Ballot Initiative Seeks to Eliminate Prop 13 for Commercial and Industrial Real Estate

Elimination of Proposition 13 for Commercial and Industrial Properties
Under the current system, Proposition 13 protects all real property that is locally assessed. Under Proposition 13, real property is reassessed at fair market value when it is first purchased, newly constructed, or upon a change in ownership. Following this initial fair market value assessment, the real property’s assessed value may not increase by more than 2% per year regardless of whether the property’s fair market value increases by more than 2%.

Initiative 17-0055, which would go into effect on the 2020-21 lien date, seeks to strip “commercial and industrial real property” of this Proposition 13 protection by requiring that these properties be reassessed at their full fair market value at least every three years. “Commercial and industrial real property” is defined as “any real property that is either used or zoned as commercial or as industrial property, or is vacant land not used or zoned for residential use or used for commercial agricultural production.”

The triennial reassessment requirement would not apply to the following types of property, which would continue to receive Proposition 13 protection:

• Residential property, including property zoned as commercial, industrial or mixed use to the extent that the property is actually used as residential property;
• Property used for commercial agricultural production; and
• Vacant land zoned as open space, residential or commercial agricultural production.

The Initiative also provides a small business exception for commercial and industrial property that meets the following requirements:

• “The owner-operator operates the business on a majority of the real property.”
• “The total fair market value of all property owned by the taxpayer in the state on which the business operates is less than two million dollars” subject to adjustments for inflation every two years.

Real property meeting the above “small business” requirements will continue to receive Proposition 13 protection.

Tangible Personal Property Exemption
The Initiative also includes a separate tangible personal property exemption that would go into effect on the 2021-22 lien date. Tangible personal property used for business purposes would be exempt up to $500,000 per taxpayer. If a taxpayer has “50 or fewer annual full-time equivalent employees in the state,” then all of the taxpayer’s tangible personal property is exempt so long as it is used for business purposes.

The Initiative’s Current Status
In order to be placed on the November 6, 2018, ballot, proponents of the Initiative must collect 585,407 signatures from registered voters and the Secretary of State must verify by June 28, 2018, that this requirement has been met. The Initiative was cleared for signature collection just yesterday afternoon, February 20, 2018, leaving supporters with relatively little time to collect signatures. If the Initiative makes it to the ballot, it would only need a simple majority vote by the electorate to pass.

How California voters react to the Initiative’s political positioning and its likelihood of success are yet to be seen. There have been many similar initiatives and legislative proposals over the last several decades. The most recent attempt to eliminate Proposition 13’s constitutional protections for commercial properties was launched by the California Senate in 2016 (i.e., Senate Constitutional Amendment 5 (SCA 5) and accompanying Senate Bill 1093 (SB 1093)). However, both proposals died without securing the requisite level of legislative approval to put it before the voters.