Everything You Need to Know About Prop 13

As we approach Bisnow's Construction & Development and the Battle of Prop 13 event March 5 at the Millennium Baltimore in DTLA, we brought in Kevin Ivey, senior manager at KPRS Construction and member of NAIOP's SoCal Legislative Affairs to walk us through the issues. Here's what you need to know.

Foundation: Prop 13 was passed by 63% of voters in 1978 to control tax hikes on real estate.

The Basics: Prop 13 allows that property is reassessed only at the time of sale and it sets the tax rate at 1% of the sale price. The tax can grow at no more than 2% a year, providing stability for property owners.

The Good: The law has made it easier for homeowners and commercial property owners to keep a handle on real estate taxes. Since real estate tax is the largest operating expense for commercial properties, it has a huge impact on NOI. Any increase in real estate taxes reduces a project's value when your cap rate is applied. Prop 13 allows stability and predictability in commercial property valuation. Remove commercial property from Prop 13 and all that predictability goes right out the window.

The Bad: A few recent sales highlighted in the news point out that there is a change of ownership loophole that deserves addressing. An unintended consequence of Prop 13 has allowed some buyers to structure deals so that no one member of the buying partnership holds more than 51%. This allows some buyers to avoid reassessment for property taxes. Michael Dell, who purchased the Fairmont Miramar (above) in 2006, used this approach to avoid reassessment, a strategy not endorsed by the commercial real restate industry.

The Latest: A growing movement by tax reformers would uncouple commercial real estate from the protections of Prop 13. This is the so-called split-roll. Kevin cites a study from Pepperdine University's Davenport Institute for Public Policy that claims an uncoupling could cost the state nearly 400,000 jobs and a $72B dip in state GDP within the first five years.

Bottom Line: Kevin says our industry needs an increased awareness over this movement aimed at gutting Prop 13. We expect a ballot initiative by the split rollers as soon as November 2016. And even though any change to Prop 13 would require a two-thirds majority, our commercial real estate industry needs to continue to fight hard against it.