Two California senators, Loni Hancock and Holly Mitchell, introduced a constitutional amendment June 10 to change Proposition 13 for commercial real estate owners. This amendment may cause businesses to move out of state, job losses due to increased property taxes, and commercial and industrial real estate markets to return to recession levels or worse. The purpose of this amendment is to throw more money at our failing school systems and repair our ailing infrastructure. This is a terrible idea.
Proposition 13 was passed by the voters in 1978 and protects all owners from rising tax rates until they sell or remodel their property. This new amendment will increase taxes to current property values only on commercial and industrial properties.
Proposition 13 currently requires a 2 percent annual increase in the real estate tax levied on a property. For instance, if property taxes in one year were $10,000, the taxes will increase to $10,200 the following year unless the property was remodeled or sold.
This new amendment will increase taxes to astronomical levels due to current commercial and industrial real estate prices. For example, a property purchased in 1990 that cost $2 million will have an annual property tax of 1.2 percent, which is $24,000. This same building is now worth $7.5 million today. The proposed bill would require the owner to pay an annual tax rate of more than $90,000 – nearly four times as much.
This might be a rare example of a tax increase, but it does demonstrate how potentially damaging a split tax roll will affect business. It should be considered that commercial real estate typically is held for long periods of time and that it is sometimes handed down from generation to generation.
Every commercial lease has a pass-through provision for increased expenses in the contract; therefore, tenants will bear the cost of additional taxes. This bill will add huge costs to all commercial real estate owners and tenants. Those tenants might have to lay off employees, raise prices or move out of California all together. Furthermore, this proposed increase in taxes will push the value of commercial real estate down and it will surely send the California real estate market into a tailspin.
The thought of huge tax increases on commercial real estate will depress real estate values. Sure, the taxes will go down with the value of the property; however, the mortgage market could collapse in California, since the value of the real estate will be dramatically depressed. Real estate investment trusts will be devalued and might cause major calamity in the securities markets.