Legislature Targets Business for Higher Property Taxes

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CalChamber's March 15th Alert Newsletter reported that less than six months after Proposition 30 raised taxes by $7 billion, the Legislature is proposing higher taxes on business property, including a reassessment even when property doesn’t change hands. The proposal, AB 188 (Ammiano; D-San Francisco), has been identified by the California Chamber of Commerce as a "job killer." AB 188 unfairly targets commercial property by redefining "change of ownership" so such property is reassessed more frequently, which ultimately will lead to higher property tax. AB 188 completely alters the definition of "change of ownership" for commercial property for the purpose of increasing property taxes.

Proposition 13

Currently, under Proposition 13, commercial property is reassessed only when there is an actual change of ownership in the entity that owns the property. That is, another entity or person has acquired at least 50% of the ownership interest of the entity that owns that property and therefore has a controlling interest in the property. This is the most common-sense interpretation of Proposition 13’s requirements.

It creates a bright line to determine when property ownership has changed, and is consistent with the underlying purpose of Proposition 13, which intended to provide property owners certainty and stability about the amount of property taxes due—on sale and thereafter.

"Change of Ownership"

AB 188 drastically alters the definition of "change of ownership" under Proposition 13 by dictating that a "change of ownership" occurs whenever 100% of the ownership interests in the legal entity that owns the commercial property are sold within a three-year period, regardless of whether any person or entity actually obtains control through direct or indirect ownership of at least 50% of the voting stock or ownership interest in the entity owning the property. 

This new definition that merely focuses on ownership rather than control will subject commercial property, especially property held by publicly traded corporations, to continuing reassessment that will at some point result in higher property taxes—the obvious intent of this legislation.

However, given that a reassessment could be triggered under this definition on a daily, weekly, or even monthly basis, the revenue gain anticipated by AB 188 is vastly overstated, as the market value of commercial property does not change within such a short time frame. AB 188 will provide a tool for harassing commercial property owners with constant reassessments, and an overwhelming workload for county assessors.

Detrimental Impacts

Ultimately, increasing property taxes for commercial property will have detrimental impacts on the general public, including small businesses, apartment residents, employees and consumers. 

Any higher taxes imposed on companies that own commercial property likely will be passed on to tenants, including businesses and apartment renters, through higher rents. The increased costs could result in reduced employee benefits, workforce reductions, or even higher prices for consumers.

The proposed definition of "change of ownership" under AB 188 will trigger reporting requirements for multiple "owners" of these entities. Despite the percentage of ownership acquired, an individual or entity must report the change in ownership or face a penalty of up to 20% of the assessed fair market value of the commercial property.

A penalty for failure to file a statement is imposed even if the county assessor ultimately determines no "change of ownership" has occurred. This duplicative and onerous reporting requirement that AB 188 seeks to impose creates a potentially unfair monetary trap for a minority owner in a company who is unaware that a 100% change of ownership has even taken place within the previous three years.