With the Democrats now running the show in Sacramento, local business people are bracing for changes to Proposition 13. Some are concerned their property taxes will skyrocket.

One of them is Richard Otterstrom, who owns six apartment buildings in Los Angeles. He fears that attempts by state lawmakers to change California’s landmark property tax law will finally succeed and hurt him badly.

Otterstrom, who is also president of the Apartment Association of Greater Los Angeles, is especially concerned about any bills that would trigger property tax reassessments. He has owned three of his buildings for more than 30 years, so a reassessment to current or recent market prices would be devastating.
“If any of these properties were reassessed, my property tax bill could go up fivefold or even tenfold,” Otterstrom said. “And these properties are rent controlled, so I’m forbidden by law from passing on any tax increases to my tenants. So I’d have to absorb the entire cost.”

Several bills have already been introduced or are in the works that would change Proposition 13, including one that would prompt more frequent reassessments of commercial properties and others that it would make it easier for voters to pass parcel taxes.

Otterstrom is not alone in his concern over the latest round of attempts to tinker with Proposition 13, the 1978 measure that set the property tax at 1 percent of a property’s assessed value, capped tax increases at 2 percent a year and also prevents tax reassessments until properties change ownership.

Business owners and business groups say Proposition 13 has made property taxes predictable and competitive with other regions of the country. They contend that changing the law will destroy that certainty and add to a significant business tax burden in the state.

“Once again, the state is looking to property owners to bear additional burden of paying any taxes,” said Phil Jones, owner of Coldwell Banker Coastal Alliance in Long Beach, which represents both residential and commercial real estate clients.

Tax windfall?
But advocates for changing Proposition 13 say the law has shortchanged the state out of billions of dollars in money each year, especially from commercial property owners. They point to studies saying that homeowners now provide nearly 60 percent of property tax money, a switch from pre-Proposition 13 years, when commercial property owners paid nearly 60 percent.

The liberal-oriented California Tax Reform Association, Democratic lawmakers and their union allies have made repeated attempts over the years to break off commercial properties from Proposition 13, a process referred to as the “split roll.” They have also tried to pass bills requiring more frequent reassessments of commercial properties. But those attempts have all been stymied by intense opposition from Republican lawmakers and their business allies.

But this year could be different. Democrats now have a two-thirds supermajority in each house, giving them the ability to place changes to Proposition 13’s tax rates on the ballot without Republican support.
The proposition still enjoys wide popularity in the state. But a recent poll from the Public Policy Institute of California showed 58 percent support for breaking off commercial properties from Proposition 13 protections.

Split roll
Several bills have already been introduced to change Proposition 13. Two bills would lower the threshold for voter approval of parcel taxes for schools and libraries to 55 percent from the current two-thirds.
Many also expect a split roll proposal to be introduced that would remove Proposition 13 protections from most commercial properties. Even though no one had announced such a proposal as of late last week, it’s still causing considerable angst amongst property owners.

“It’s scaring the bejesus out of a lot of our members,” said Jim Clarke, chief executive of the Apartment Association. “Especially concerned are those members subject to rent control in Los Angeles, West Hollywood and Santa Monica who cannot pass any tax increases on to their renters.”

Some business owners are also concerned. Janine Montoya, co-owner of Valley Aire Inc., an air-conditioning and heating service company in Newbury Park, said that if a split roll passes, her landlord would most likely pass on any property tax increases to her company.

“We’ve worked hard with our landlord to get a discount on our lease,” Montoya said. “A split roll tax increase would undo that and it would be another nail in the coffin for doing business here in California.”

A proposal causing immediate concern would require more frequent reassessments of commercial properties. Last month, Assemblyman Tom Ammiano, D-San Francisco, said he plans to reintroduce a bill this month similar to an earlier one he proposed three years ago. The aim is to alter the definition of a property ownership change, thereby triggering more frequent reassessments.

Under current law crafted by the Legislature shortly after Proposition 13 passed in 1978, a property ownership change takes place when a single owner buys more than 50 percent of a property. But the Tax Reform Association and other Proposition 13 reform advocates claim corporations get around this law by structuring real estate transactions in partnerships and other arrangements so that no single entity ends up owning more than 50 percent of the property.

They point to a high-profile case roughly 10 years ago in Northern California: E&J Gallo Winery of Modesto bought 1,765 acres of vineyards in the Napa Valley region. Instead of recording the purchase as a single transaction, 12 Gallo family members bought individual shares, none exceeding 50 percent. That meant E&J Gallo was able to keep its previous assessment level and save an estimated $700,000 a year in property taxes.
“Entire properties are sold without reassessment, ownership changes occur frequently that do not generate reassessment and it is a simple matter to avoid reassessment,” said Lenny Goldberg, Tax Reform Association president, in an email to the Business Journal.

Ammiano’s bill is expected to ax the 50 percent rule and make other changes to ensure that when a commercial property ownership transaction occurs, a reassessment is triggered.

The major concern from real estate and other business groups centers on whether any change in ownership – such as the buying and selling of shares in a corporation or the selling of a minority stake in a real estate partnership – would trigger a reassessment under the bill Ammiano plans to introduce.

“If the bill is worded in such a way as to sweep in the trading of shares on the public markets or transfer of minority stakes in properties, that could have a devastating impact,” said Rex Hime, chief executive of the California Business Properties Association. Hime said that was his group’s biggest concern about Ammiano’s 2010 bill.

The impact of such legislation would spread far beyond major corporate property owners, according to John Kabateck, executive director of the California chapter of the National Federation of Independent Business.
“Many small-business owners own their own buildings and most others rent and would be indirectly impacted through higher rents or leases,” Kabateck said.

Parcel taxes
Meanwhile, Sens. Mark Leno, D-San Francisco, and Lois Wolk, D-Davis, have introduced bills to lower the threshold for passing local school and library parcel taxes to 55 percent from the current 67 percent. That would repeat the change that was made for school bonds in 2000.

The big concern for business property owners is the cumulative effect of more parcel taxes passing.
“Each individual parcel tax wouldn’t be too much of a burden, but if a whole bunch more would pass, that would be quite a burden,” said Otterstrom, the L.A. apartment owner.

Business owner Montoya said more parcel taxes would also hurt her indirectly.

“If homeowners have to pay higher or more parcel taxes, they would have less money to spend on their heating and air-conditioning systems and that would have a negative impact on our business,” Montoya said.

Crossposted on Los Angeles Business Journal