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Prop. 13 reform could be big boost to county's tax revenue, study says

Original post made on Jul 10, 2020

One of the major ballot initiatives facing voters in November will be the Schools and Communities First initiative. A new study found that San Mateo County would generate the most tax revenue per capita in the state if it passes.

Read the full story here Web Link posted Friday, July 10, 2020, 11:28 AM

Comments (27)

15 people like this
Posted by David B
a resident of Portola Valley: Central Portola Valley
on Jul 10, 2020 at 12:47 pm

When you hear the ads that Prop 15 is all about raising taxes on "Walmart and Target", don't believe it. Many small businesses will see their costs go up by this (and they'll raise prices to you).

Many businesses rent space with "triple-net" leases whereby they pay the rent plus their share of the taxes, insurance and maintenance costs on the building. If taxes go up, the increases are passed through to the tenants. It's not the landlord's fault, it's just the way the leases work.

I manage 5 properties with 24 tenants that have been in my family for a long time, and would be affected by this law. Total tax increase on the properties would be $428,000/year. Most of the tenants are small businesses.

The bill claims to exempt "some" small businesses, but the exemptions are very limited.... none of our tenants would qualify.

So sure, go ahead and vote for Prop 15... if you think this is a good time to raise costs on small businesses.


58 people like this
Posted by David R
a resident of Menlo Park: Allied Arts/Stanford Park
on Jul 10, 2020 at 3:02 pm

David B: With all due respect, if your family has owned 5 properties in the area "for a long time", you have been underpaying your share of property taxes relative to residential property owners for years. Unless you have been charging your tenants 1978-era rents during that time, maybe you and your family should consider absorbing the tax hit yourselves. Good luck passing any tax increases on to your tenants in this market.


6 people like this
Posted by Wendyb
a resident of Menlo Park: Central Menlo Park
on Jul 10, 2020 at 8:11 pm

This looks like a windfall for Menlo Park from a broad brush stoke observation. It is not. SMC will pay the most toward this Proposition and the bulk of the money goes to Sacramento. Read this proposition carefully - it is full of promises for schools but the amount of money that actually goes to schools is very small compared to the amount of money that will be collected.


9 people like this
Posted by David B
a resident of Portola Valley: Central Portola Valley
on Jul 10, 2020 at 9:57 pm

@DavidR: They're in Southern Cal, not the Bay Area. And I manage them on behalf of pools of "Mom and Pop" investors, many of whom are relying on the income in their retirement. We already had to reduce distributions due to giving breaks to tenants for the pandemic, and rental rates are collapsing as we speak. But the key point is: small business tenants WILL take a big hit with this law that the ads won't tell you about, and they WILL pass that on to their customers.


9 people like this
Posted by Howard Crittenden
a resident of Menlo Park: Downtown
on Jul 11, 2020 at 7:45 am

Adding to the previous posts, nearly all the commercial and industrial leases are on a triple net basis. The tenant pays taxes, insurance, and maintenance. The fat cat developers and property owners will not pay any increase in taxes but pass it on to the tenant.
The increase in expenses ultimately is passed on to the consumer, the voter. You might as well Not vote for this bill and just write a check to the tax collector directly. The result is exactly the same.


6 people like this
Posted by Menlo Voter.
a resident of Menlo Park: other
on Jul 11, 2020 at 7:55 am

Howard:

stop talking sense. This is a perfect example of why this state is so overtaxed. The majority of voters don't understand how economics works. They'll vote for this in a minute thinking the "fat cats" are paying the bill when actually they ultimately pay. But, they don't get it.


43 people like this
Posted by return the balance
a resident of Atherton: West Atherton
on Jul 11, 2020 at 9:18 am

You lost your credibility with this:

> It's not the landlord's fault, it's just the way the leases work.

Huh? "It's not the landlord's *fault*, it's just the primary tool used by landlords."

Then you back-peddle from "...have been in my family for a long time" to, oh no, I really meant it's "Mom and Pop investors".

Prop 13 has shifted the property tax burden in California from Commercial Property Owners to Residential Property owners.

It's time to return the balance.




5 people like this
Posted by Menlo Voter.
a resident of Menlo Park: other
on Jul 11, 2020 at 10:46 am

return the balance:

You do realize if you tax a business that tax gets passed on to the consumer, right? So increasing taxes on businesses (landlords) just increases what consumers have to pay. They're not going to come out of pocket so consumers don't have to pay more money. They're in business to make money. Your "re-balancing" doesn't "re-balance anything. It just changes where the consumer pays their money. Directly to the state, or to the state via the business.


67 people like this
Posted by return the balance
a resident of Atherton: West Atherton
on Jul 11, 2020 at 11:13 am

No. You're not correct.

Two apartment tenants, one renting from a landlord who has lower property taxes than the other landlord.

Does the first tenant pay less because the landlord's costs are lower? Of course not. The landlord with the lower taxes doesn't discount from the market. To paraphrase a song: he takes and he takes and he takes... a whole lot of Hamiltons.


15 people like this
Posted by Follow The Money
a resident of Menlo Park: Central Menlo Park
on Jul 11, 2020 at 12:24 pm

I own and run a small business employing 50 people in the technology sector manufacturing company. We pay our people very competitive wages but must compete with companies who build their products offshore.

My lease payments are triple net as described above. If this "reform" passes, my lease payments will increase substantially, and it will be even harder to preserve the jobs we are now providing.

Look at major supporters of this initiative: public employee unions. Why are they supporting it? Because it means more money to fund their fixed benefit pensions. I provide benefits to my employees, but they share in the cost. Why can't public employees do what we are doing? Do we really need to give more to the public sector employees at the expense of good paying private sector jobs? As sure as the sun comes up in the morning, raising commercial property taxes will cost jobs. When you are competing against offshore-built products you can't just raise prices to your customers. They have alternatives. It's basic economics.


6 people like this
Posted by CyberVoter
a resident of Atherton: other
on Jul 13, 2020 at 8:03 am

There is no "Free Lunch"! Step 1 is to cancel Prop 13 for greedy Property Owners & Step 2 will be to cancel Prop 13 for greedy homeowners!
Two things that you should understand:
1) Corporations never actually pay the taxes - they are eventually passed on to their customers (you & me) as higher costs of their products & services
- This is really a new tax on us
2) CA & local Governments are NOT addressing the COVID crisis as they should
- Virtually none are cutting their bloated staff (or even pay cuts), but are looking for Federal "Handouts" and new local taxes (see Prop 15) to continue their "Business as Usual"
- See Caltrain & BART as services that are now running with ~ 5% of ridership, but are looking for new taxes (New Sales Tax Initiative) so they can continue "AS IS" - Instead they should be restructuring to serve the "New Normal"!

Please vote No on Proposition 15!


16 people like this
Posted by HotArc
a resident of Atherton: other
on Jul 13, 2020 at 9:40 pm

Yes on 15.

Time to eliminate the loopholes and corporate welfare for large landowners and their commercial properties.


34 people like this
Posted by MCC
a resident of Menlo Park: other
on Jul 14, 2020 at 12:52 pm

Commercial property owners have loopholes unavailable to residential owners.

Equalize the rules for us and the millionaires and billionaires.

Pass the reform in prop 15.


7 people like this
Posted by Liesel
a resident of Portola Valley: Central Portola Valley
on Jul 14, 2020 at 1:14 pm

This will make it that much harder for small businesses to stay in business. Given the hit that many have taken from Covid 19 this will just be the last nail in the coffin for some of them. If you have small, local businesses that you love I strongly encourage you to VOTE NO. Lets not lose any more of our favorite establishments.

Also, for those that can, they will pass these costs onto you. Are you okay paying more for everyday items to pay for this? In the end this will be a tax on consumers. Don't you send enough of your hard earned $$ to Sacramento already?


7 people like this
Posted by Sammy
a resident of Menlo Park: Allied Arts/Stanford Park
on Jul 15, 2020 at 12:08 pm

Eliminate corporate loopholes.


62 people like this
Posted by PVwest
a resident of Portola Valley: Westridge
on Jul 15, 2020 at 4:55 pm

To the original poster, David B. of Portola Valley:

A tax bill of $428,000 means your property is worth in excess of $40,000,000.

Just re-write the leases and absorb the tax.

You've benefited enormously from the boom in California real estate. I bought a Palo Alto property in 1978 for $90,000 and sold it two years ago for $2.5M. Equity does that. It's real. Commiserating about reduced monthly payouts and the plight of tenants who aren't being offered a change in their lease terms, just doesn't cut it.

Be grateful. And also, remember that commercial property taxes are still 100% IRS deductible (unlike residential property taxes).


2 people like this
Posted by Menlomaniac
a resident of Menlo Park: Central Menlo Park
on Jul 20, 2020 at 2:29 am

More than three out of four small businesses in California do not own real property. Most small businesses in shops, industrial areas and office buildings lease their spaces. Standard triple net leases require that the leasing businesses cover any of the increases of insurance, maintenance and taxes. Basically, these small businesses are required under the contract of the lease to pay the property tax increase.

In turn, where possible, the small businesses will pass the tax increases on to customers in the form of higher costs. Goods and services will go up in price including gasoline, food, and retail goods.

So I am confused. How does the Almanac Editorial Board call this reform?


11 people like this
Posted by return the balance
a resident of Atherton: West Atherton
on Jul 20, 2020 at 5:52 pm

@manlomaniac - same response

"No. You're not correct.

Two apartment tenants, one renting from a landlord who has lower property taxes than the other landlord.

Does the first tenant pay less because the landlord's costs are lower? Of course not. The landlord with the lower taxes doesn't discount from the market. To paraphrase a song: he takes and he takes and he takes... a whole lot of Hamiltons."

Shocking how many large landowners defend their tax cuts and loopholes with a faux
"save small business" canard.


2 people like this
Posted by Menlomaniac
a resident of Menlo Park: Central Menlo Park
on Jul 21, 2020 at 2:07 am

I am also a landlord. I have some condo rentals and they had negative cash flow for about 20 years. In your example, the one with the lower property taxes most likely went through a significant cash well before he went positive. This was an investment. So using your tortured logic the person who sacrificed during the lean years shouldn't be able to eventually profit. So, why would anyone invest in housing? The answer is no rational person would do so. The end result of your logic is that there would be even a much greater housing shortage than exists today.

A wise person will sacrifice in the short and medium term if there is a long term gain. Take the long term gain away you stifle economic growth. Socialists love everyone sharing misery equally. Capitalists like everyone sharing prosperity with those being the most innovative, creative, and willing to sacrifice in the short and medium term having more prosperity. They created the wealth and are entitled to enjoy it. Those who are not willing to risk or do not have the capacity to create wealth are still better off under the Capitalist model than under Socialism.


2 people like this
Posted by Joan
a resident of Menlo Park: Central Menlo Park
on Jul 21, 2020 at 8:04 am

Don't be fooled. This is the first step in repealing Prop. 13. Vote NO.


Like this comment
Posted by @Menlomaniac
a resident of Menlo Park: Felton Gables
on Jul 21, 2020 at 12:47 pm

Your condos won't be affected by Prop 15. Only commercial and industrial properties are affected.


4 people like this
Posted by Menlomaniac
a resident of Menlo Park: Central Menlo Park
on Jul 22, 2020 at 3:01 am

Triple Net leases result in businesses passing the costs on to the consumer. This is just another way to get the hard working people of California to prop up the unsustainable pensions for State and Local Government workers. If you truly want to quit "dying by a thousand cuts" then you should insist that all State and local Government workers go to a defined contribution plan-like a 401K and eliminate defined pensions.

Instead of Prop 15 we should have a proposition for a defined Contribution plan.


Like this comment
Posted by Joan
a resident of Menlo Park: Central Menlo Park
on Jul 22, 2020 at 9:02 am

"Your condos won't be affected by Prop 15. Only commercial and industrial properties are affected."

That's not entirely true. There is a provision in Prop. 15 that affects parent to child transfers of RESIDENTIAL property.


2 people like this
Posted by David B
a resident of Portola Valley: Central Portola Valley
on Jul 22, 2020 at 1:29 pm

@Joan.... there is no mention of parent child transfers in Prop 15. The big one for that was Prop 58 in 1986.

Everyone who didn't like my arguments... I'll simply say again: Prop 15 tax increases will be passed on to many small businesses, who will likely raise prices on you to cover the costs. Whatever you think about corporations or landlords doesn't change that. If that's what you want, then sure, vote for it.


Like this comment
Posted by Joan
a resident of Menlo Park: Central Menlo Park
on Jul 22, 2020 at 3:36 pm

David, there is. I read it on the Howard Jarvis web site. The provision says a residence cannot pass from parent to child without being reassessed unless the receiving child lives in the residence for one year.


4 people like this
Posted by Jennifer Bestor
a resident of Menlo Park: Allied Arts/Stanford Park
on Jul 22, 2020 at 4:16 pm

Heartbreakingly, the correct title for this article would have been "Prop. 13 reform could be big loss to local schools.”

Below, at length, I run through six major local effects of the initiative’s mechanisms. I apologize — but reality is sadly different from the proposition's supporters’ hopes and imaginings — indeed, from my own hopes when I first saw it. I would be happy to support any statement below with in-depth analysis from public sources.

First, it is the language in the proposition itself that would divert half of San Mateo County's $800 million of new tax revenue to Sacramento. Property tax has NEVER left the county in which it is collected before. Article XIII Section 1 paragraph (a) of the California Constitution has always prohibited it. Until this.

Second, the proposition arrogates ALL new commercial construction property tax revenue to itself — along with all appreciation from sales of existing commercial property. This is not “new money” raised by the initiative, but future revenue that would have been collected anyway.

Thus, the new commercial construction that pushed Redwood City Elementary Schools into basic-aid status in December (sparing them this year’s massive education state-aid deferrals) would have simply been allocated to this state pot. The hundreds of millions of recent property sales on Sand Hill and Willow Roads that will be funding Las Lomitas, MPCSD and Sequoia Union HSD this year would also have been redirected, while those districts would just get a fixed $100 a year per student.

The legislature is allowed to decide how much school property to redistribute statewide. This year's precipitous $11B drop in the school funding minimum guarantee functionally allows the legislature to divert any proposition-related San Mateo revenue elsewhere in the state to fund schools, sparing its own General Fund revenue to spend outside education.

Third, the proposition effectively ensures that Ravenswood will never get enough property tax revenue to fund itself, unlike every district around it. This is a tragedy. Its tax base is growing faster than the county as a whole, 12.45% this year, compared with 7% generally. This base has been growing heavily on the back of new commercial construction. Meanwhile, Ravenswood’s state school funding allowance is flat, with no adjustment for the high local cost of living. Once again, Ravenswood would find itself the loser — not due to lack of local property tax available or allocated for its use, but due to yet another law favoring cities and county interests — and redirecting Ravenswood's tax to satisfy the state's commitments elsewhere.

Fourth, the proposition is measurably punitive towards business properties. California's acquisition-value based property tax system, established under Proposition 13 in 1978, extracts a substantial 40% tax premium from new property buyers for the first decade. Taxed initially at market value, the 2% growth cap provides predictability and a form of guarantee that an owner can recoup that first decade's subsidy in the second and third decade of ownership. Moving one property segment — commercial and industrial property — into perennial ’new buyer’ status effectively puts a 40% surcharge on that segment, given that the remaining three-quarters of all properties will continue to be assessed at an average of 70% of market.

Fifth, the proposition makes housing less attractive to local governments. Given this hefty 40% surcharge on commercial property, the Proposition encourages cities to pursue commercial development — not housing — making the Housing Commission’s recommendation counterproductive. Commercial development would yield 40% more revenue than residential development — due to its perpetual market-value basis — on top of sales tax revenue, occupancy taxes, business tax revenue, etc.

Sixth, please recognize that San Mateo County raises so much revenue because few local commercial properties would be exempted. Statewide percentages are weighted heavily by tens of thousands of small parcels in Imperial, Kings, Tulare, Yuba and other inland counties. No commercial property has changed hands in Menlo Park for less than $3 million recently except single suites within the medical/VC office buildings at 695 and 888 Oak Grove. The Flegel’s building — double the standard width for Santa Cruz Avenue — is on the market for $22,750,000 and has just gone into escrow. A standard (double-retail-front) parcel would sit in the $7-10 million range for land value alone — which is consistent with the sale of the half-wide 888 Santa Cruz for $3.3 million. The Jeffrey’s building on El Camino is on the market for $5.5 million, while larger properties start north of $10 million.

It was heartbreaking to me to realize that voting for this proposition was NOT to close the loophole that allows a small percentage of local landlords a big tax break — but rather to hand revenue our local schools would have received to Sacramento for disbursal elsewhere.

Finally, if you wonder what I’ve been writing about or how to check it, realize that the biggest victim here is civic transparency. Where do our local property taxes go? Until now the one thing I could say with certainty was ’somewhere in the county.’ Then I’d scramble to analyze the original AB-8 allocations, ERAF, Excess ERAF, the VLF Swap, the County Office of Education trial court diversion … and come up with some pretty good estimates. Moving forward, the answer will be ’somewhere.’ It is telling that this initiative requires recipients to document how much they get and where they spend it — but doesn’t require any county to publish how much they collect, then send to Sacramento, nor Sacramento to publish how much it receives or disburses.

Many of you know how carefully I’ve studied local property tax and school funding. For ten years, I’ve worked to close the loophole that allows about 15% of commercial owners to enjoy ‘widows and orphans’ tax benefits. But this is a smash-and-grab. It is the antithesis of tax fairness. It will hurt, not help, our local schools.


2 people like this
Posted by Jennifer Bestor
a resident of Menlo Park: Allied Arts/Stanford Park
on Jul 22, 2020 at 4:26 pm

Joan et al, there are two propositions on the ballot dealing with property tax. The split-roll commercial property measure is Proposition 15. The basis-portability and inheritance proposition is Proposition 19.

The latter, Proposition 19, has two main effects for taxpayers.

First, it allows older or disabled homeowners to transfer their current property tax basis to any new home anywhere in the state, with an adjustment if the new home is significantly more expensive than the current one.

Second, it restricts the inheritability of a parent's property tax basis to the situation where the child (or surviving grandchild) takes over the family home and lives there. It therefore ends the entitlement, created by Prop 58 in 1986, to pass on a home, business property, apartment building, to a child, that she or he then maintains as an income or vacation property, without re-assessing that property to market value at the time of transfer.


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