Split Roll Initiative:

Turbulent Times for California Commercial, Industrial, and Office Real Estate

 (This is the first installment in a series of blogs examining the impact on commercial and industrial real estate of the split roll initiative that is qualified for the November 2020 ballot in California.)

 The “split roll” initiative is a looming threat to the commercial and industrial real estate industry in California. In 1978, California voters passed Proposition 13, limiting property taxes to 1% of the sale price of a property, and capping property tax increases to 2% annually.  Proposition 13 permits the reassessment of a property only upon a change of ownership or if there is new construction.

The “California Schools and Local Communities Funding Act of 2018” (Initiative 17-0055), which is referred to as the “split roll” initiative, is qualified for the November 2020 ballot in California. The California Attorney General recently published the official title and summary of a revised version of the split roll initiative entitled the “California Tax on Commercial and Industrial Properties for Education and Local Government Funding Initiative (2020)” (Initiative 19-0008).

What Happens Next?

Proponents must now obtain approximately 1 million voter signatures by April 21, 2020 to qualify Initiative 19-0008 for the November 2020 ballot.  The proponents will not withdraw Initiative 17-0055, unless Initiative 19-0008 qualifies for the November 2020 ballot. Thus, in any event, in November 2020 voters will decide whether to modify Proposition 13, as it relates to commercial and industrial properties.

The split roll initiative modifies Proposition 13 to provide for the reassessment of commercial and industrial properties in California to their “full cash value.” Thereafter, commercial and industrial properties are to be reassessed every three years.

Commercial and industrial properties include retail, office and vacant land not zoned for residential use or used for commercial agricultural production.  Initiative 19-0008 excludes from reassessment commercial and industrial property with a fair market value of $3 million or less. The California Legislative Analyst’s Office estimates Initiative 19-0008 will increase property taxes annually by $7.5 billion to $12 billion.

What Happens if It Passes?

If approved by voters, the split roll initiative will eliminate the current certainty, stability and predictability of the taxation of commercial and industrial real estate. Also, it will change the basis for the assessment of commercial and industrial property from an objective standard, based upon the sale price of a property, to a subjective standard, based upon the County Assessor’s opinion of the full cash value of a property.

Already the specter of the passage of the split roll initiative is impacting California commercial and industrial real estate. In a July 2019 press release of Decron Properties the split roll initiative was cited as one of the reasons for the divestiture of its commercial and office assets in California. It is suggested owner, lenders, tenants and users of commercial and industrial real estate in California consider the potential impact of the split roll initiative on their operations and transactions.

Any Questions?

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.