Property Taxes and YOUR Tenancy - PLEASE READ THIS!

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Whether you own and occupy the building from which your business operates - owner occupant - or you lease the premises - tenant - THIS is for you. A proposition may be on the November 3, 2020 ballot that could dramatically increase property taxes for commercial properties.

Property Taxes Currently. As a business owner - you reside in a building - a manufacturing plant, a retail storefront, or a suite of offices. Our state of California taxes those premises in two ways - through a property tax of the land and structures and through a business personal tax which is levied upon fixtures, machinery and equipment used in the operation of your company. Both are currently protected by a constitutional amendment known as Proposition 13. In effect - since 1978 - real property and business property are taxed at 1% of the assessed value and said taxes are limited to a 2% annual increase unless the property is sold - triggering a reassessment at the current market value.

So, if you opted to buy your location in 1980 - and have occupied it since - you’ve benefited from a low taxable basis relative to the market value.

Specifically? Let’s say you own a 20,000 square foot industrial building you purchased for $700,000 in 1980. Assuming a 2% annual increase in taxable assessed value since your purchase in 1980 - your assessed value today is approximately $1,500,000 - resulting in property taxes of close to $15,000 per year. However - the market value for your building is around $4,500,000 which would yield an annual property tax of $45,000 if the parcel was re-assessed at market. Wow! A whopping difference of $30,000 per year.

Property Taxes Proposed. Some say this disparity creates an unfair advantage for certain businesses and a shortfall for state coffers. Authored is the California Schools and Local Community Funding Act of 2018. Under the proposition - which may appear as a ballot initiative on November 3, 2020 - commercial properties will be taxed differently than real estate zoned for residential and agricultural uses. Under the plan - certain commercial properties would be re-assessed every three years and immediately taxed at their current market value. Projected to generate $6-$10 Billion per year - 40% of the windfall is earmarked for schools.

Excluded from the initiative are owner occupied commercial properties with an assessed value of under $3,000,000. If your business employees fewer than 50 workers - good news! Your company is exempt from Business Personal Property taxes on your machinery, equipment and fixtures. Otherwise - a new $500,000 floor is created. You only pay the tax if the value of your machinery, fixtures and equipment exceed this amount.

What does this mean to you? This certainly depends. The examples below model some potential impacts.

Example 1. You lease an office, industrial or retail building and employee fewer than 50 folks. Depending upon the current assessed value of your owner’s building and the terms of your lease - your property taxes may increase but you’ll benefit from the exclusion of your business personal taxes.

Example 2. You lease an office, industrial, or retail building and employee more than 50 workers. Depending upon the current assessed value of your owner’s building and the terms of your lease - your property taxes may increase. You’ll pay business personal property tax on any fixtures, machinery, and equipment with an assessed value greater than $500,000. The initial $500,00 is exempt.

Example 3. You own and occupy a small commercial property - assume $225 per square foot for industrial, $275 for an office building, or $300 for a retail storefront - multiplied by your square footage. If the current assessed value of your real estate is less than $3,000,000 - no re-assessed property tax increase. And - if your headcount is fewer than 50 employees - you’ll also avoid the business personal tax.

Example 4. You own and occupy a 30,000 square foot industrial property. Your product is made of steel and you employee 100 individuals. Unfortunately - you’ll potentially face the perfect storm - your location will be re-assessed and taxed at the current value AND you’ll have to pay Business Personal Property taxes on your fixtures and equipment. You will - however - get a $500,000 exemption for the value of your fixtures, machinery, and equipment.

What should you do? Read the proposition! Seek counsel from a commercial real estate or tax professional on the exact impact to your business situation. Be mindful - of the proposition - when signing a new lease or extending an existing lease. Be vocal in your industry trade groups and social circles.

Allen C. Buchanan, SIOR, is a principal with Lee & Associates Commercial Real Estate Services in Orange. He can be reached at abuchanan@lee-associates.com or 714.564.7104. His website is allencbuchanan.com.