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Proposed split-roll system worries taxpayer groups

A move in the state Assembly that would ensure reassessment when 90 percent of a property is sold is the least of commercial real estate professionals’ worries, said Jon Coupal, president of the Howard Jarvis Taxpayers Association.

Coupal joined Lenny Goldberg, executive director of the California Tax Reform Association, and Lou Lollio, commercial managing director and broker associate at Keller Williams Carlsbad, for a panel discussion on Proposition 13 Wednesday, hosted by the San Diego County Taxpayers Association.

AB 2372, written by Assemblymembers Tom Ammiano, D-San Francisco, and Raul Bocanegra, D-Pacoima, would change the way commercial property is transferred. Coupal said this bill is a small technical correction and “the least of your worries if you’re in commercial real estate.”

Coupal said the bigger worry is an effort to change the uniformity requirement of education parcel taxes to allow split-roll parcel taxes with unlimited increases.

HJTA recently withdrew its opposition to AB 2372, allowing business groups to take the lead, Coupal said. The bill would bring in an estimated annual property tax revenue increase of $70 million, but Coupal said it would affect only a narrow range of transactions.

“There are some situations where ordinary homeowners — this is not liberal, conservative, Republican, Democrat — will look at a certain transaction and all of the interest has been shifted and think, ‘You know what, if I get reassessed when I sell my house, then that should apply to some of these complicated structure deals,’” Coupal said.

Coupal said the bill is up for an Assembly floor vote this week and expects continuing amendments before it goes before the Senate.

“If it morphs into something that the business community doesn’t like, we have the opportunity to kill it in the Senate,” Coupal said.

Ammiano has introduced multiple amendments to Proposition 13, and there have been many proposed variations of a split-roll property tax system.

Proposition 13, passed in 1978, limits the amount of property taxes on any property to 1 percent of its assessed value, with a 2 percent annual limit on increases in an acquisition-based system. The value is reassessed when it changes ownership or when new construction is completed.

In a split-roll tax system, commercial properties would be taxed on market values; residential properties would continue to be taxed based on the latest purchase price.

Proposition 13 was intended to protect homeowners, Goldberg said.

The measure has created a stable property tax system and eliminated the frustration and fear of opening a bill from the county assessor with property taxes quadrupled from the previous year, Coupal said.

The bill wouldn’t change Proposition 13, Coupal said. Rather, it would change a narrow statute enacted shortly after Proposition 13 was passed, dealing with what triggers reassessment when fictitious entities, LLCs or partnerships buy and sell properties, he said.

“Howard Jarvis himself said that when any property changes hands, it needs to be reassessed at full market value,” Coupal said. “There have been very clever ways not intended by the voters and Howard Jarvis to avoid reassessment even when 100 percent of the ownership has changed.”

Coupal said there is a perception problem related to the bill, as it encompasses a “very narrow range of transactions designed solely to avoid reassessment, when there has in fact been a change of ownership.”

He added that there could be a potential impact on family businesses that are often organized as LLCs.

The bill seeks to close a loophole in which people were avoiding reassessments by owning properties in an entity, and selling the entity instead of the property. The bill would make the sale of that entity a change in ownership, which triggers reassessment, said Peter Solecki, real estate lawyer at Winston Larson & Solecki, in an interview.

The bill has been amended from 100 percent of the property sold to 90 percent, and no longer includes the sale of stock or publicly traded corporation, Solecki said.

“It’s not intended to stop a business from having different owners. It’s intended to stop basically creating an entity for the sole purpose of transferring a property without getting it reassessed,” Solecki said.

Commercial property is held in complex ways, not for reasons of avoiding property taxes, but for liquidity and for capitalization, Goldberg said. There are real estate investment trusts, LLCs and trusts holding properties, publicly traded corporations that hold property in their own names, private equity buyouts, and property in which hedge funds and pension funds have investments, he said.

The question is whether it’s possible to have a statutory change not affecting Proposition 13 that defines the change of ownership in a reasonable way, or if Proposition 13 has to be amended, Goldberg said.

Goldberg said his goal is to open up the discussion about change of ownership. Split-roll, which he preferred to refer to as “commercial property tax reform,” is a “complicated area of law that’s not working well,” he said. The business community recognizes a “growing pressure for change,” and so it agreed to adopt AB 2372, which would close the small loophole. “Only it doesn’t do a very good job of it,” Goldberg said.

“But the good news is that it opens up the discussion,” he said.

A split-roll tax system is a concern for commercial real estate professionals. The San Diego County Taxpayers Association released a report Wednesday on the predicted effects of a split-roll tax system on San Diego’s economy.

Altering the definition of “change of ownership” or reassessing commercial properties at predetermined intervals are both referred to as a split-roll tax system, according to the report.

The report finds that adding a split-roll property assessment system would result in an estimated $173.5 million annual tax increase in San Diego. Businesses might respond by passing costs to consumers, downsizing or relocating. The estimated economic impact of that increase could be as high as $355.4 million annually, equating to 2,240 jobs in San Diego.

The strategy is to “divide and conquer,” Lollio said, and Coupal agreed. Lollio said his opponents can’t really change Proposition 13 for homeowners, but could get their foot in the door by changing it for commercial property owners.

“The residential people aren’t going to stand up and fight against the change in commercial taxation, right? So it’s a divide and conquer,” Lollio said.

He gave an example from the Californians to Stop Higher Property Taxes of what he called a typical real estate transaction: a $300,000 industrial warehouse, which under Proposition 13 has a $300,000 gross revenue, $225,000 business expenses, a property tax of $7,500, and net individual income of $54,000.

Under a split-roll system, the gross revenues and business expenses would remain the same, the property taxes would increase to $15,000, and the net individual income would drop to $48,000.

“We’re talking about individuals like you and me — the people we do business with on a daily basis — the people that own businesses on the corners. This is a different scenario. We don’t want to change that tax structure,” Lollio said.

Coupal said HJTA opposes a split-roll system because of the scenario that Lollio mentioned.

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