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What You Need to Know: California Split Roll Initiative Commercial and Industrial Property Tax Increase

California Split Roll Initiative Commercial and Industrial Property Tax Increase

Q&A with Herb Tyson of the International

Council of Shopping Centers

The split roll proposal recently qualified as an initiative on the California ballot to be voted on in November 2020. Although split roll is described by its proponents as “tax reform,” it is really a targeted tax increase on businesses—potentially more than $12 billion per year.

I recently discussed this initiative with Herb Tyson, Vice President of State & Local Government Relations for the International Council of Shopping Centers (ICSC)’s Office of Global Public Policy. Our conversation addresses the proposed split roll initiative tax increase in California and ICSC’s opposition to the initiative.

What is the mission of the International Council of Shopping Centers (ICSC) and the Office of Global Public Policy?

ICSC is the pre-eminent voice of retail real estate. Our mission is to ensure the retail real estate industry is broadly recognized for the integral role it plays in the social, civic and economic vibrancy of communities across the globe. Founded in 1957, today we are a 70,000-member network joined together in one vibrant global community.

Government decisions affect our business, so we work to affect government decisions. Our Office of Global Public Policy advocates for legislative, regulatory and political outcomes that benefit our members. With resources to assist retail real estate professionals, we can help you take a stance too.

What is the California split roll initiative tax increase?

In California, escalating property taxes have long been a challenge for residents and businesses. Passed in 1978, Proposition 13 limited property tax increases on both residential and commercial properties. The constitutional amendment limits property tax increases to no more than 2% per year, regardless of the market value. Typically, an owner would only pay taxes based on the property’s real market value when ownership of the property changes.

In November 2020, Californians will vote on a ballot initiative that could raise an additional $12 billion in property taxes on the backs of commercial property owners. The initiative would upend Proposition 13 and decouple the residential and commercial property tax linkage in effect since 1978. The measure proposes to tax “certain commercial and industrial real property based on fair-market value–rather than, under current law, the purchase price with limited inflation.”

The measure, if passed, would require reassessment of all commercial, industrial and retail properties throughout California, with regular reassessments every three years thereafter. Owners will lose the ability to predict their property taxes and could very well face double-digit increases similar to the property tax rate increases in other states.

Why is the opposition to the split roll initiative tax increase in California one of ICSC’s Global   Public Policy top priorities?

ICSC believes adopting a new tax formula that radically increases the amount retail and other businesses owe will result in harm to California’s economy, hurting businesses and threatening job losses in the state—ultimately having the opposite effect of the referendum’s alleged goal of helping “schools and communities. While an initiative entitled “Schools and Communities First” is a nice label—in reality, the proposal, if approved, will threatened your business, the jobs you create and your bottom line.

What is at stake for the California retail real estate industry if the split roll initiative tax increase is not defeated? 

Forecasting future liability for commercial property taxes will be less reliable and riskier and could affect securing or renegotiating financing. Leasing activity may become increasing challenging as landlords and tenants deal with more variable and increased property taxes. Vacancy factors may also increase, and property values may decrease based upon a reduction in the property’s net cash flow. The initiative could destabilize commercial development in California for years to come.

I will also note the California Assessors Association estimates it will cost over $250 million to implement this initiative and require the taxing authorities to hire 1000s of staff to handle tax appeals. This is an extraordinary cost to implement a proposal that could create harm to the commercial and residential real estate market.

How will the passage of the split roll initiative tax increase by California voters’ impact on small and mom and pop businesses and consumers?

Although the terms of retail leases vary widely, under traditional triple net leases landlords have the right to pass through to retail tenants increases in property taxes. Depending on when a commercial retail property was last reassessed, property taxes could increase dramatically and create an additional burden on struggling small and mom and pop businesses and resulting in increased business failures.

The split roll initiative tax increase could also accelerate the trend of businesses in California to relocate outside of the state. This loss of jobs and income could further negatively impact small and mom and pop businesses. Consumers will feel the pinch as a result of higher prices for goods and services.

Some businesses like grocery stores operate on a razor-thin margin and any type of property tax, large or small, will be passed on to consumers. Grocery stores may cease operating in areas where it is no longer economically viable—reducing consumer choices and potentially creating “food desserts”. The greatest risk of a new split roll tax system falls on smaller tenants, retailers and consumers.

Why is the retail real estate industry so important to the national and local economy?

  • The retail real estate industry supports 8 million jobs, or 1 out of 6 jobs, and accounts for $792 billion in wages annually. Retail real estate jobs have expanded beyond traditional merchants: 48.4% are in health care, fitness, education and other service-related industries.
  • Local property taxes and state sales taxes generate $390 billion annually, helping communities pay for teachers, first-responders, road repairs and other critical services.
  • 70% of retail real estate-related establishments have fewer than 10 employees. There are more than 1 million female-owned establishments and 650,348 minority-owned businesses.

What is ICSC doing to oppose the split roll initiative tax increase?

ICSC is working with like-minded coalitions and business groups to educate the public on the issue, including the California Chamber of Commerce, California Taxpayers Association, California Business Roundtable, Howard Jarvis Taxpayer Association, California Business Properties Association and a growing list of local businesses and taxpayer advocates.

Californians to Stop Higher Property Taxes & Protect Prop 13” is a coalition of businesses, taxpayers, homeowners and renters, opposed to the split roll initiative tax increase. ICSC encourages California retail and commercial landowners, developers and tenants to become involved in the opposition to the split roll initiative tax increase. 

How can opponents to the split roll initiative tax increase become more involved in the opposition and assist ICSC in the efforts to defeat the initiative?

Commercial property owners and the public need to work together to educate voters about the detrimental effect the split roll tax increase will have on California’s economic welfare. Please oppose attempts to split the tax roll in California and help ICSC in this effort by sharing this information with your employees and others in commercial real estate and encouraging them to oppose and vote “no” on the split roll tax initiative increase.

Thanks to Herb for his insightful comments.

In Conclusion

What does this mean for you? I encourage my clients to proactively assess the impact on their bottom line and take action to mitigate the effects, in the event the split roll initiative is passed.

Their questions include:

  • How will the split roll initiative affect the leasing and financing of my properties?
  • Who is the party responsible for paying property tax increases pursuant to my existing leases?
  • How will it impact me as an owner of commercial and industrial property that has increased in value since the last property tax reassessment?

If I can assist you in addressing any of these or other concerns regarding the split roll initiative, please contact me.

 

 

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