Controversial Prop. 15 could change the way Californian businesses are taxed

If passed, commercial and industrial tenants may be on the hook for drastic property tax increases

Controversial Prop. 15 could change the way Californian businesses are taxed

On November 3, Americans will head to the polls to decide on who will lead the country for the next four years. Californian voters will also face decisions on several ballot propositions, one of them being Proposition 15.

Prop. 15 is a “split roll” initiative that would have major implications to the way that commercial and industrial properties are taxed. Since 1978, the value of any Californian property – commercial, industrial, or residential – is based on its most recent purchase price, under Prop. 13. Property taxes are calculated based on that value, and annual increases cannot exceed 2%.

Prop. 15 would roll back these protections for commercial and industrial properties, requiring reassessments every three years, and property taxes would be calculated on fair market value. Depending on how long ago a property was purchased, this could mean drastic increases for some commercial property owners and their tenants.

“I have clients who bought their properties in the 70s and 80s,” said Usman Mohammed, managing partner at Consensus Legal, a real estate law firm in California. “The longer it’s been since the property was purchased, the greater the potential increase in property taxes.”

There is an exemption for properties that are valued at $3 million or less, and it will be phased in over time, lessening the blow to owners and their tenants. However, Mohammed says there’s also an important caveat to the exemption.

“If any owner of a commercial property valued at under $3 million owns another commercial property, and the combined value of those properties exceed that amount, then none of the properties get the benefit of the exemption,” he explained.

Opponents to the proposition say the impact will be devastating for some businesses that are already struggling in the difficult economic environment brought on by the pandemic.

“Most small business rent their spaces and have leases that make them responsible for costs, including property taxes…A massive tax hike may be the final straw that determines whether a business remains open or closes permanently,” wrote Jerry Sanders, president of the San Diego Regional Chamber of Commerce, in the San Diego Union-Tribune.

Mohammed told MPA that if Prop. 15 passes, some tenants could be facing property tax increases of up to 5-times more.

“In California, we’re seeing an increase in landlord-tenant issues, as tenants struggle to make their rental payments,” he said. He recommends brokers advise tenant clients about Prop.15 and the possibility their property tax obligation could increase substantially.

If the initiative passes, it’s estimated state revenue could increase by up to $12 billion, which is earmarked to fund local government schools and community colleges. Supporters of the initiative say school and community funding is much needed, and some businesses have been unfairly benefiting from Prop. 13.

A recent statewide poll by Berkeley’s Institute of Governmental Studies found almost half of Californian voters supported Prop. 15, while 34% say they will oppose it. 17% are still undecided.