Organizations Aim To Raise $100M To Defeat CRE Property Tax Measure

Business organizations representing commercial and industrial real estate property owners are mobilizing statewide to raise $100M to defeat an upcoming ballot measure that would allow California to reassess commercial properties to current market value, and continue to do so every three years.

In front of a crowd of more than 800 industrial professionals, NAIOP President and CEO Thomas Bisacquino said the “split roll” initiative, which would start to tax owners of commercial property based on market value while leaving residential property under the existing system, is one of the biggest issues impacting commercial real estate owners in California. If it passes in 2020, there could be repercussions across the nation.

“This is a very important issue for anybody that owns commercial real estate in California,” Bisacquino said Thursday during NAIOP’s I.CON industrial real estate conference in Long Beach. “One thing you also have to understand is that these issues migrate throughout the country. … What happens in California is very important to what happens across the country.”

Under California's Proposition 13, which was passed in 1978, residential and commercial property taxes are reassessed upon the sale of the property to a new buyer. The state property tax is usually 1% of the property's purchase price.

For example, if an owner of a 10K SF retail center in downtown Los Angeles acquired the property in 1990, that owner is paying taxes on the value of the property based on the purchase price in 1990 and not at today’s fair market rate.

This is the same for residential. A buyer who purchased a home in Beverly Hills for $1M in 2000 is most likely paying 1% of that price in property taxes even if that property today may have appreciated to $2M in value. 

“Prop. 13 came about in 1978 as part of the taxpayer revolt,” NAIOP Vice President of Government Affairs Aquiles Suarez said. “At that time people were losing their businesses and homes because local jurisdictions were very arbitrary with local tax increases — this essentially put the power of property taxation on a state level and put some controls and placed certainties, which is very important for businesses.”

Set for the 2020 California ballot, the California Tax on Commercial and Industrial Properties For Education and Local Government Funding Initiative, more commonly known as “split roll” would break commercial properties out of Prop. 13’s protective sphere, Suarez said.

The split roll initiative would tax certain commercial and industrial properties based on fair-market value rather than based on the original purchase price and those properties would continue to be reassessed every three years. 

The backers of the measure include several statewide teachers organizations and unions and the Chan Zuckerberg Initiative from Facebook’s Mark Zuckerberg and his wife, Priscilla Chan. Those backers claim that the reassessed property tax could generate $6.5B to $10.5B that would be allocated to schools and local governments.

Since property in California appreciates at a much higher rate than the rest of the nation, opponents said this would drive small businesses and investors out of the state. Opponents include the California Chamber of Commerce, the Howard Jarvis Taxpayers Association and several business and commercial real estate organizations.

California Business Properties Association President Rex Hime told Bisnow California is already a high-cost state for businesses. Adding to their tax burden would further drive businesses away, he said.

“Last year, California lost 1,800 businesses,” Hime said. “Should this pass, the small businesses will go away.”

Suarez said the landlords of these buildings would pass on the cost to tenants.

“If you think of triple net leases, most folks that will be paying for these increased property taxes will be small businesses,” Suarez said. “This will hurt California.”

Suarez, who is part of NAIOP’s national lobbying team, said some government officials and others “basically see commercial real estate as a piggy bank for whatever social ill needs to be fixed.”

Last year, the commercial real estate community banded together to defeat a repeal of California’s Prop. 10 that would have allowed local governments to expand rent control. 

Businesses and the commercial real estate community raised more than $65M to defeat that repeal. Hime and Bisacquino believe it is going to take more than $100M to beat the split roll initiative.

The split roll supporters are heavily funded by the teachers and labor unions and Facebook’s Zuckerberg, who put in $485K just to get the required signatures for the 2020 ballot.

Next year is also a presidential election. People may not be paying close attention to other issues on the ballot, Suarez said. 

“To get a media campaign and to get ahead of this issue is going to cost much more money than it would in a nonpresidential year because the major media buys will be that much more expensive,” Bisacquino said. 

Suarez said those people who think the split roll is a California-only issue are mistaken.

“If this initiative wins in California, it’s going to throw gas on the fire on all these ordinances and initiatives [that impact commercial real estate] elsewhere,” Suarez said. “What happens in California echoes to the rest [of the country] … if you think this is not your problem because you’re not here, I’m here to tell you that you are wrong. This is everyone’s challenge.”