinking of rent control? Prop 13 applies to every property including commercial. You can also transfer reduced tax to your heirs or to another property of yours
This article is remiss in not mentioning how Jarvis et al. also got commercial property included in Prop 13. With many commercial properties held in trusts and corporations, the ownership never "changes" and generations of beneficiaries pay a pittance in taxes on incredibly valuable real estate. San Francisco, in particular, strikes me as a city awash in properties that haven't changed hands in generations because even a crappy old warehouse practically mints income.
Thankfully, Californians have the opportunity to correct this giveaway with a vote for a split-roll in 2020[0].
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