Prop. 15: Revenue for California public services or higher taxes for small business?

California voters will again be asked whether a four-decade-old law capping property-tax assessment increases should be revised to allow more revenue to be collected from business properties.

Proposition 15 would amend the provisions in California’s Constitution in how property taxes are calculated. Prop. 13 of 1978 capped how much property taxes could increase, except were certain events, such as sale or significant improvements, would trigger re-evaluation.

The state fiscal analyst estimated that, upon full implementation, the ballot initiative would generate between $8 billion and $12.5 billion in property tax revenue per year.

Under the latest ballot initiative commercial and industrial properties would be taxed on market value, rather than at property transfer. Residential properties would continue to be assessed on original purchase price, creating a “split roll” for how each county figures property tax assessments.

Specifically excluded in the initiative is agricultural property, but farming groups in the North Bay and statewide have been sounding an alarm that Prop. 15 would increase their taxes.

Sonoma County Farm Bureau estimated that the new property tax bill for an unnamed small Sonoma County winery with about 20 acres of vineyards and a production facility would soar 234% under Prop. 15, from $15,800 a year to $52,815.

Yet Lenny Goldberg, executive director of the California Tax Reform Association and an advocate of split-roll reforms to Prop. 13 in previous elections, told The Press Democrat that the initiative was crafted with input from local tax assessors to base the determination on agricultural use, which is reflected in assessments, rather than zoning.

Nearly a year ago when the legislation behind Prop. 15 was taking shape, one of the key supporters, Schools & Communities First, told the Business Journal that it would phase in the reassessments so they would not hit smaller businesses. Many commercial real estate leases, particularly in retail, are structured with “net” provisions that pass certain expenses, such as property taxes and insurance, through from the landlord to the tenant on top of a base rental rate.

Prop. 15 would phase in the tax changes for commercial and industrial properties, starting in July 2022 generally. But for retail centers and other properties occupied by 50% percent or more of “small businesses,” the start date would be July 2025, leaving open a delay of that by the Legislature. The initiative defines small businesses as those that that are independently owned and operated, own property in the state, and have 50 or fewer employees.

Excluded from the new regular reassessment would be all tangible personal property for a small business and $500,000 in value for a larger business.

Also exempted would be properties whose business owners have $3 million or less in holdings in California.

“It doesn’t take much for properties in Sonoma County to be worth over $3 million,” said Vince Rizzo. The portfolio of the Santa Rosa-based commercial real estate developer and investor includes the 200,000-square-foot Industry West Commerce Center, standalone retail properties in Solano County and property-management assignments for other Industry West Industrial Park properties.

“If you owned a property for 10 to 15 years, the (property) tax likely would have doubled, so then there would be huge increases passed through to small businesses. It’s so disturbing to me that they’re trying to raise tax dollars for various things but they’re also raising taxes on small business owners.”

While the phase-in period would push back the brunt of the property-tax passthroughs for smaller businesses for a few years, it also would give their landlords less room to maneuver financially to be able to offer relieve from economic shocks such as the current coronavirus pandemic, according to Dennis Fisco, a principal of San Rafael-based Seagate Properties, which owns a few million square feet of commercial properties in the Bay Area and Sacramento.

“We have 60 retail tenants, and they are on triple-net leases,” Fisco said, referring to leases where tenants are responsible for property taxes, insurance and maintenance expenses. “And probably 40 of them are mom-and-pop businesses. Passing on the tax to them would be a huge burden.”

Seagate has helped more than two-thirds of those small retail tenants with rent payments while they have been either closed or operating below full capacity during the pandemic, Fisco said. Those measures include outright forgiveness of rents for many and “blend and extend” or similar arrangements with the remainder.

Because Fisco and fellow Seagate principal Wick Polite Jr. have owned the 45-tenant Montecito Plaza shopping center in San Rafael for 34 years, the property tax is low enough that Seagate was able to absorb the expenses for the smallest shops as well as forego the rent.

“The benefit for me is I have prosperous tenants when they come back after COVID, but if I have to pass on higher tax expenses then lose tenants, you tell me how I would find a tenant to fill the space in this environment,” Fisco said.

Jeff Quackenbush covers wine, construction and real estate. Before the Business Journal, he wrote for Bay City News Service in San Francisco. He has a degree from Walla Walla University. Reach him at jquackenbush@busjrnl.com or 707-521-4256.