Real-estate taxes for commercial properties haven’t been reassessed since California Proposition 13 from 1978. More than 40 years after imposing severe restrictions on property-taxes, California voters shivered the state’s commercial real estate industry once again, with a new measure called Proposition 15.
Proposition 15 amended the Constitution of California to adjust the limitations on property taxes – and failed! So, what does that mean for the commercial real estate of this country, and how the proposition 15 pros and cons are shaping the industry?
Tax Increasing for Commercial Property
Commercial and residential property taxes in California were limited by Proposition 13, whereby being fixed at 1% of the original purchase price, with annual increases at 2% per year, maximum. Local governments set those tax rates to fund local services. Prior to Prop 13’s limitations on property tax increases, California property tax rates were based on market value changes.
By declining Proposition 15, the State of California couldn’t pick a new tax rate based on its operating needs, thus keeping the 1% tax rate prescribed by Proposition 13 applicable for a while more. Future property tax increases would be reassessed by each county assessor based on changes in future market value over time.
Direct Pass-Through to Commercial Tenants
Commercial leases are normally structured either as a “triple net” or some form of a “gross” lease. Nevertheless, all forms of commercial leases allow landlords to “pass-through” additional tax increases occurring during the term of the tenant’s lease. In Proposition 15, the increase in property taxes would flow directly to each tenant, so the tax increases triggered by this new Proposition would directly affect the tenants as an excess operating expense and charge over their base year.
When it comes to proposition 15 pros and cons, the only thing we are actually very sure of is that it would be senseless to pass one of the biggest tax increase measures in California history – in the middle of a bad recession that the COVID-19 pandemic has inflicted upon all of us.