Proposition 13, Property Taxes, and Tenants
February 26, 2009
In the previous post we discussed plans on the table to hike taxes as an effort to help close budget deficits. As cities and the state continue to face tough economic decisions, there is increased scrutiny of Proposition 13, as it is seen by many as a way to help bring in additional revenue for government. Proposition 13 was adopted by California voters in 1978, and caps real estate tax on property to 1% of its assessed value, and limits annual increases at 2% therefrom until the property changes ownership.
Revoking Proposition 13 has been a highly unpopular subject amongst voters, but there are some signs that some groups may be looking to repeal a portion of Proposition 13 as it relates to commercial property, an issue which is less likely to affect taxpayers directly and therefore would be easier to change.
Most tenants of commercial property are liable to pay their portion of the property’s real estate taxes or any increases in property taxes. Properties which have been held by owner’s for a long time usually benefit from a lower tax basis. As a result, a repeal of Proposition 13 has the potential to increase property taxes significantly, an expense which tenants could be forced to shoulder.
In order to protect themselves, tenant’s can try to work language into the lease in their favor. One approach is to limit overall expense increases. For instance, tenant’s may ask that real estate taxes and operating expense increases be capped at 5% per year. That doesn’t protect the tenant completely, but the risk and cost increase will be known and manageable.
A second approach is tenant’s can seek to include language in the lease which provides them protection against Proposition 13. There are a lot of ways tenants and landlords can craft the language. I’ve seen language in which a tenant’s exposure increases progressively as the lease progresses, to language which completely shields the tenant.
For our purposes, lets assume a tenant can negotiate language into the lease which provides them blanket coverage against Proposition 13. Some sample language could be something along the following. Keep in mind that this is just draft language, and is being provided merely as an example – an attorney should ultimately draft and review any lease language.
In the event that at any time during the initial Term the Building is reassessed (the “Reassessment”) for real estate tax purposes by the appropriate governmental authority, then Tenant shall not be obligated to pay any portion of the Tax Increase relating to the Reassessment. For purposes of this Section, the term “Tax Increase” shall mean that portion of the Tax Expenses, as calculated immediately following the Reassessment, which is attributable solely to the Reassessment. Accordingly, the term Tax Reassessment shall not include any portion of the Tax Expenses, as calculated immediately following the Reassessment, which (i) is attributable to the initial assessment of the value of the Building, the base, shell and core of the Building, or the tenant improvements located in the Building, (ii) is attributable to assessments pending immediately prior to the Reassessment, which assessments were conducted during, and included in, such Reassessment or which were otherwise rendered unnecessary following the Reassessment, or (iii) is attributable to the annual inflationary increase to real estate taxes.
Similar Posts:
- Property Tax Appeals: The Impact on Government, Landlord, and Tenants
- Capital Gains Tax Hikes Loom; Proposition 13 Tax At Risk
- Efforts To Raise Commercial Property Taxes Gaining
- Studley Says…
- The Top Ten Mistakes Companies Make When Leasing Office Space
Tags: California, Leasing Tips, Property Tax, Proposition 13, Taxes, tenants
Proposition 13 should be repealed entirely. Efforts to repeal it only for commercial properties are misguided. Had it only protected owner-occupied residences at the expense of commercial real estate, the business climate would have been worse, the impact on renters would have been worse, and the housing bubble would have been worse.
Breaks for owner-occupied residences at the expense of rental properties lead to an artificial increase in conversions from rental units to units for sale or for condos. This drives up rents. Meanwhile, shifting the taxes onto commercial properties drives businesses away.
The biggest tragedy of Prop 13 is that the incentives it gave to home ownership created the nation’s worst housing bubble. What home buyers saved in property taxes was dwarfed by what they paid to subsequent home buyers and to banks. The second biggest tragedy is that sales and income taxes were raised to make up the difference, and these taxes have made California uncompetitive.
I don’t know if this blog accepts links, but we ranked every city in the nation according to its housing affordability and its tax rates on unmortgaged homes. If you search “Affordability Charts” and “Affordability Index” you will see the results: The lower the tax rate on unmortgaged homes, the less affordable the housing.
Our California affiliates tried to explain this in 1978, but Califorian’s wouldn’t listen. Perhaps they’ll listen now.
-ds
Thanks for the comment. You say, “The biggest tragedy of Prop 13 is that the incentives it gave to home ownership created the nation’s worst housing bubble.”
I would disagree, “the worst housing bubble” in history was created by insanely lax underwriting standards for loans and the rating agencies..
The real tragedy is not Prop 13, but that that government will spend every last cent of tax they collect, and then some.
Admin – can he link from this forum? I tried searching for his terms, but it’s hard to tell what links he’s referring to – these terms are just too general to be of much use.
He can link. As long as people don’t spam, I’m open to people linking to relevant content.
In so far as his comment is concerned, i’m not sure what he’s referring to exactly. You can click on his name and visit the URL he inputted along with his comment – maybe you can find something there.
And so you can, thanks for that tip, I didn’t know about that.
I think i see what I need from his website. It would be nice if people who are worked up over an issue could formulate a cohesive argument – that might stimulate a discussion on the issues, not just a diatribe.