California’s Split Roll Initiative Would Eliminate CRE Property Tax Cap

Split Roll Tax Advances Toward November Vote

(VIA: Taylor Kendzora, Kidder Mathews)

In November 2020, California voters will decide if property tax assessment calculations will be changed. The proposed Split Roll Ballot, called “The Schools and Communities First” initiative, seeks to increase property taxes by eliminating the existing annual assessment cap. Should the bill pass, many property owners will see their tax bills rise significantly. The split roll could amount to the largest tax increase ever in California.

California voters imposed strict limits on property tax in 1978, when Proposition 13 passed. Currently, annual California property tax assessment increases are limited to the California Consumer Price Index or 2%, whichever is less. If passed, the new measure would mandate that commercial properties be re-assessed based on their market value in 2021 and then be re-assessed every three years at market value, thus effectively eliminating the cap on commercial property taxes.

California Secretary of State Alex Padilla certified last month that the bill had secured enough valid signatures to appear on the November 3, 2020 ballot in California as an initiated constitutional amendment. This version of the bill retains limits on tax increases for residential properties but allows new commercial site assessments.

The change would be phased-in beginning on January 1, 2022. Properties with occupancy of 50% or more (retail buildings, etc.) would be taxed based on market value beginning in fiscal year 2025-2026 or later as determined.

Analysts believe the bill could translate to property taxes doubling or even tripling over the coming two years. Research by the International Council of Shopping Centers (ICSC) notes that if enacted, the initiative could generate more than $11 billion in commercial property taxes in the state, depending on the real estate market.

Even with a California economy battered by the negative impacts of the COVID-19 pandemic, the Split Roll will challenge businesses and reduce jobs while adding to the cost burden carried by consumers and property owners. The biggest commercial real estate asset class feeling the Split Roll Tax impact could be the retail sector.

This increase may have a significant impact on retail tenants since property taxes are typically passed through to the tenant. Under NNN leases, these additional taxes levied on a property owner are directly passed onto each business owner. Retailers are already struggling with stay-home orders, shifts in consumer spending habits, and the emergence of online e-commerce shopping. It’s unlikely small retail businesses in California can support these increases, therefore customers may seek lower-cost options, further hurting retailers.

Those higher occupancy costs will land hard on a retailer’s bottom line, and likely cause low margin businesses to fail, costing jobs and out-migration to lower-cost states or forcing retailers to elect not to open a location in the Golden State.