Prop 13 Tax Reform to Skyrocket Taxes on Owners of Commercial Properties

California commercial property owners need to be aware that proposed reforms to California Tax Code could result in significantly increased property taxes on their holdings.

In 2020, California voters will head to the polls in a presidential election that will also ask them to approve the “California Schools and Local Communities Funding Act,” which has the purported goal of funding education and local government.  The measure is expected to pass easily, so you should be prepared.

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The California Schools and Local Communities Funding Act aims to fundamentally alter the protections that Proposition 13 afforded owners and create a split roll tax system, which treats commercial and residential property owners differently in terms of tax burden.

Proposed Changes

There are no proposed changes to residential property taxes, but commercial properties will see a dramatic change that could cost owners thousands of dollars. Under the proposed measure, commercial properties would be reassessed at a minimum once every three years, though the maximum tax rate will remain at 1% of the assessed value.

Outlook

These reforms will hurt California commercial and industrial property owners. Longtime owners will see the most significant impact. In a case study involving an 82,000 square foot industrial property purchased in 2003, the proposed changes would increase the owner’s taxes by more than 100%!

While some of the increase would be passed on to tenants or consumers, most owners will not be able to absorb the drastic increases in operating costs. This will substantially devalue properties by increasing vacancy rates and reducing lease rates. Exemptions exist for small businesses and owner-users with properties valued at less than $2M, but for many commercial property owners, the proposed reform is detrimental.


For more information on how Prop 13 tax reform could impact your commercial real estate holdings or to receive a complimentary evaluation of your property, contact a member of our Investment Services Group today.