By Dan Aiello
California Progress Report
Amidst the perennial partisan finger-pointing over California’s budget and deficit, the California Tax Reform Association (CTRA) has released a new report concluding California’s current commercial property tax assessment policy, not its spending on education and social programs as suggested in Republican gubernatorial candidate Meg Whitman’s latest political campaign ads, is the culprit crippling the state’s ability to balance its books.
The idea to revise the state’s commercial property code is not new. Following passage of Proposition 13, the realization that no clear definition of what types of transactions constituted a commercial property sale created a huge windfall of tax breaks for commercial property owners – amounting to $7.5 billion dollars annually – that is not enjoyed by residential homeowners.
Legislative attempts to close the loophole also is not new. It has been championed by former Senators Quentin Kopp (I-SF) and Martha Escutia (D-LA) over the course of a decade, and more recently by Warren Buffet while acting as Governor Schwarzenegger’s financial advisor and as legislation sponsored by the California Teacher’s Association desperate to turn around the state’s lagging national ranking in per-student spending ratios.
In 2010, Assembly member Tom Ammiano (D-SF) is the new standard bearer for revising the state’s property tax code – which would require voter approval – as he introduces AB 2492, a ‘homeowner-exempt’ split roll revision intended to “close the loophole” created for commercial property owners with the passage of Prop 13.
A summary of the examples of corporate mergers and buy-outs which avoided reassessment is available.
CTRA claims its report offers compelling data showing the impact of the loophole on the state budget, and suggesting those who remain focused on the need for further spending cuts in areas like, social services, emergency services, infrastructure and education, where the state has fallen desperately behind, can never resolve the crisis because the commercial property tax loophole, left unfixed, decreases commercial property tax revenue over time while increasing the share of taxes onto the backs of California homeowners.
The report supports proponents of AB 2492 (Ammiano-SF), like Closetheloophole.com who are calling for the revision of the state’s 1978 Proposition 13 property tax law regarding commercial property sales.
CTRA Executive Director, Lenny Goldberg, told California Progress Report that while the sale of a residential property is fairly straightforward, the complexity of what constitutes the sale of a commercial property, which was not clearly defined within the language of Prop. 13, created a legal loophole big enough to drive much of the state’s commercial properties through to shift the state’s property tax burden increasingly away from commercial property owners who are enjoying a tax windfall that fails to benefit the state in jobs creation, new industry or new business.
“There is a ton of data here that shows in virtually every county, urban or agricultural, the shift [of the tax burden] is consistent throughout the state,” said Goldberg. “The trends are so overwhelmingly consistent, if you look through county after county after county, with only a couple of exceptions [Mono County's reclassification of Mammoth Mountain resulted in a commercial property revenue increase, for example], the shift is everywhere.”
VIRTUAL FLIP
What Goldberg calls a “shift,” Closetheloophole.com’s founder, San Francisco County Assessor Philip Ting referred to as a “flip” in share of the tax burden in CPR’s earlier coverage on AB 2492. Prior to Proposition 13′s passage, the state property tax burden approximated 60 percent commercial property taxes, 40 percent residential or homeowner burden. While Ting was able to provide proof that San Francisco’s homeowners now contribute 60 percent and commercial property owners 40 percent, he did not have information on the statewide impact of the current law.
The CTRA report found homeowners are paying more than businesses statewide, noting “In virtually every county, commercial property is paying a far smaller share of the property tax since Proposition 13 passed in 1978.” The group’s conclusion: “Commercial property owners are able to exploit huge loopholes in the law to avoid reassessment upon change in ownership.”
“The whole system is a nightmare,” Goldberg told CPR. “We have ships in the night between the law and the property tax private equity ownership definition. There are tens of millions of dollars even under the current assessment law that the state isn’t collecting.”
According to Goldberg, the problem extends past the state’s tax law to how California determines a commercial property for assessment, assesses and collects its property tax revenue.
In CPR’s earlier report, Ting cited the 2008 JP Morgan [Chase] acquisition of Washington Mutual and its 100 plus commercial property assets as an example of the state’s tax collection system failure.
Goldberg said Ting’s reference to that transaction in the CPR story led to the CTRA research released Thursday.
“I cannot imagine the business folks disputing any of this. The shift is significant and it is everywhere, in every county and city in California,” said Goldberg. “This what you reported on regarding the Board of Equalization.”
Because of the complexities of what defines the sale of a commercial property, an issue entirely unique to California’s tax code and one that was not approved by voters but rather evolved from litigation following prop 13′s passage in 1978, California’s Board of Equalization could not, because of staffing or code, define the JP Morgan acquisition as a sale, despite their opinion that, in fact, it should.
The BOE issued a “suggestion” that counties review the merger as a possible sale. “They sent a letter saying ‘we think this is a sale,” said Goldberg, who claims the BOE’s impotence in its ability to define the sale then shifts the investigative burden to individual county assessor’s offices which often don’t have the research and legal staff or the business expertise to investigate a sale, leaving many of commercial properties potentially eligible but never actually reassessed.
Board of Equalization Chairwoman and First District Member Betty Yee sent a statement to CPR that appears to dispute the CTRA findings, claiming that while the Washington Mutual sale involved a “techincality,” the Chairwoman believes “All real property is subject to reassessment.”
“I am advised [the BOE] staff’s determination that an entity transfer of ownership did not occur relates to a technical consideration related to Washington Mutual’s sale having occurred via receivership of the Federal Deposit Insurance Corporation (FDIC), stated Yee. “I believe all of the real property transfers should be subject to reassessment. Notwithstanding the technical issues, I am advised all of the properties are, in fact, subject to reassessment.”
If Yee is correct and the BOE and the tax code are not issues, why has there been such a notable decline in commercial property tax share?
In the case of the Washington Mutual properties there were 100 properties to be considered for reassessment, according to the CTRA report, representing millions in potential annual revenue for the state. But if a county has only two of those locations to consider, the Assessor’s office might reasonably conclude the pursuit of that reassessment to not be in the interest of the public.
Goldberg also noted that the commercial sale loophole has led to residential properties being reclassified as commercial in order to avoid reassessment. “When you make that distinction [residential property is reassessed almost every sale while commercial property is often not reassessed] when you load all the advantages to one side, you’re going to see property owners wanting to take advantage of that,” said Goldberg. “We’re seeing condominiums and apartment complexes now being listed as commercial property. There are a lot of residential properties, an increasing number, that don’t hold a homeowner’s exemption any longer for this reason.”
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Dan Aiello reports for the California Progress Report.