Dozens of measures are on California’s November 2020 election ballot, several of which will impact real estate, rent control and property taxes. If passed, these measures will change the state’s landscape for the next decade to come. To this extent, agents and brokers hold an especially large stake in Proposition 15.

What is Prop 15?

Proposition 15 (Prop 15) is a November 2020 ballot measure created to split roll the state’s property tax, subjecting commercial property owners to billions of dollars in additional taxes each year. The measure is aimed at closing a major loophole which allows investors and businesses to take advantage of reduced property taxes each year.

Under the ballot measure, commercial and industrial properties, excluding those zoned as commercial agriculture, would be taxed based on their current market value (CMV). Commercial property owners whose holdings are valued at $3 million or less are also protected from Prop 15.

In addition to small businesses, the bill also carves out an exemption for residential properties, which would remain subject to measures under Proposition 13 (Prop 13). Prop 13 caps property taxes at 1% of the purchase price with annual increases of no more than 2%.

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Why the change? Measures similar to Prop 15 have been on several past ballots. The state Legislative Analyst’s Office found market values in California typically increase faster than 2% each year, meaning the taxable value of commercial and industrial properties is often lower than the current market value.

So, what exactly would change?

Commercial properties would be taxed on their CMV instead of their purchase price.

The change from the purchase price to CMV would be phased in beginning the fiscal year of 2022-2023 and occur over three to four years. Commercial property owners affected by Prop 15 would need to pay taxes based on the new assessed value of their property, beginning with the lien date for the fiscal year in which the property’s CMV is reassessed.

The California Legislature would be required to ensure that phase-in provisions provide affected owners of under-assessed commercial and industrial real estate reasonable time to pay any increase in tax obligations resulting from the measure.

Prop 15 would require commercial and industrial real estate to be reassessed at least every three years. Under Prop 13, real property is only assessed when it is sold or undergoes significant construction.

Properties whose business owners have $3 million or less in holdings in California would continue to be taxed based on their purchase price.

Further, the ballot measure would eliminate the business tangible personal property tax on equipment and features for small businesses and provide a $500,000 per year exemption. The California Legislature may not reduce the exemption but may increase it.

Small businesses are defined as those which are independently owned and operated, own California property and have 50 or fewer employees.

Where would the revenue go?

Prop 15 would provide between $6.5 and $11.5 billion dollars in new property taxes funding local schools and governments. Sixty percent would go to cities, counties and special districts, and around 40 percent would increase funding for schools and community colleges.

The measure will distribute the revenue from the revised tax on commercial and industrial properties to the state to:

  • supplement decreases in revenue from the state’s personal income tax and corporation tax due to increased tax deductions; and
  • counties to cover the costs of implementing the measure.

The state has long searched for a solution to separate commercial and residential property taxes. If passed, Prop 15 will place a bigger tax burden on commercial property owners while residential and small business owners will remain subject to current property tax law under Prop 13. California has found a veritable loophole closer in Prop 15.