On November 12, 2019, the State of California’s newest tax initiative aims to hit the most vulnerable commercial property owners, those who own properties worth $2 million or more, basically mom and pop businesses and property owners. The California Schools and Local Communities Funding Act, which seeks to raise money for public schools, if passed, would remove the Prop 13 protection on commercial properties with an assessed value of $2 million or more.
The State of California, the sponsor of this initiative, justifies this new tax by claiming that there are a large number of commercial property owners who are not paying their fair share of taxes, and identify this group as the “largest corporations and wealthiest investors.” However in today’s market, nearly all commercial properties would exceed the $2 million threshold very easily.
Who would be most harmed by this initiative? Small business owners and investors of commercial income properties, i.e. retirees who are living off the income generated by properties they own. Primarily, those who bought properties, post – recession under the $2 million threshold will see a huge increase on their property taxes if this passes.
The Prop 13 protection has been in place since the mid 1970’s, setting property tax values based on the purchase price with only incremental increases, rather than the market assessed value. Without this protection, any commercial property owner whose property is worth $2 million or more will be taxed 1.26% every year on the market assessed value, rather than the purchase price they paid.
For example, a property purchased in 2012 for $1 million would now pay property taxes of roughly $12,000 a year. If this initiative passes in November, that same property, which is now worth well over the $2 million threshold, would be taxed at about $24,000 a year. At Triniti Partners, we refer to the California Schools and Local Communities Funding Act as “the claw-back initiative,” since it is focused on taking away the longtime protection of Prop 13 on income properties and small businesses.
Looking ahead, not only would this new tax harm those who own commercial property, it would also hurt tenants in commercial properties.
In commercial leases, if the lease is drafted correctly, the landlord has the ability to raise the rent on tenants by the percentage increase of their property tax. (If you are a landlord and do not have this provision in your lease, you would not be able to ‘share the pain’ with your tenants, but rather, you would be forced to absorb this huge tax increase).
As a longtime commercial agent and the owner of commercial real estate, myself, my fear is many voters will think that this initiative is justified because “only the largest corporations and wealthiest property owners” – as it is worded – will have to pay. However, this is simply not true.
As a result, that increase would be passed on to tenants who are leasing space in a commercial building – and they, in turn – will pass on this increase to their customers. The Big Picture is that everyone will be paying more for products and services provided in the State of California if this initiative goes through.
Triniti Partners is working to create awareness of this very high cost initiative which would raise taxes at the expense of those who could least afford it. While the public schools in California are a worthy cause to support, The California Schools and Local Communities Funding Act is the wrong way to fund them. We saw a similar measure aimed at raising taxes on residential properties with Measure EE last June.
It’s difficult enough to be in business in California, especially if you are a small businesses. We believe small businesses should be rewarded for trying to live the American Dream in today’s economy and every effort should be made to entice businesses to come to California – not to leave for other states or other countries.
If you are a commercial property owner or lease property for your business and you are concerned about how this tax would affect you, Triniti Partners may be able to help you.
Triniti Partners provides commercial real estate services to north Los Angeles’ landlords, sellers, tenants and buyers of commercial/industrial properties in the San Fernando Valley, Santa Clarita Valley, and southern Ventura County. We founded Triniti Partners with the objective of providing uncommon expertise and value-added service to our clients – and that’s what we are known for.
For more information, please contact Triniti Partners, Inc. at: 818 788-3800, email: [email protected] or visit: www.trinitipartners.com.