The Prop 15 Details No One Is Talking About

Prop 15 has been one of the most talked-about ballot measures in California, especially for commercial real estate professionals. If passed, the measure would increase property taxes for commercial and industrial assets, which are currently protected under Prop 13. While the proposition has been making headlines, there are a few important details that no one is talking about.

“The least talked about nuance about Proposition 15 is that a lot of critical details are yet to be determined.  In that regard, Proposition 15 requires the creation of a “Task Force” that will fill a lot of the holes in Proposition 15.  For example, this Task Force will determine the phase-in schedule of the tax increase and when those tax increases are actually due,” Fernando Landa, a partner at law firm Crosbie Gliner Schiffman Southard & Swanson.

In addition, there are missing details in the law, like how often properties will be reassessed or how mixed-use properties, which include both retail and residential, will be assessed. “We also do not know how frequently properties will be reassessed to market value,” Landa says. “Because residential property is exempt from Proposition 15, how mixed-use properties will be taxed is also still to be determined.  If Proposition 15 passes, property owners will have to monitor the decisions of the Task Force and legislative action to assess the impact on their properties.”

The proposition will impact all asset classes, except for residential and agricultural land, which are expressly exempt. In addition, some owners of commercial properties will also be exempt. “Also exempt from Proposition 15 are assets valued at $3 million or less provided the owner or beneficial owner of such asset does not own other real estate that, in the aggregate, has a value that exceeds $3 million,” says Landa. “These $3 million thresholds will increase in accordance with changes to the Consumer Price Index.  Also, if an asset is fifty percent or more occupied by small businesses, then any reassessment will not take place until at least the 2025-2026 tax year.”

As a result, large landlords or landlords or larger assets will be the most impacted by the proposition. However, Landa says that this will impact all CRE assets. “Assets owned by larger landlords and/or assets occupied by larger tenants will be affected first, but Proposition 15 will eventually impact all commercial real estate assets,” says Landa. “Also, Proposition 15 will likely impact how commercial real estates are valued, so all commercial real estate—regardless of its size or tenant base—will be affected.”

Proposition 15 overturns Prop 13 in part, but residential properties are still protected. There has been a lot of speculation that this is the first step toward completely overturning Prop 13. “Any repeal of Proposition 13 as to residential properties would similarly require of an affirmative vote of Californians,” says Landa. “Political winds can change quickly, but right now, it is hard to imagine Californians affirmatively voting to repeal Proposition 13’s protections for residential properties.  It is easier to imagine Proposition 13 being repealed for residential properties valued in excess of a certain threshold, but a wholesale repeal of Proposition 13 seems politically challenging right now.”