What Prop 15 means to California Hotel Owners
Hotel owners could finally see a balance of property taxes across the state if Prop 15 passes this election. They could also see substantial increases.
What is Prop 15?
On election day this year, voters in California will be choosing between maintaining the existing Prop 13 which has been in place for 42 years (since 1978) and Prop 15, the first meaningful adjustment to tax laws with regard to assessing real estate in California for property tax purposes.
Proposition 15 is a repeal of Prop 13 whereby commercial property will go no less than three years between assessments, where-as currently property is valued on the date of transfer and capped at a rate of 2% per year.
If passed, many commercial properties are going to have significantly larger tax bills. That means less revenue flowing to an investor's bottom line. And if you're an office tenant paying triple net leases, your tenants are all going to see an increase in their expenses.
The ultimate goal of Prop 15 is to raise taxes to current market value, generating billions annually providing new funding to local governments and schools.
Who will Prop 15 affect?
Most commercial property types are affected except Multi-Housing (which is being considered residential). Retail will have a delay in the enrollment and exceptions will be made on a rolling bases depending on occupancy and company sizes.
What can property owners do to prepare for Prop 15 if it passes?
California Hotel owners should hire a third-party consulting firm to review and minimize their assessments, based on available laws, that allow for intangible (non-taxable) asset value to be removed. An experienced property tax advisor can make sure you are being fairly assessed, especially given the current economic climate. With COVID, we expect assessments in general to come down in California, at least for the next 2-3 years.
The impact for more recent hotel purchases is minimal, and in fact might actually see reductions, however properties purchased years ago at lower basis could see a substantial increase in taxes. This may increase the hotel sales in the market.
There will of course be winners and losers among asset classes. The playing field will be leveled between similar hotels with significantly different property tax assessments based on when they were purchased.
Are there other states proposing similar tax legislation?
Yes, however the State of California has very specific legislation from Proposition 13 that limits property tax increases to 2 percent or CPI, whichever is lower. The result is properties that have been held for extended period generally have a lower tax basis than properties bought more recently. This is unique to California. Ultimately, Proposition 15 would appeal that rule for most commercial properties. Its cost would therefore vary considerably based on when the property was purchase and how much it has appreciated since purchasing the property.
What are the arguments for and against Prop 15?
According to California's official voter information guide: https://voterguide.sos.ca.gov/propositions/15/
Pros: Prop. 15 is a fair and balanced reform that: closes property tax loopholes benefitting wealthy corporations, cuts taxes for small businesses, protects homeowners and renters, requires full transparency and reclaims billions of dollars for schools and local communities. Supported by nurses, teachers, small business owners, affordable housing advocates and community organizations.
Cons: Prop 15 is a $12.5 billion property tax increase that raises our cost of living and makes everything we buy - food, gas, utilities, day care and health care - more expensive. Prop 15 repeals taxpayer protections in Prop 13.
Summary
While we cannot predict the results of the voting on this issue, hiring a Property Tax advisor like JLL is highly recommended during times of change. It's important to have someone valuation expertise, so that if these assessments become uncapped you can still maintain an equitable fair market level valuation. Hotel property owners in California should keep an eye on the results of this proposition and if we don't call them first, they should call us if it goes the way of a yes vote. And even if it's a no vote, we will be aggressively appealing assessments in California anyway due to current economic environment and other factors specific to each individual Property.
About JLL
For over 200 years, JLL (NYSE: JLL), a leading global commercial real estate and investment management company, has helped clients buy, build, occupy, manage and invest in a variety of commercial, industrial, hotel, residential and retail properties. A Fortune 500® company with annual revenue of $20.9 billion and operations in over 80 countries around the world, our more than 103,000 employees bring the power of a global platform combined with local expertise. Driven by our purpose to shape the future of real estate for a better world, we help our clients, people and communities SEE A BRIGHTER WAYSM. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit jll.com.
