California’s Split Roll Tax Would Eliminate CRE Property Tax Cap

California’s Split Roll Tax Advances Toward November Vote

Posted In — Market Research | Trend Article

In November 2020, California voters will decide if property tax assessment calculations will be changed. The proposed Split Roll Ballot, also called “The Schools and Communities First” initiative, seeks to increase property taxes by eliminating the existing cap. Should the bill pass, property owners can expect to see bills rise significantly, in what would amount to the largest tax increase ever in California.

California voters imposed strict limits on property tax in 1978, when Proposition 13 passed. Currently, California commercial property tax assessment increases are capped to the lower of inflation or two percent. If passed, the new measure would mandate that all commercial properties be re-assessed based on their market value in 2021 and then be re-assessed every three years at market value, thus effectively eliminating the cap on commercial property taxes.

California Secretary of State Alex Padilla certified last month that the bill had secured enough valid signatures to appear on the November 3, 2020 ballot in California as an initiated constitutional amendment. This version of the bill retains limits on tax increases for residential properties but allows new commercial site assessments.

The change would be phased-in beginning on January 1, 2022. Properties, such as retail centers, with small business occupancy of 50% or more would be taxed based on market value beginning in the fiscal year 2025-2026 or a later date as the legislature determines.

Analysts believe the bill could translate to property taxes doubling or even tripling over the coming two years. Research by the International Council of Shopping Centers (ICSC) notes that if enacted, the initiative could generate more than $11 billion in commercial property taxes in the state, depending on the real estate market.

Not only would the measure be felt by a California economy battered by the negative impacts of the COVID-19 pandemic, but it will also challenge businesses and reduce jobs while adding to the cost burden carried by consumers and property owners. Perhaps the biggest commercial real estate asset class to feel the impacts of the Split Roll Tax would be the retail sector.

This tax increase is expected to have a significant impact on the retail industry since property taxes are typically passed directly through to the retail tenant. Under NNN leases, these additional taxes levied on a property owner are directly passed onto each business owner. Retailers are already struggling with stay-home orders, shifts in consumer spending habits, and the emergence of online e-commerce shopping. It is unlikely that small retail businesses in California can support these increases, and customers are expected to seek lower-cost options, further hurting retailers.

Those higher occupancy costs will land hard on a retailer’s bottom line, and likely cause low margin businesses to fail, costing jobs and out-migration to lower-cost states or forcing retailers to elect not to open a location in the Golden State.

We strongly encourage property and business owners to research fully the impact this measure could have should it ultimately pass.

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