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Since 1978, California has used the Proposition 13 tax system. Under the current property tax system, all property types, — whether residential, commercial or industrial — are initially taxed at a maximum rate of 1% of the purchase price for the property. Then, annual increases are equal to the rate of inflation, with a maximum of 2% per year — very minimal increases.
However, Proposition 15, an updated amendment, is now up for a vote and could eradicate Proposition 13.
What Is Proposition 15?
Proposition 15 is an amendment to the California state constitution. Specifically, it seeks to require commercial and industrial properties to be taxed based on their current market value, as opposed to their original purchase price. If passed, this bill would drastically increase property taxes for many properties throughout California. That’s because the current market value of most properties is much higher today than their original purchase price.
Notably, many landlords initially purchased property years ago — at a time when the market value was far lower than its current value — and even before considering inflation.
For example, landowner “X” purchased a commercial building in 1991. At that time, the purchase price was $350,000 and, therefore, the property taxes for landowner X’s building is based on this price. But, in 2020, that same commercial building is now worth $3.5 million. Per Proposition 15, this would now be the amount that the property tax would be based upon.
However, there are a few exceptions to Proposition 15:
- It does not apply to owners of properties with a total value of $3 million or less.
- Neither residential nor agricultural properties would be included in this proposition.
- To be exempt, businesses would have to meet all of the following criteria: be independently owned and operated; own the property; and have 50 or fewer employees. This is because the tax hike is not intended to have any effect on smaller businesses, but instead is focused on larger businesses and corporations.
Lawmakers estimate that the tax hike would generate a significant increase in funds — anywhere between $6.5 billion and $11.5 billion per year. And, in an effort to support local communities, the additional tax income would primarily funnel back into local government and schools.
Meanwhile, although this tax is aimed toward larger businesses, landlords could pass some of these implications on to their tenants, which could potentially be catastrophic during the current state of the world.
What’s more, tenants who are generally responsible for paying a portion of the property’s real estate taxes would also feel the effects of this tax bill as their monthly rent and additional rent would increase. Therefore, should the law pass, it would be vital for business owners to reassess their leases.
California landlords and residents will have to wait until November 3 to find out whether the amendment passes. Until then, we can expect the contentious discussions to continue, especially considering the aftermath of COVID-19.
Taso Pardalis is a founding partner of the Law Offices of Pardalis and Nohavicka, a leading full- service NYC law firm with offices in Manhattan, Queens and WeWork. Taso may be a well-known attorney with many cases making headlines in major media outlets, but at heart, he is a true entrepreneur that believes in supporting the small business community. His areas of concentration are: Intellectual Property, Trademarks, Corporate, Business Law and Real Estate Law.
Real Estate and Corporate Transactions Attorney Nataly Goldstein is a graduate of Cardozo School of Law, where she served as President of the Real Estate Law Association. She is experienced in both residential and commercial real estate transactions, and she prides herself on guiding her clients through every step of their transaction, whether they are first home buyers or franchised businesses.