Palm Desert Assembly member Brian Nestande said it best: “It must be a cold day in hell. The cow jumped over the moon. And pigs are flying somewhere.”
The Howard Jarvis Taxpayers Association (HJTA) has withdrawn its opposition to Assembly Bill 2372. AB 2372 proposes to close a longstanding loophole in the 1978 Proposition 13 (Prop. 13) property tax law. This statement follows HJTA’s indication last year that they and other tax watchdogs were “open to narrow legislation to fix the law.”
The laws implementing Prop. 13 enable incorporated property owners to skirt reassessment by gaming the legislation’s definition of “transfer of ownership.” Under the current scheme, reassessment is triggered only if one person or entity gains a majority ownership interest in the transferred property (or an entity which owns the property).
AB 2372 instead provides that a change in ownership occurs when 100% of the ownership interest in a property or a property-owning entity is transferred in a single transaction, regardless of whether anyone takes a majority stake.
The fact HJTA has decide not to oppose AB 2372 is a huge development for several reasons.
First, HJTA is Prop. 13’s foremost cheerleader and the namesake of the proposition’s godfather. The eponymous Howard Jarvis, a lobbyist for the Los Angeles Apartment Owners Association (LAAOA), was instrumental in the design and passage of the ballot initiative. His employment with the LAAOA says a great deal about what type of property owner the law was truly designed to benefit.
The Jarvis legacy organization’s refusal to fight the closure of a loophole benefiting corporate property ownership is a testament to Prop. 13’s inequitable tax protections.
Second, HJTA’s demurrer to the proposed legislation indicates the clouds of public misunderstanding are finally parting. According to the Los Angeles Times, a recent Gallup poll revealed 69% of voters were in favor of changing Prop. 13 to ensure that large, expensive properties are reassessed fairly when they change hands.
Californians are coming to an overdue realization: Proposition 13 needs serious reworking.
Taking taxpayers for a ride
Here’s how incorporated owners milk the law’s protections: under Prop. 13, property tax reassessment is triggered when any one entity attains a 50% or greater ownership stake upon the transfer of a property. Large property owners and their tax attorneys structure deals so properties are bought and sold through consortia and shell companies in which no one party holds a majority stake. Thus, when the transfer of property occurs, reassessment isn’t triggered since a change of ownership hasn’t taken place. Technically.
Just recently, this issue came up in Los Angeles when real estate giant Brookfield acquired millions of square feet of downtown office space. Brookfield avoided reassessment of extremely valuable commercial property by taking title via a new entity in which it has only a 47% stake. The rest of the ownership was split nominally with financial partners. No one person or entity acquired more than 50% ownership in the property, and thus no reassessment was triggered.
Such a maneuver is totally above-board and, from a business perspective, the savvy thing to do. It’s standard practice for big-league property owners and investors. In 2006, tech magnate Michael Dell restructured a multi-million dollar hotel purchase to avoid reassessment. Dell, his wife and other partners took minority stakes in a shell holding company which acquired the property in a highly public last-minute tax dodge. Dell pays property tax on just 43% of the $200 million purchase price.
And Westfield Group, the international operator of fabulously profitable malls, withered controversy last year for chronic under-assessment of their lucrative real estate holdings. A labor group exposed the huge discrepancy between the value of their Century City mall property reported to shareholders and the assessed value on which they paid taxes. That gap – nearly half a billion dollars – came to light even as they asked the City of Los Angeles for millions in subsidies to redevelop another nearby shopping center.
These are just the most high-profile examples. An entire cottage industry of law firms and tax consultants are dedicated to helping corporate property owners exploit the tax haven baked into Prop. 13. Take it from first tuesday readers themselves – one recent commenter with experience in this field says it best:
“…until California figures out there are people like me out there costing the state billions of dollars of lost – and fully appropriate – tax dollars, we will just keep on doing it.”
A lesser evil
We’re not here to argue that the state needs more or less revenue, or that this or that type of taxpayer deserves to pay more or less in tax. Such proclamations are beyond the scope of both this article and our expertise. Increasing taxes is neither the issue nor the goal here.
And we have made it abundantly clear we are not fans of Prop. 13. Prop. 13 is a deeply regressive tax scheme that places an outsize burden on younger, less-established homeowners while stifling sales volume and homeownership in times of inflated prices (read: today). There are better, fairer ways to protect property owners from excessive property tax burdens.
We know we’re in the minority here – and realistically, Prop 13 isn’t going anywhere. Repealing Prop. 13 is political suicide for anyone who dares to undertake such a project.
But that doesn’t mean we can’t improve how Prop. 13 works. A strong argument can be made for a system that ensures both a predictable cost of ownership for homeowners and a stable source of revenue for the operation of the state.
What we are arguing for, and what AB 2372 offers, is a just and rational application of our existing tax law. Eliminating this unequal taxation loophole – which gives corporate buyers a tremendous edge individual homebuyers cannot access – is a step in that direction.
It’s far past time for this. If we’re going to live with the uneven tax playing field created by Prop. 13’s unintended side effects, we can at least make sure it applies to everyone equally.