There is a statewide campaign afoot that wants to eliminate Proposition 13 gradually by first trying to take away its protections for the timing of property tax reassessments of commercial properties.
The Miramar Hotel in Santa Monica is being used as a high profile symbol of why Proposition 13 should be revoked for commercial properties. But maybe the Los Angeles Times Building in downtown Los Angeles and billionaire owner Sam Zell is a symbol of a much bigger alleged tax scofflaw than the Miramar Hotel and billionaire business owner Michael Dell.
Proposition 13 is the 1978 law that changed the rules from required annual property tax reassessments to reassessment only when property re-sells or is substantially upgraded. Proposition 13 also provided that the base value of all property would be taxed at a 1 percent rate plus up to a 2 percent upward or downward adjustment each year for inflation or deflation.
From Dell to Zell
The Los Angeles Times has been running a series of articles about alleged Proposition 13 property tax loopholes exploited by billionaire Michael Dell’s $200 million purchase of the operating company of the Miramar Hotel in Santa Monica in 2005. Dell allegedly avoided a $1.1 million property tax increase by switching from taking title to the property to buying a 91.5 percent interest in the business instead.
All this finger pointing diverts attention away from the fact that the Chicago Tribune –- parent company of the Los Angeles Times — reportedly avoided all ongoing Federal and state taxes when real estate mogul Sam Zell bought the Tribune companies in 2007 for about $8 billion. Zell bought the Tribune newspaper and broadcast businesses for 40 times what Dell bought the operating company of the Miramar Hotel for.
How did the Tribune escape taxes? It changed the form of ownership of the LA Times and its other affiliated companies from a corporation to a Subchapter S Employee Stock Ownership Plan. By doing so it reportedly also was able to save the pension plans of its employees.
Here is how the LA Times itself reported the particulars of the Tribune’s sale to Zell in 2007 two years after Dell purchased a controlling interest in the operating company of the Miramar Hotel:
“The transactions announced Monday (Sam Zell’s purchase in 2007) would create hundreds of millions of dollars in tax benefits for the company — possibly eliminating its tax liability entirely. Its effective federal and state tax rate for 2006 was 34.5%, resulting in $348 million in taxes on $1 billion in operating income.
The key aspect of the deal is the conversion of Tribune into a Subchapter S corporation. Such entities pay no corporate income tax but must funnel all profit directly to shareholders, who then pay taxes on those distributions. In this case, the sole shareholder would be the ESOP (Employee Stock Ownership Plan), which is itself untaxed. The combination of benefits may mean that the recapitalized Tribune would be essentially tax-exempt, a boon to a company with a need to harvest every dollar of revenue.”
Taxes Shifted Not Avoided
So the Times reported that Dell avoided $1.1 million in speculative property taxes in 2005. This is two years before the LA Times-Chicago Tribune escaped $348 million in actual annual Federal and state taxes on the sale of its assets.
In the Dell deal for the Miramar Hotel the property tax assessment was unchanged. But Dell and his wife had to pay increased Federal and state income taxes, state corporate taxes, and any business taxes on its $200 million purchase of a 91.5 percent interest in the hotel operating company.
In the Zell deal for the Tribune the tax liability was shifted from the corporation to its employees.
In both deals, taxes were not totally avoided as much as they were shifted.
It is reasonable to assume in Dell’s deal that paying all Federal and state taxes on $200 million would have vastly exceeded the 1 percent base property tax rate on an assumed $200 million purchase of the real estate.
In the Dell deal property taxes would be deferred until the land was redeveloped for a new hotel in 2015 that would generate about $4 million in additional local property taxes per year, create 150 new permanent union jobs, and generate about $12 million a year in new taxes and fees for the City of Santa Monica during construction.
In the 2007 Zell deal, property taxes remained about the same for the LA Times, and the “big corporation” of the Tribune avoided $348 million in Federal and state taxes; but retirement plans for Tribune employees were salvaged.
Neither Zell nor Dell used loopholes under Proposition 13 to dodge paying taxes. Property taxes were paid and income, corporate, and partnership taxes were shifted rather than escaped. Neither Zell nor Dell were tax scofflaws.
If Zell Sells to Koch Would There be a Property Tax Reassessment?
The parent company to the Chicago Tribune is now doing better financially and is no longer in pre-bankruptcy. But it still needs to pay off creditors who kept them afloat during the managed depression from 2008 to 2013. This has raised a politically controversial issue of the LA Times and other assets of the Tribune possibly having to be sold to the conservative Koch brothers to pay off about $1 billion in accrued debts.
Unions, public pension funds, and local liberal politicians have opposed any such sale of the business to the Kochs, who allegedly might control the paper for different political interests than the Times today.
When the LA Times sold in 2007 the building had to be sold with the newspaper and broadcast businesses of the Tribune. As reported in the Jan. 28, 2013 issue of “The Wrap” News:
“And it may be an opportune time to sell a prestigious title like the L.A. Times. Before Tribune was bought by Sam Zell in 2007 and became mired in bankruptcy, the paper had garnered the interest of local billionaires Eli Broad, Ron Burkle and David Geffen. (At the time, the property could not be sold separately from Tribune Company because of the tax implications.).”
But now that the Tribune has emerged from 4 years of bankruptcy proceedings, its property and business assets can be uncoupled.
If maverick real estate tycoon Sam Zell re-sold the Tribune today he might retain the property and just sell off the businesses.
This would be nearly the same only in reverse of what Dell did in 2005 when he bought the Miramar Hotel business but not the property.
In both the cases of Dell’s 2005 purchase of the hotel business and in the rumored re-sale of the Tribune Company by Zell, there would be no likely tax reassessment and thus no increase in property taxes.
Paraphrasing former Democratic Party U.S. Senator Russell B. Long: “A tax loophole is something that benefits the other guy. If it benefits you, it is tax reform.”