Has Anything Really Changed with Commercial Real Estate?

As I sit here in my home office - a conversion of the third stall of our garage - crafting this column, my thoughts reflect upon 2019. So long ago, it seems, yet in reality only eight short months hence.

This time last year, I wrote about a brewing change in the way commercial real estate is assessed and taxed in California. Akin to observing the massing clouds in the local mountains - those in our industry could sense a storm. Presently, because of Proposition 13 - which became a constitutional amendment in 1978, ALL real estate state wide is taxed at 1% of its assessed value. If real estate of any genre is sold - a new property tax baseline is established and the 1% applied. No recent sale? Property taxes can only increase by 2% annually. Opponents believe an unfair advantage exists for those who’ve owned for years and pay a smaller tax bill - because values have eclipsed a 2% annual bump.

But in August of 2019 - an initiative had secured a November 2020 ballot spot - albeit with a re-write underway. The “new and improved” version has now qualified and been given a moniker - Proposition 15. Now, voters in the state of California will be given a choice in November to enact said Proposition. If passed, Proposition 15 will “split the tax roll” in two. Assessed differently will be residentially and agriculturally zoned parcels from their commercial counterparts. Simply, a commercially zoned piece of real estate will carry a higher property tax burden than a corresponding resi or ag zoned property. Hmmm.

You may be thinking - so what? I don’t own any commercial real estate and our cities and schools partially rely upon property tax receipts to fund their activities - see police, fire, street maintenance, etc. Plus, commercial real estate is owned by huge conglomerates who will simply absorb the potential increase and finally pay their fair share. Tack on the fact that our municipalities face funding shortages from the self imposed business lockdown and voila! We have a trifecta suggesting enactment.

Please keep in mind - the majority of commercial real estate ownership is not huge corporations - but with folks like your neighbor. Owners and occupants of manufacturing companies, hair salons, consulting businesses, auto repair shops, and the like. Where do you suspect this increased property tax cost will fall? Yep! On you as a consumer of these goods and services.

Also, please consider this. If Proposition 15 passes - do you really believe your home will forever be immune from the same mechanism? Some would say, absolutely, yes! Increasing residential property taxes is the third rail. You don’t touch it lest you’re electrocuted. However, according to my research, residential owners in California pay approximately 72% of property taxes. Proposition 15, some argue, would level this percentage - causing a greater burden on commercial owners. Here is where the crossover could occur. Currently, multi-family properties of four or greater units are classified as commercial real estate - although they are residentially zoned. So, what’s to keep cities - facing an ever increasing crush on their budgets - to “re-zone” multi-family properties to commercial? This move is not unprecedented. Certain cities - facing a shortage of domiciles - have done the opposite - re-zoned commercial to residential. I’ll bet they regret that move! Remember redevelopment districts? Those vehicles intended to quell blight and grant incentives to construct new, nice buildings. Orange County’s abundance of auto malls and big box retailers were the unintended consequence - as new sales and property tax revenues would follow.

What can appear as a great idea - with all the best of intentions - can sometimes yield horrible outcomes. Remember shag haircuts and leisure suits? I thought so.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at [email protected] or 714.564.7104. His website is allencbuchanan.blogspot.com.