Removing Commercial Real Estate from Prop 13 Protection is Simply a Bad Idea for Businesses

Written by:	Hans Hansson
E-mail:	hans@starboardnet.com
Date:	06.15.09

California voters recently rejected state budget measures intended to shore up our declining budget, which has stirred up talk about the need to revisit overturning Proposition 13, particularly with commercial properties. But removing commercial real estate from Proposition 13 protection may have many unintended negative consequences for business owners.

Supporters of overturning Proposition 13 have used Bank of America to illustrate the potential revenue loss to the state of California. They suggest that Bank of America owns many branches that were purchased years ago at rates way below current market value, therefore they are taxed at a rate far below their potential reassessed values. This example is being used to show that there is somehow an inequity that needs to be corrected.

The Bank of America example, however, is misleading. Most Bank of America sites are actually under long-term leases not owned by Bank of America. These properties, like other commercial properties, are constantly being bought and sold leading to property tax adjustments.

Also, for the majority of commercial properties this model is simply not true. Unlike residential real estate, commercial properties tend to trade hands far more often thereby automatically readjusting values for tax purposes. Commercial properties require constant upgrades and tenant improvements to meet the requirements of new tenants. Every time a commercial property owner files for a building permit the cost of these improvements triggers a reassessment, effectively offsetting the effects of the Proposition 13 tax shelter.

In addition, commercial property taxes are not typically paid by the building owner but by the building tenants. Retail NNN leases have the retailer paying these taxes. In office buildings, the tenants pay any increases over a base year for property taxes. With our economy in such a poor state the last thing that retailers and businesses need is the pass-through of more taxes.

I believe that Governor Schwarzenegger said it best, "the voters have spoken and they are not interested in any tax increases". What government should focus on is spending more time living within its means rather than burden our already weak economy with more business taxes.