Fight Looms Over Prop. 13′s Biggest Scam

Jun27

Jerry Brown’s not-so-subtle warning that the failure of a budget deal will lead to a liberal-labor initiative attack on Proposition 13′s gaping corporate loophole had two immediate and interrelated impacts:

a) it sanctioned debate about amending the sacred cow tax cut;
b) it made Joel Fox’s head explode.

“I would expect there will be efforts to accelerate the reassessment of commercial property tax,” the governor said in San Francisco last week, comments recorded and duly recounted by the ubiquitous Anthony York

While Brown characteristically left himself plenty of wiggle room to claim that he wasn’t endorsing such a move – perish the thought! – he sent a clear signal that if corporate types can’t pressure a couple of Grover-bot Republicans to back his budget play, they can expect a ballot box assault on the lucrative property tax dodge from which they’ve benefited since Howard Jarvis shot a moon.

It’s a safe bet that most voters don’t truly understand, or even know about, the full extent to which corporations and other commercial property owners for three decades have systematically shifted California’s property tax burden onto residential homeowners – and away from themselves.

What regular folks do know, however, is that they don’t like the idea when they learn a little about it: while 55 percent of Californians still say Prop. 13 is a good thing, 58 percent in a 2009 PPIC poll said they would favor taxing commercial property at current market rate by using a split roll assessment system.

Just think what they’d say if they knew how outrageous the current scheme actually is.

A must-read report: A little-noticed, but extremely important 2010 study by the California Tax Reform Association provides hard evidence of how much Prop. 13 has benefited those who own and operate commercial property – bank and other office buildings, shopping malls and industrial parks, for example –  at the expense of homeowners.

Sure, the tax group is packed to the rafters with bleeding hearts, but their extremely detailed report on this matter is based squarely on the most neutral, bottom line information available from the Board of Equalization and assessors around the state.

And those numbers show that in 55 of 58 California’s counties, there has been a significant shift in the proportion of local property taxes paid over the past 30+ years, to the substantial detriment of those single family homeowners whom Prop. 13 absolutists just love to demagogue are the biggest beneficiaries of their iconic tax cut:

The data is consistent throughout the state: in virtually every county in the state, the share of the property tax borne by residential property has increased since the passage of Proposition 13 in 1978, while the share of the property tax borne by non-residential property has decreased.

Some examples: in Contra Costa County, the residential share of the property tax went from 48% to 73%. In Santa Clara County, the residential share went from 50% to 64%, despite massive industrial/commercial growth. In Los Angeles County, it went from 53% to 69%. In Orange County, it went from 59% to 72%.

And there is no counter-shift in any counties at any level of significance. We looked at the data from numerous angles but different approaches only led to marginal changes in the numbers and did not affect the trends. We also looked at whether employment growth—an indication of the commercial/industrial sector—outstripped residential population growth, as it did in many counties, but the burden still shifted away from non-residential property, as it did in San Francisco (56% to 67% despite limited population growth and substantial employment growth).

With regard to the question: how has the burden of the property tax changed in the last 30 years? The answer is: it has shifted markedly away from the commercial sector and towards the residential sector.

How the scams work: The report also discloses some of the legal sleights-of-hand commonly used to avoid triggering the “change of ownership” standard of Prop. 13 that automatically happens whenever some middle class schlub buys a house – but often seems miraculously not to occur when a shopping center gets shopped:

While we have long contended that the law is inapplicable to the complexity of commercial property ownership as well as loophole-ridden, we have made that contention specific: we have found major changes of ownership in major properties which have gone without reassessment.

The ones we examined are predominantly those of private equity buyouts, corporate purchases of companies, and bank mergers which have avoided reassessment.

In particular, what we have found is a tax system which is inconsistently applied in many counties. We believe that there are many properties, particularly the banks and other commercial properties, which should have been reassessed but have not been, and found that some counties have assessed these properties while others have not.

Our legal analysis suggests why this inconsistency occurs: the law is a mess and impossible to enforce. We examined records and cases from the Board of Equalization which demonstrate incredible complexity used to avoid taxes, complexity which should have nothing to do with the assessors’ job, which is to determine property valuation (emphases ours).

All against all: Not surprisingly, the immediate response by Prop. 13 ideologues to Brown’s comments raising the specter of a statewide battle over the split roll issue was to sputter that the end of the world is near.

“A reckless threat against Prop. 13” our friend Fox, for example, thundered about Brown’s oh-so-mild comments.

To be sure, Fox’s concern about short-term sagging real estate values, cratered by the Wall Street greedhead recession, is legitimate, and his question about whether split roll advocates would include apartment houses in any initiative – are they residential or commercial property? – is a shrewd one.

But it speaks volumes that Fox doesn’t bother to acknowledge, let alone seek to counter, the plain facts of how much commercial property owners have benefited from Prop. 13 over the long-term – a 33-year period that has spanned several previous recessions.

If a split roll initiative does end up on the ballot, we look forward to lots of ginned-up scare stories from his corner about evil union bosses driving gramps and grandma from their ancestral homes.

Recklessly throwing around that argument, it must be noted, belies the truth that no one on the left, or anywhere else in the state, has the slightest intention of messing with Prop. 13′s protections of  family homeowners.

Of course, it’s a helluva’ easier to toss out such canards than to defend with a straight face the  sweetheart deal which corporate interests have enjoyed for decades thanks to the Spawn of Jarvis.

But that’s an argument they better get ready to make.


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There are 8 comments for this post

  1. avatar OC Progressive says:

    Wait just a second. Hold the horses.

    Do you mean that billionaire Donald Bren might have to pay more money in taxes on the property that he owns through the Irvine Company? Why should billionaires have to pay property taxes at the same rate as some schlub who owns a condo in Aliso Viejo?

    That’s just wrong. Damn it, you Prius-driving wealth-redistributing socialists. Billionaires and corporations are people too. And they bought the government fair and square.

    • avatar Ernie Konnyu says:

      The OC Progressive has it wrong since it is not the tax rate that would change under the most frequently mentioned proposed revision on commercial property. The tax rate would stay the same, around 1.2% per annum, but the annual current market rate value for property would be massively increased the first year (to make up for the 18 years of 2% per year limits) than annually at market.

      The origin of this issue is that business property sales, that is turnover, occurs much less frequently than homeowner property sales. So, as an example, business property turnover is at about a 19 year frequency. Because of the 2% per year increase limit in Prop. 13, property does not go to full market value until the property is sold at the 19th year point on average.

      Under the most frequently mentioned Liberal revision, the annual 2% increase limit on commercial property would be changed out to market value increase limits yielding lots of new tax dollars and making business more expensive in the already very expensive California.

    • avatar OC Progressive says:

      Blah, blah, blah Ernie.

      Donald Bren hired lawyers and spent two years battling Orange County until they reached a settlement on the value of the land the last time ownership changed in 1985. It was a pretty good investment that cost the county 2 million in legal fees.

      Now Bren’s 12 billion real estate empire includes raw land, 40 million square feet of commercial office space, 44,000 apartment units, 3 resort properties, 3 golf courses, 5 marinas and new housing communities in Orange County, San Diego, Los Angeles. And he is paying taxes on an adjusted basis of around 5 billion instead of 12 billion.

      The shlub with the condo in Aliso Viejo is paying at the same base rate on the market value, plus paying Mello-Roos fees and paying his condo association and AVCA for his streets and parks, which never got transferred to the city.

      The effective rate for Bren is about 40% of the effective rate for the schlub, even not counting the Mellos Roos fees, the two HOA fees, and the tolls on the road that he takes to commute someday.

      Would Bren be forced to push through a huge rent increase on all his tenants, or would the market determine the rent and have Bren pay another 70 million a year in property taxes?

      Well maybe his tenants would pay a little more because the money flowing into schools and local government might benefit them directly. With Bren, if he paid his fair share, he would probably just get richer.

    • avatar jalford says:

      I can’t believe it. I actually kind of half-assed agree with Ernie Konnyu (except for the gratuitous Liberal-bashing). I’ve been hearing the guy since the Reagan administration and, for once, he makes sense. I must be getting old.

  2. avatar tonyseton says:

    Excellent and important piece. Thank you.

  3. avatar bogey says:

    The initiative on the split-roll should occur independently of the current budget discussion. There is no reason commercial properties shouldn’t be reassessed upon change of ownership – any change in ownership, just as residences are. And not just on change in ownership, but regularly. Of course, should lease rates/rents decline, the building could be reassessed lower as well.

    Also, the apartment question is just a smokescreen. Buyers of apartment buildings view them the same way any buyer of a commercial building views his purchase. As an investment driven by rental return converted into a cap rate.

  4. avatar chrisfinnie says:

    Ernie is right that the rate wouldn’t change. I’m not entirely sure about the claim of a “massive” initial increase though–given the recent and steep declines in commercial property values.

    I am more sure about the most frequently mentioned liberal proposal though as I heard a presentation on it from the SF assessor a few years ago. The issue, as the Tax Reform Association correctly notes, is that there are many ways corporations transfer assets like real property that don’t trigger a reassessment under prop 13. The split-roll folks want to change that and do appraisals on a regular basis to overcome that issue.

  5. avatar ocbabe says:

    There’s another tax that commercial property owners avoid by the slight of hand over dodging change of ownership: Documentary Transfer Tax.

    If there’s no Preliminary Change of Ownership filed with the assessor, nothing comes over to the recorder side, which is where the documents are recorded and the tax collected.

    Documentary Transfer Tax statewide is $0.55 per each $500 of the sale price or value of the real property being transferred. It is due at the time of recording on any transfer of real property unless an exemption under the California State Revenue and Taxation Codes is provided.

    It’s a huge problem up and down the state. Estimates are something in the order of $10 billion a year not being paid. Money would go to counties, schools and other taxing entities.

    Thanks for continuing to fight the good fight! :-)

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