I wanted to add a little more about this “loophole” I discussed earlier. For starters, let’s look at how residential properties are transferred. It’s a relatively simple transaction, leaving the banks out of it, as the mortgage is a deal between the purchaser and the bank, it really is a two parties, simple transfer. The purchaser pays the seller for the parcel. It’s easy to see that there was a transfer there.
But commercial properties are far more difficult. There are several scenarios where it becomes difficult to answer what seems like an easy question: Was the property transferred? The transfer triggers a reassesment, and usually higher revenue for that county. Let’s consider a couple of those situations, but these are not the only tough questions on when to reassess:
1) Purchase of a Corporate (or other legal) Entity
Here, the question is what was sold? Did the acquiring company merely purchase stock? Or should the property be considered as having sold since there is a new owner? Take the sale of the Equity Office Group. I used to work in one of the Equity Office buildings in fact. In 2007, the Company was sold to the Blackstone Group, a private equity firm. Yet, Equity Office (EO) was a vast company, and sold for $39 Billion. So, was the purchase of EO a transfer of the properties in California? Did Blackstone simply purchase stock in EO, or did they purchase a bunch of properties? If so, what is the value of the properties? How do they attribute money for each of the buildings that EO owns?
This question is still open for debate. Blackstone made some of this a bit easier by selling off some of the properties, but a complete resolution on these kinds of cases is really tough for the affected assessors.
2) Partial Transfers
There are a few partial sales in residential property, but it is far more common in commercial property. Real estate investment trusts (REITs) allow several owners to own a building or a group of properties. What if one of the large participants in the REITs leave? You might have a new majority owner of the property, yet is there a transfer?
These cases end up in court frequently, and often the owners of teh property can vastly change without triggering a transfer and a reassessment of the property. Homeowners generally can’t avoid these reassessments, and besides the fact that commercial properties sell less often, this slight of hand is why commercial properties pay so much less today in comparison to residential properties.
The Facts Speak for Themselves
Phil Ting is fond of citing a statistic:
30 years ago in San Francisco, commercial property owners contributed the majority of property taxes, 59%, and residential property owners contributed 41%. Today, we see the reverse: commercial property owners contributed just 43% of property taxes in 2008 while residential property owners contributed 57%. (SF Chronicle 5/21/09)
That statistic should be somewhat shocking to voters who were around to remember the 1978 vote. Looking back at the information from that vote, you’ll see the advertising and ballot argument focused on keeping poor granny in her house. Yet Prop 13 was always a project of the corporations and the landlords. Howard Jarvis was whiling away his time as the lobbyist for Los Angeles Apartment Owners Association, incidentally where the Yes on Prop 13 HQ was located, when he emerged from obscurity. The Apartment Owners funded Prop 13, and commercial property owners will be sure to protect it from attack.
If Prop 13 is to be reformed, it must come from homeowners and renters that are being slagged with higher taxes. It should come from those who use services, like our K-12 education system, higher education, and the state parks. It needs to come from a well-informed populace that sees Prop 13 for what it is: A Corporate Power Grab.
This discussion is not to say that the “loophole” is necessarily the biggest issue relating to split roll. It isn’t, it is just one way that the corporations have found to use the system that Prop 13 put in place to avoid paying their fair share.
….let’s also help the voters remember that prior to the ascension of St. Ronnie to Governor of CA corps. paid 75%, more or less, in income taxes, and everyone else 25%. Same deal, same instigators.
The meme of ‘it’s your money you should be able to keep it…’ which the ‘tax cutters’ have used so effectively must be replaced with ‘everyone should pay their fair share!’.
People should be informed as to the government services corporations use as opposed to private citizens.
A detailed per capita, of employees at any particular site, of say Chevron in Richmond, analysis would, I believe, be a real eyeopener. The additional fire department costs must be astounding let alone the impact on the community’s health which is most certainly born by the state, city, and county not Chevron. This is an argument the public can follow and leaves lots of room for piling on to the corporate shirkers who live amongst us like bloated ticks on a gradually weakening dog.
Perhaps several instances such as this could be analyzed and the results ‘leaked’ to the press?
I’d also like to see ‘court costs’ analyzed. That would be interesting.
When I took the Cal Bar, I thanked every deity that I could conceptualize that our real property essay question was a landlord/tenant warranty and breach issue – issues of land sales and transfers are often inscrutable even to lawyers.
I’m still scratching my head trying to figure out how to reassessment for buildings owned by one-asset “holding companies” where there is no new recordation
So how do you handle Prop 13 for businesses? I hate how much Prop 13 has hurt the state as a whole, but there are a small category of people who are still entitled to protection from California’s roller coaster real estate market, namely people who have owned a family home in an area that was once modest but is now extremely wealthy, that sort of thing. For instance, if you were to buy a condo in LA’s Koreatown today and 20 years from now it became an extremely wealthy neighborhood (entirely possible, maybe even inevitable given its desirable location and diversity) How do you protect those people without allowing for all this abuse?
I guess I would flip the presumption around, given that “owner-occupied” and “residence” are easy to define and don’t require you to define a “transfer.” Instead of only triggering a reassessment upon a new land transfer recordation, you’d have to instead create a presumption that a piece of property should be reassessed yearly unless the owner of the property can provide proof that it’s an owner-occupied residence. In order to prevent excess paperwork, is that something that the Franchise Tax Board could handle? I don’t have an adequate answer to these questions.
Prop 13 is only triggered if there is a change of ownership above a minimum threshold (33% IIRC) over X period of time (1 year IIRC). So most commercial property sales in CA are structured as follows:
–Reality: Corp A sells Building to Corp B on 7/1/09 for $3 million. Corp A has owned Building since 1978, when it was assessed at $100K, and has faithfully paid $1,000/year (plus 1%) since then. The sale should cause Building’s property tax to be reassessed at $30,000, but instead Corps A & B engage in Legal Fiction.
–Legal Fiction: Corp A transfers Building to a Holding Corp with 3 shares of stock; an exception in Prop 13 somewhere permits intracorporate transfers, so no reassessment is triggered. On 7/1/09, 1 share of stock is transfered to Corp B; on 7/1/10, 1 more share; on 7/1/11 the final share is transferred to B. (I assume that there are escrows and safeguards built in somewhere to ensure that A doesn’t play games with transfers.) Thus, the property is never “transferred,” never reassessed, and Corp B goes on paying $1,000/year instead of $30,000/year.
Full disclosure: I’m a lawyer with some limited real estate practice but I don’t do commercial transactional work. I have heard that failing to structure the transfer as above constitutes legal malpractice.
…call this a “movement to strengthen Prop 13.” seriously.