California’s Prop15 May Enhance Taxes for CRE House owners Considerably

A Closer Look at California’s AB 3088

Prop 15, also known as the split roll tax, is officially coming to the California vote in November and is the latest initiative to cause a sensation in the commercial real estate industry. Prop 15 would reverse certain elements of Prop 13, California's landmark property tax rule, which limits property tax increases on all real estate assets, both residential and commercial. Prop 15 would open up tax increases on commercial assets, including office, industrial and retail properties, and those assets would be taxed at market value. The election measure has the potential to dramatically increase taxes for commercial owners, according to a new report from Marcus & Millichap.

In fact, the report states that the initiative is the largest proposed tax hike in California history. The revenue from the new tax structure could range from $ 8 billion to $ 12 billion, according to the report by Marcus & Millichap, with the funds being distributed to local communities. Long-term owned properties face the largest potential tax hike. For example, properties that have owned the same property for 20 years could be subject to double taxation.

Currently Prop 13 limits property tax to 1% of the appraised value with a limit of 2% tax increases, regardless of the increase in value. In addition, a property can only be revalued after a change of ownership. These benefits have helped contain potentially rising tax rates even if property values ​​have risen across the state. Prop 15 would negate these benefits for commercial property owners, however. If Prop 15 is passed, commercial properties are revalued at current market value every three years. A handful of exceptions are built into the measure. In addition to residential properties, multi-family houses are also excluded from the measure. Additionally, real estate owners with less than $ 3 million in real estate in California are exempt from the new tax law.

While this measure has a significant impact on property owners, it has an equally severe impact on tenants. Retailers and net renters in particular will be hardest hit by this new law as property taxes will be passed on to tenants. Retailers, especially mom and pop shops, are barely stopping after the economic collapse caused by the pandemic. This tax hike could therefore have a serious impact on small businesses. Many may not be able to make the adjustment. According to the report, net rental structures have expanded in recent years, including in industrial and retail office space. The trend will expose many tenants to significant cost increases.

According to the report, these costs could ultimately fall on consumers as well. While some smaller retailers may have to close in response to the increased costs, those who survive along with medium and large retail chains will pass the increased costs on to consumers through increased costs for goods and services.

The industry has been following the split roll tax initiative for years as it went through the approval stages to get to the electoral action. During this time, many industry experts have spoken out publicly against the initiative and the possible consequences for entrepreneurs and property owners. In an interview about the measure, Vicky Hammond, a client at Coreland Cos., said, that 75% of small business owners will be directly affected by the re-evaluation. These include hair salons, veterinarians, grocers, and sandwich shops. In addition, she estimates the measure will double the current property tax role in the state, with the increased revenue coming entirely from the commercial sector, with residential and residential real estate excluded.

With significant opposition to the measure, Hammond says there is a high likelihood that the measure could fail if a proper marketing and awareness campaign is carried out. As she says, the move would have a negative impact on the California economy for everyone.


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