Changes to Proposition 13 Could Cause Commercial Property Owner Taxes to Increase by $12 Billion

California’s landmark property tax law may be facing a change. An effort to repeal protections of the property tax-cutting measure known as Proposition 13 for commercial real estate has qualified for the state’s 2020 ballot. [1]

The measure qualified for the ballot in October after proponents collected more than the 644,000 signatures required by state law. Currently Proposition 13 caps annual property tax increases on California properties at 2 percent, with valuation reassessments allowed only when properties are sold.

Commercial real estate owners and developers are already warning that hundreds of companies could leave California, taking thousands of jobs with them, to avoid paying higher state taxes — and that could drive up commercial vacancy rates, discourage development and alter the economics of real estate investment in the state. Meanwhile, backers of the measure project it could raise as much as $12 billion annually for California schools and colleges, affordable housing, emergency services and local programs that they argue have been chronically underfunded for decades.

This proposed ballot measure, which backers are calling “Schools and Communities First” would amend the state constitution to end Proposition 13’s restrictions on taxing commercial and industrial properties, creating a so-called “split-roll” property tax system. Single-family homes would retain their current tax rate under the amended proposition. A split tax roll would probably mean taxes on residential property would remain limited under the current system, while commercial real estate would be subject to annual tax increases greater than 2 percent. Commercial Real Estate experts weigh in:

“This would create a huge tax hit for commercial property owners as well as increased uncertainty,” – Kevin Ivey, chairman of the corporate, state and local subcommittee for National Association of Industrial and Office Properties, known as NAIOP.

“That’s where the money is and that’s where the politicians will come looking, so I think we probably will have a split tax roll,” – Hamid Moghadam, chief executive of San Francisco-based Prologis, the largest warehouse and distribution property owner in the world.

“The way the law is now, businesses can predict with certainty what their property taxes will be in the future.” “This initiative discriminates against California businesses. It could give them yet another reason to move out of the state.” – Jon Coupal, president of the Howard Jarvis Taxpayers Association.

AS A COMMERCIAL PROPERTY OWNER, WHAT DOES THIS MEAN TO YOU? As values have gone up dramatically in the past 6-7 years, a PROPERTY OWNER that acquired a property as recently as 2010, or before 2005, could see their property taxes DOUBLE should this measure pass.