How much of a role does prop13 play in this discussion? ( the real deal)

https://www.latimes.com/california/story/2019-08-14/california-proposition-13-business-taxes-split-roll

going4roses said:

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How much of a role does prop13 play in this discussion? ( the real deal)

https://www.latimes.com/california/story/2019-08-14/california-proposition-13-business-taxes-split-roll

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It would be huge if this passed. I fully agree with the idea of repealing Prop 13 protections for large businesses.

sycasey said:

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going4roses said:

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How much of a role does prop13 play in this discussion? ( the real deal)

https://www.latimes.com/california/story/2019-08-14/california-proposition-13-business-taxes-split-roll

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It would be huge if this passed. I fully agree with the idea of repealing Prop 13 protections for large businesses.

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This legislation actually doesn't look at the size of the business. Let me repeat that, it is not based on the tenant being a small business, but the property owner (landlord). being a small business, which they consider to mean has property value over $3 million. $3 million is basically the value of any single purpose stand along parcel in most urban areas with a tenant of any credit value. This means essentially every commercial landlord in the urban parts of the states.

Almost all commercial leases are triple net, meaning taxes are passed through to the tenant. You can kiss any small or start-up tenant good-bye, as they typically operate on small marries and can't pass the extra tax hit, which is significant if the landlord owns the property for any length of time. And I do mean good bye to mom and pop businesses. If this passes, in it's present form, I can assure you that the Democrats will not win a state wide office for some time. I know since discussion came out about the split roll, we have refused to lease to anyone who isn't a chain, or is in retail. All those boutique restaurants you guys like - gone. All those specialty shops - gone. Retail in particular has taken hard hits from the internet. This could be a fatal blow to what remains of the industry in Calfornia, except for very high margin stores, and the Costco's of the world that can pass on costs. Oh, and as income drops, so do tax revenues in a state which is way to dependent on income tax revenues. Guess we were right to be selling a good portion of our Cali properties and to buy in neighboring states. Values should go up their considerably as business migrates out of California.

wifeisafurd said:

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sycasey said:

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going4roses said:

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How much of a role does prop13 play in this discussion? ( the real deal)

https://www.latimes.com/california/story/2019-08-14/california-proposition-13-business-taxes-split-roll

---

It would be huge if this passed. I fully agree with the idea of repealing Prop 13 protections for large businesses.

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This legislation actually doesn't look at the size of the business. Let me repeat that, it is not based on the tenant being a small business, but the property owner (landlord). being a small business, which they consider to mean has property value over $3 million. $3 million is basically the value of any single purpose stand along parcel in most urban areas with a tenant of any credit value. This means essentially every commercial landlord in the urban parts of the states.

Almost all commercial leases are triple net, meaning taxes are passed through to the tenant. You can kiss any small or start-up tenant good-bye, as they typically operate on small marries and can't pass the extra tax hit, which is significant if the landlord owns the property for any length of time. And I do mean good bye to mom and pop businesses. If this passes, in it's present form, I can assure you that the Democrats will not win a state wide office for some time. I know since discussion came out about the split roll, we have refused to lease to anyone who isn't a chain, or is in retail. All those boutique restaurants you guys like - gone. All those specialty shops - gone. Retail in particular has taken hard hits from the internet. This could be a fatal blow to what remains of the industry in Calfornia, except for very high margin stores, and the Costco's of the world that can pass on costs. Oh, and as income drops, so do tax revenues in a state which is way to dependent on income tax revenues. Guess we were right to be selling a good portion of our Cali properties and to buy in neighboring states. Values should go up their considerably as business migrates out of California.

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This makes no sense WIAF. When your properties are vacant won't you lower the rent? I agree that this is a redistribution of wealth from land owners to the state's coffers, but to argue that landowners will hold their land vacant rather than assume any additional margin-reducing tax seems to fly in the face of economic theory.

Will there be dislocation in the short and medium term? Sure. But will that dislocation be as meaningful as you claim - I would love to see a study on it.

Unit2Sucks said:

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wifeisafurd said:

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sycasey said:

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going4roses said:

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How much of a role does prop13 play in this discussion? ( the real deal)

https://www.latimes.com/california/story/2019-08-14/california-proposition-13-business-taxes-split-roll

---

It would be huge if this passed. I fully agree with the idea of repealing Prop 13 protections for large businesses.

---

This legislation actually doesn't look at the size of the business. Let me repeat that, it is not based on the tenant being a small business, but the property owner (landlord). being a small business, which they consider to mean has property value over $3 million. $3 million is basically the value of any single purpose stand along parcel in most urban areas with a tenant of any credit value. This means essentially every commercial landlord in the urban parts of the states.

Almost all commercial leases are triple net, meaning taxes are passed through to the tenant. You can kiss any small or start-up tenant good-bye, as they typically operate on small marries and can't pass the extra tax hit, which is significant if the landlord owns the property for any length of time. And I do mean good bye to mom and pop businesses. If this passes, in it's present form, I can assure you that the Democrats will not win a state wide office for some time. I know since discussion came out about the split roll, we have refused to lease to anyone who isn't a chain, or is in retail. All those boutique restaurants you guys like - gone. All those specialty shops - gone. Retail in particular has taken hard hits from the internet. This could be a fatal blow to what remains of the industry in Calfornia, except for very high margin stores, and the Costco's of the world that can pass on costs. Oh, and as income drops, so do tax revenues in a state which is way to dependent on income tax revenues. Guess we were right to be selling a good portion of our Cali properties and to buy in neighboring states. Values should go up their considerably as business migrates out of California.

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This makes no sense WIAF. When your properties are vacant won't you lower the rent? I agree that this is a redistribution of wealth from land owners to the state's coffers, but to argue that landowners will hold their land vacant rather than assume any additional margin-reducing tax seems to fly in the face of economic theory.

Will there be dislocation in the short and medium term? Sure. But will that dislocation be as meaningful as you claim - I would love to see a study on it.

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Only to a limited degree. A lot of what will change is who you rent to, assuming you are in somewhat desirable locations. IMO, there will be a massive change in the better properties to services (from retail) and business that can pass on higher tax costs. Most large commercial tenants, especially with a direct to consumer presence, spend a huge amount of time on site selection and know where they must be located to maximize sale. If they and all their local competitors have to pass on the extra cost, so be it, as long as everyone is essentially paying the same tax; that is, they are accepting the extra cost passed through by the lease. I think the fall out is on small business, like a family business, such as a restaurant, or a start-up that has to conserve cash, that can't pass the cost on. They are priced out of the good properties and will have to close or find far less desirable areas, where the landlord can't pass on the tax. So, for example, we are one of the larger commercial landlords in downtown Laguna Beach. If Whole Foods comes to us and says we won't pay the tax, we say fine, you are in breach, and Pavilions wants you space (this is a very much a hypothetical as Whole Foods seems to be able to charge anything they want w/o any loss in customers). But the way commercial leases are structured, as long at there is surplus tenant demand, and the tenant and its competitors can pass the tax on, I see no harm, no foul. The problem with be our laundry guy can't, the gelato place probably can't (this may be beneficial to my waist line), the person that does nails can't, the start-up in the upstairs office that currently doesn't make any revenue yet will see it's burn rate skyrocket from extra tax, etc. (the start-up probably thinks it can move to cheap quarters in Santa Ana, but it may lose some of its keep employees that want to be near the beach if it does so). I some ways this will be a very regressive tax. That said, there is plenty of demand for this property from other tenants that can pass the tax on.

Any studies I have seen are by biased parties (not surprisingly, liberal academics think split role is great, business groups its terrible), and were based on looking that the size of the tenant. I'm really surprised they did this by landlord size, rather than tenant size. They are going to kill small retailers.

wifeisafurd said:

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But the way commercial leases are structured, as long at there is surplus tenant demand, and the tenant and its competitors can pass the tax on, I see no harm, no foul. The problem with be our laundry guy can't, the gelato place probably can't (this may be beneficial to my waist line), the person that does nails can't, the start-up on the office that currently doesn't make any money yet will see it's burn rate skyrocket, etc. (the start-up probably thinks it can move to cheap quarters in Santa Ana, but it may lose some of its keep employees that want to be near the beach if it does so).

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The commercial real estate market is a market like any other. California wouldn't be the only state where commercial properties pay taxes based on current value - far from it. You are sort of assuming that it's a given that landlords will continue to be able to command the same rents plus the increased taxes, but is there a reason to believe that will be the case?

I'm not an expert on commercial real estate like you, but what you seem to be saying is that something that works in every other state in the nation (including in other desirable real estate markets) is unworkable in California, and I don't see why that would be the case. Will it be painful for commercial landlords? Certainly, particularly in the short term. I don't think it will change the fundamental dynamics of the commercial real estate market however, If 10% of commercial tenants will be priced out of the market, landlords will need to adjust their expectations and the market will become more tenant friendly.

Unit2Sucks said:

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wifeisafurd said:

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But the way commercial leases are structured, as long at there is surplus tenant demand, and the tenant and its competitors can pass the tax on, I see no harm, no foul. The problem with be our laundry guy can't, the gelato place probably can't (this may be beneficial to my waist line), the person that does nails can't, the start-up on the office that currently doesn't make any money yet will see it's burn rate skyrocket, etc. (the start-up probably thinks it can move to cheap quarters in Santa Ana, but it may lose some of its keep employees that want to be near the beach if it does so).

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The commercial real estate market is a market like any other. California wouldn't be the only state where commercial properties pay taxes based on current value - far from it. You are sort of assuming that it's a given that landlords will continue to be able to command the same rents plus the increased taxes, but is there a reason to believe that will be the case?

I'm not an expert on commercial real estate like you, but what you seem to be saying is that something that works in every other state in the nation (including in other desirable real estate markets) is unworkable in California, and I don't see why that would be the case. Will it be painful for commercial landlords? Certainly, particularly in the short term. I don't think it will change the fundamental dynamics of the commercial real estate market however, If 10% of commercial tenants will be priced out of the market, landlords will need to adjust their expectations and the market will become more tenant friendly.

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Again there will be winners and losers. Companies that pass on the tax (again as long as their competitors do) will not care. This means everything just keeps getting costlier in California, but your Whole Foods isn't going anywhere. Those that can't pass on the tax probably fail, and that means higher unemployment. My guess os landlords in less desirable areas probably drop rent. But the areas are less diserable for a reason and may not be good substitutes for most retail that is priced out by the higher tax. Overall less income tax, and probably some severe economic problems in areas that already have problems from being undesirable. I also could see a loss in overall property values, which also is counter the intent of the tax.

I don't see how this impact residential housing other than there is more unemployed.

BTW, commercial real estate is not like regular markets, and I can't even begin to tell you the arguments I have when dealing with a lender or a financial analyst type. I can't tell you how many analysts I run into that start looking at rates of return on improvements, on improvements until I tell them that is utter BS. You sell when the market is hot, not based on useful life of improvements, and you typically don't recover the unamortized cost of an improvement if you sell early in hot market, because they buyer is only looking at your tenant's credit value and lease provisions and what other smiler properties are selling for, and not that you have a new facade or whatever. (You may make Improvements to attract a certain buyer that is a completely different analysis. Real estate is not like a stock you could or a company that makes products, or selling products.

WIAF - you seem to be ingoring market forces. Tenants look at total cost, they don't necessarily care about whether it's rent or taxes or maintenance. If landlords could charge more, they would do so now. Why would 100% of this tax increase be passed onto tenants any more than a corporate income tax increase?

This of course relates to the same discussion we had about the reduction in federal corporate income tax. I think you are taking the same alarmist position that business owners take with respect to corporate taxes. This will certainly negatively impact returns for real estate investors in California, but it's something that landlords all over the country deal with and in the long run it will work in California too. Whole Foods may initially pay higher costs when factoring in rent plus taxes on existing leases, but come renewal time they will benefit from lower rents as everyone takes into account the higher operating costs associated with commercial real estate. My expectation is that, as with all other taxes, the burden will be shared.

EDIT: By the way, won't this also fix the asymmetry between landlords who have owned their properties longer and haven't had their property's assessed value stepped up upon a transfer? It arguably will create a more fluid and dynamic commercial rental market. Of course, there are ways landlords get around ever having it step up upon transfer through LLCs. In any event, it's clearly the case that there are currently commercial property owners paying and passing through up to date tax assessments.

Unit2Sucks said:

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WIAF - you seem to be ingoring market forces. Tenants look at total cost, they don't necessarily care about whether it's rent or taxes or maintenance. If landlords could charge more, they would do so now. Why would 100% of this tax increase be passed onto tenants any more than a corporate income tax increase?

This of course relates to the same discussion we had about the reduction in federal corporate income tax. I think you are taking the same alarmist position that business owners take with respect to corporate taxes. This will certainly negatively impact returns for real estate investors in California, but it's something that landlords all over the country deal with and in the long run it will work in California too. Whole Foods may initially pay higher costs when factoring in rent plus taxes on existing leases, but come renewal time they will benefit from lower rents as everyone takes into account the higher operating costs associated with commercial real estate. My expectation is that, as with all other taxes, the burden will be shared.

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Well I'm not ignoring real estate market decision making. For starters, tenants look at the ratio of occupancy costs to sales. if occupancy costs and sales go up the same amount because the cost is passed through to consumers, there is no change. The reason they can raise their prices is because their competitors costs went-up also, so everyone is passing the costs along. Admittedly, as some cost point, there is drop in demand at some level of cost increase, so sales are impacted. But where the tax pass through is a small portion of the overall cost, like to Costco's or Whole Food's sales, you are not going to see a drop off.


As for market forces, it's called price inelasticity for the economics majors. Go back to supply and demand curves and see at the lower cost increase levels, consumer demand really doesn't change. That doesn't hold for mom and pop company when they don't have the large revenues to spread the overall percentage cost of the price increases due to increased taxes. This is basic Econ 101 and further, it means the impact in the short run will be borne by small business, and the politicians that pushed this lame legislation. BTW, if you said we are going to protect small business tenants from the tax (rather than a few small landlords), a completely different result.

Unit2Sucks said:

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WIAF - you seem to be ingoring market forces. Tenants look at total cost, they don't necessarily care about whether it's rent or taxes or maintenance. If landlords could charge more, they would do so now. Why would 100% of this tax increase be passed onto tenants any more than a corporate income tax increase?

This of course relates to the same discussion we had about the reduction in federal corporate income tax. I think you are taking the same alarmist position that business owners take with respect to corporate taxes. This will certainly negatively impact returns for real estate investors in California, but it's something that landlords all over the country deal with and in the long run it will work in California too. Whole Foods may initially pay higher costs when factoring in rent plus taxes on existing leases, but come renewal time they will benefit from lower rents as everyone takes into account the higher operating costs associated with commercial real estate. My expectation is that, as with all other taxes, the burden will be shared.

EDIT: By the way, won't this also fix the asymmetry between landlords who have owned their properties longer and haven't had their property's assessed value stepped up upon a transfer? It arguably will create a more fluid and dynamic commercial rental market. Of course, there are ways landlords get around ever having it step up upon transfer through LLCs. In any event, it's clearly the case that there are currently commercial property owners paying and passing through up to date tax assessments.

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Your edit. I tend to agree with that part. And as result I think you will see cap rates for commercial properties rise, which is a major economic loss to the California economy. I certainly don't want to be a lender being told by my auditors that so many of my real estate loans are now underwater or out of compliance, which I now have to disclose. I can also see the have a chilling impact on new building.

That said I don't agree with your view that you can get around tax reassessments with LLC ownership changes. The SBE regs are in direct contraction (more that 50% change of ownership interests is a change of ownership triggering reassessment). I don't think people have really thought through all the consequences of this approach. You know there were reasons Brown was so against the tax roll split.

wifeisafurd said:

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My two cents. The one thing politicians done't seem to get is that capital is much more portable these days, It really doesn't care much about international borders. It moves to where the best returns are for risk. The more risk government, social and economic unrest imposes, the less likely capital will flow to finance all that production. And capital markets react bad to volatile situations. For the political risk: a President that tweets about massive changes in trade or business policies every couple days. Also, it doesn't like radical change that say a Sanders is proposing, and my guess is capital will flee from a Sanders or Warren win. From a political risk perspective, a steady guy like Biden is preferable. (This ignores all the other non-economic issues in electing a President).

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I'll double your 2 cents and make it 4.
Where you and I differ, I believe, is you fear Sanders/Warren more than Trump, while I think Trump is 10x more dangerous than the progressive liberal proposals.

Do not forget, or underestimate, Wife, that any Sanders/Warren presidential proposals would need congress approval, and that is almost always a tough pass - and currently would be a near impossible thing given the Debate is GOP controlled.

The changes those two propose are unlikely to happen. Meanwhile, Trump is a walking talking land mine who explodes DAILY.

No more!
He is ruining our culture!!!

wifeisafurd said:

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sycasey said:

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going4roses said:

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How much of a role does prop13 play in this discussion? ( the real deal)

https://www.latimes.com/california/story/2019-08-14/california-proposition-13-business-taxes-split-roll

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It would be huge if this passed. I fully agree with the idea of repealing Prop 13 protections for large businesses.

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This legislation actually doesn't look at the size of the business. Let me repeat that, it is not based on the tenant being a small business, but the property owner (landlord). being a small business, which they consider to mean has property value over $3 million. $3 million is basically the value of any single purpose stand along parcel in most urban areas with a tenant of any credit value. This means essentially every commercial landlord in the urban parts of the states.

Almost all commercial leases are triple net, meaning taxes are passed through to the tenant. You can kiss any small or start-up tenant good-bye, as they typically operate on small marries and can't pass the extra tax hit, which is significant if the landlord owns the property for any length of time. And I do mean good bye to mom and pop businesses. If this passes, in it's present form, I can assure you that the Democrats will not win a state wide office for some time. I know since discussion came out about the split roll, we have refused to lease to anyone who isn't a chain, or is in retail. All those boutique restaurants you guys like - gone. All those specialty shops - gone. Retail in particular has taken hard hits from the internet. This could be a fatal blow to what remains of the industry in Calfornia, except for very high margin stores, and the Costco's of the world that can pass on costs. Oh, and as income drops, so do tax revenues in a state which is way to dependent on income tax revenues. Guess we were right to be selling a good portion of our Cali properties and to buy in neighboring states. Values should go up their considerably as business migrates out of California.

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You could/should write a detailed op-ed for the LATimes.

concordtom said:

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wifeisafurd said:

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My two cents. The one thing politicians done't seem to get is that capital is much more portable these days, It really doesn't care much about international borders. It moves to where the best returns are for risk. The more risk government, social and economic unrest imposes, the less likely capital will flow to finance all that production. And capital markets react bad to volatile situations. For the political risk: a President that tweets about massive changes in trade or business policies every couple days. Also, it doesn't like radical change that say a Sanders is proposing, and my guess is capital will flee from a Sanders or Warren win. From a political risk perspective, a steady guy like Biden is preferable. (This ignores all the other non-economic issues in electing a President).

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I'll double your 2 cents and make it 4.
Where you and I differ, I believe, is you fear Sanders/Warren more than Trump, while I think Trump is 10x more dangerous than the progressive liberal proposals.

Do not forget, or underestimate, Wife, that any Sanders/Warren presidential proposals would need congress approval, and that is almost always a tough pass - and currently would be a near impossible thing given the Debate is GOP controlled.

The changes those two propose are unlikely to happen. Meanwhile, Trump is a walking talking land mine who explodes DAILY.

No more!
He is ruining our culture!!!

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Oh, Trump is doing plenty to scare me (and capital markets) as well. I'm hoping for Biden or Harris, rather than none of the above.

concordtom said:

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wifeisafurd said:

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sycasey said:

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going4roses said:

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How much of a role does prop13 play in this discussion? ( the real deal)

https://www.latimes.com/california/story/2019-08-14/california-proposition-13-business-taxes-split-roll

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It would be huge if this passed. I fully agree with the idea of repealing Prop 13 protections for large businesses.

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This legislation actually doesn't look at the size of the business. Let me repeat that, it is not based on the tenant being a small business, but the property owner (landlord). being a small business, which they consider to mean has property value over $3 million. $3 million is basically the value of any single purpose stand along parcel in most urban areas with a tenant of any credit value. This means essentially every commercial landlord in the urban parts of the states.

Almost all commercial leases are triple net, meaning taxes are passed through to the tenant. You can kiss any small or start-up tenant good-bye, as they typically operate on small marries and can't pass the extra tax hit, which is significant if the landlord owns the property for any length of time. And I do mean good bye to mom and pop businesses. If this passes, in it's present form, I can assure you that the Democrats will not win a state wide office for some time. I know since discussion came out about the split roll, we have refused to lease to anyone who isn't a chain, or is in retail. All those boutique restaurants you guys like - gone. All those specialty shops - gone. Retail in particular has taken hard hits from the internet. This could be a fatal blow to what remains of the industry in Calfornia, except for very high margin stores, and the Costco's of the world that can pass on costs. Oh, and as income drops, so do tax revenues in a state which is way to dependent on income tax revenues. Guess we were right to be selling a good portion of our Cali properties and to buy in neighboring states. Values should go up their considerably as business migrates out of California.

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You could/should write a detailed op-ed for the LATimes.

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They wouldn't print it. They want some expert from a trade industry group (or the Jarvis people) or some academic. They never want people who actually do stuff to comment on what they do. Also, I just don't see the Times wanting a discussion of inelastic demand and other economic terms. Their newspaper is boring enough as it is. It is just wonks like us who want to discuss this stuff.

I thought if you hold in an LLC from day one and sell the LLC the 50% continuity requirement is not needed. Again, not an expert on commercial real estate so will defer to you.

Not being an expert won't preventing me from weighing in of course.

It seems like you are speaking more directly to retail real estate, is that correct? What percent of the market is retail?

I've been involved in a number of transactions for corporate commercial real estate (general purpose office space) and we have always evaluated the total cost including taxes. I don't know why anyone would do it any differently. In that market, it's pretty clear to me that the burden of increased property taxes will be shared. Given that there is already competition between landlords with Prop 13 advantaged prop taxes and those with up to date assessments, I can't see how the parade of horribles you are describing will occur.

By the way, I don't disagree that the state will find a way to screw this up and that the cost of administration could exceed the benefits. It just seems to me that vast majority of the people complaining about this change are commercial property owners, commercial brokers, lawyers that represent commercial property owners, and industry trade groups. I don't see consumer groups up in arms over this.

Also, you mentioned there not being an exemption for small businesses - but there actually is. Whether it is sufficient, I can't really say.

Overall I understand there is cause for concern and clearly there is only lukewarm support from governors (both Brown and Newsom) but I think the real concern is that landlords who've benefited from property tax arbitrage will no longer be able to do so. I get why that sucks for them, but that's exactly the problem with Prop 13 and it will only get worse over time.

Unit2Sucks said:

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I thought if you hold in an LLC from day one and sell the LLC the 50% continuity requirement is not needed. Again, not an expert on commercial real estate so will defer to you.

Not being an expert won't preventing me from weighing in of course.

It seems like you are speaking more directly to retail real estate, is that correct? What percent of the market is retail?

I've been involved in a number of transactions for corporate commercial real estate (general purpose office space) and we have always evaluated the total cost including taxes. I don't know why anyone would do it any differently. In that market, it's pretty clear to me that the burden of increased property taxes will be shared. Given that there is already competition between landlords with Prop 13 advantaged prop taxes and those with up to date assessments, I can't see how the parade of horribles you are describing will occur.

By the way, I don't disagree that the state will find a way to screw this up and that the cost of administration could exceed the benefits. It just seems to me that vast majority of the people complaining about this change are commercial property owners, commercial brokers, lawyers that represent commercial property owners, and industry trade groups. I don't see consumer groups up in arms over this.

Also, you mentioned there not being an exemption for small businesses - but there actually is. Whether it is sufficient, I can't really say.

Overall I understand there is cause for concern and clearly there is only lukewarm support from governors (both Brown and Newsom) but I think the real concern is that landlords who've benefited from property tax arbitrage will no longer be able to do so. I get why that sucks for them, but that's exactly the problem with Prop 13 and it will only get worse over time.

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Well it is an interesting conversation.

SBE Rule 462.180(d)(1)(A) and (B) trip you up. Any deemed ownership change (which includes a 50% plus change in interests) triggers the reassessment. You may be thinking about the sales tax where if you sell out as the original owner, you are exempt from paying sales tax under the occasional sales rules.

I have been discussing retail because that it is the most vulnerable segment of commercial real estate currently due to the internet, and where the I think (note speculation) the most impact will be felt. I don't know what the tax would do on residential (other than probably kill apartment starts), since residential tenants can't pass on the tax. I think (speculation warning) landlords will often not pass the cost on (NOTE THE EXEMPTION APPLIES TO HOMEOWNERS, NOT TENANTS, SO TECHNICALLY TENANTS COULD SEE SOME PORTION OF THE TAX PASSED ON). Some office probably can pass the tax on. If all landlords in Century City or Beverly Hills would pass the tax on to say your law firm, asnd you need the prestige of having your office in those locations, you are going to pay the taxes and pass on the cost to your clients, at least if you are a large law firm. I'm saying the rule of property is that location matters. If your office is in a "C" office building near LAX, and you are a solo, you may thing about leaving, since that might mean a hefty increase in the rates you charge clients. Again, you have to think of this as a sophisticated tenant. They look at the ratio of occupancy costs to sales or revenue. If you lose revenue by changing locations, your reduction in occupancy cost really doesn't matter. You are making a mistake treating all real estate and tenants as uniform and subject to the same results, and also as real estate being completely interchangeable, when you say we only look at occupancy costs. Real Estate is not interchangeable - location matters.

The other thing is the Times article has the current legislation wrong. It is $3 million on the "Property Owner"(maybe they drafted the legislation wrong and will be corrected). If is is 50 people and $3 million for the tenant, that is a very different analysis (it also means a lot less tax revenue, and less financial impact.

Unit2Sucks said:

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Overall I understand there is cause for concern and clearly there is only lukewarm support from governors (both Brown and Newsom) but I think the real concern is that landlords who've benefited from property tax arbitrage will no longer be able to do so. I get why that sucks for them, but that's exactly the problem with Prop 13 and it will only get worse over time.

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I personally know that Brown killed the legislation that the Assembly wanted to pass. I don't know where Newsom stands.

WIAF - I feel like this is very similar to the tax cut conversation from last year. My thoughts are largely the same. If landlords in Century City have the ability to charge their tenants more (in the form of passed through property taxes) why aren't they charging more in rent right now?

You seem to be making an argument that landlords are leaving money on the table which I don't believe to be the case. Similarly, when the recession hits and demand for commercial real estate declines, rent will go down. As it has in other recessions.

Unit2Sucks said:

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WIAF - I feel like this is very similar to the tax cut conversation from last year. My thoughts are largely the same. If landlords in Century City have the ability to charge their tenants more (in the form of passed through property taxes) why aren't they charging more in rent right now?

You seem to be making an argument that landlords are leaving money on the table which I don't believe to be the case. Similarly, when the recession hits and demand for commercial real estate declines, rent will go down. As it has in other recessions.

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Yes, you don't understand how rental real estate works.

Landlords don't have the ability to just charge more rent "right now" for starters. I don't think you understand how leases are structured and negotiated. The rent is bargained for often between brokers and based on gong rates in the area at the time of the lease inception, and usually rises over time by some measure, such as CPI. So you keep saying that the landlord can charge more of rent, but that isn't the way leases work. I simply don't know what else to say other than you basic assumption is wrong. In cases where there are substantial improvements to the Premises (this happens more in commercial), the leases last decades because the parties need a long period to finance and amortize their expenses and often there are extensions. In California, rents generally have risen far faster than indexes, and in most long term leases, the rent is significantly below fair market rental value if the landlord could rent it "right now." Landlords can't even charge that, more less what you think is some sort of additional rent that the landlord is leaving on the table because the lease adds that the tenant pays for property taxes, which is utter nonsense when you look at any lease.

Moreover, I don't think you understand the way taxes are paid, especially in multi-tenant situations. You seem to think tenants can just move if they don't like the fact that their occupancy costs go up for some reason, like additional property taxes. They can leave after their lease ends (they can breach and move and pay damages which include making the landlord whole for taxes) which can be in decades, though lease terms are usually shorter in office, and some office may not be triple net. The taxes are just part of many common area expenses, that the tenant pays it pro-rata share of each quarter typically, for the entire lease term and if the tenant extends the term, for that period as well. The risk of expenses going up or benefit of them going down is almost always allocated to the tenant. That has been market for probably a century now. At the beginning of the lease, projected CAMs are discussed, but in most situations, CAMs charges generally are close for like kind properties, and not really negotiating points, especially in long term leases, where expenses are going to vary over time. There is some negotiation on inclusion of management fees and other unique items, but CAMs provision are standardized these days and really there is nothing much to negotiate on property taxes. The expenses vary from year to year, are simply an allocation under a long term lease to the tenant, and the tenant pays reimburses the landlord. The costs the tenant must pay has nothing to do with how much rent the tenant pays. For some reason you correlate rent and taxes, and further you seem to think the landlord and tenant negotiate then on some sort of short term basis, which would only occur on a month to month lease, which you hardly see in business leases. Rents are set at the lease inception and expenses like property taxes vary over time, based on future events with no correlation to rent numbers. So I'm at a total loss as to how in this framework you say landlords are leaving rent on the table "right now" because under the lease property expenses flow through to tenants.

Edit this does not apply to apartment leases, which are a different animal.

Sorry WIAF I was not arguing that people would raise rents on existing tenants. I was referring to new leases.

My last company's main corporate lease recently was renewed and the price went up by around 50%. We looked at other spaces in the area with the help of our broker and were always presented with total cost.

If pass through costs rise, rents will either rise slower or go down to compensate. Will it be immediate? Of course not. But the real estate market will adjust. Just like rents go down in a tough market and rise in a strong market.

I keep harping on this but last year you predicted that when Trump cut corporate taxes, businesses would use that money to make long-term investments. Many of us, myself included, said that it didn't make sense because company's already had excess cash and if they wanted to invest there was nothing stopping them. We all know what happened there.

I believe this is similar. Perhaps you are blinded by experience in the strong California real estate market, I don't know. But you still haven't provided any fundamental reason why over time landlords won't bear their share of higher real estate taxes. And frankly, it's quite obvious that they will since commercial property owners are fighting this tax increase. I don't believe it's because they are worried about their tenants having to pay more.

EDIT: I just looked at some decks from our broker and the other thing I would add is that many of the spaces we looked at were industrial gross and that there was an obvious price difference between full service, industrial gross and triple net, which is exactly what you would expect in a fluid market.

How come tariffs on only Chinese goods are considered by some posters here as a tax on consumers while property taxes on all commercial property, which actually are 100% passed onto commercial tenants, are considered a tax on commercial lessors?

Oski - you made two false statements. First the tariffs are said to be a tax on Americans, not just consumers. They injure both businesses and consumers. The portion to which it is passed on to consumers varies. Similarly, it is not the case that property taxes are 100% passed on to tenants. That goes far beyond what WIAF has said and no one could credibly make that claim. Nor have I claimed, by the way, that commercial property owners will bear 100% of the increase in property taxes. The tax burden will be shared like all tax burdens.

By the way, do you believe that commercial property tenants currently benefit from prop 13 in the form of lower costs?

yes

oski003 said:

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How come tariffs on only Chinese goods are considered by some posters here as a tax on consumers while property taxes on all commercial property, which actually are 100% passed onto commercial tenants, are considered a tax on commercial lessors?

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They are a tax on consumers to the extent that consumers pay more than what they otherwise would have paid, with the incremental cost passed on to the government for their inefficient use or social economic engineering (e.g., pay off farmers). They are a tax on businesses to the extent that the incremental costs are not passed on to consumers based on fixed price contracts or competition. Ultimately, I view tariffs generally as a fail because they suppress competition and best prices and allow government to pick and choose winners based on factors other than quality and price.

I am not sure that I would compare tariffs with property tax. Unless it's a triple net lease, it is not clear that the tax is built into the rent. The rent will be based on what the market will bear. Not sure I can say whether an increase in property tax or property assessment will be passed on 100% to the tenant. In either case, it is a tax that impacts rent (not sure how much) but the government is not picking winners and losers like a big brother.

I am not a fan of tariffs in any manner even though I do understand that we needed to do something about China and their exploitation of IP and oppressive requirements for US companies operating in China.

Unit2Sucks said:

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Sorry WIAF I was not arguing that people would raise rents on existing tenants. I was referring to new leases.

My last company's main corporate lease recently was renewed and the price went up by around 50%. We looked at other spaces in the area with the help of our broker and were always presented with total cost.

If pass through costs rise, rents will either rise slower or go down to compensate. Will it be immediate? Of course not. But the real estate market will adjust. Just like rents go down in a tough market and rise in a strong market.

I keep harping on this but last year you predicted that when Trump cut corporate taxes, businesses would use that money to make long-term investments. Many of us, myself included, said that it didn't make sense because company's already had excess cash and if they wanted to invest there was nothing stopping them. We all know what happened there.

I believe this is similar. Perhaps you are blinded by experience in the strong California real estate market, I don't know. But you still haven't provided any fundamental reason why over time landlords won't bear their share of higher real estate taxes. And frankly, it's quite obvious that they will since commercial property owners are fighting this tax increase. I don't believe it's because they are worried about their tenants having to pay more.

EDIT: I just looked at some decks from our broker and the other thing I would add is that many of the spaces we looked at were industrial gross and that there was an obvious price difference between full service, industrial gross and triple net, which is exactly what you would expect in a fluid market.

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You didn't say that. Go back - you were talking about right now. Also, some news discussed below that changes the analysis big time.

If you are now saying only new leases, than most leases will run their course for many years, and a some retail won't survive in the interim and those retailers that do will increase prices for the tax to the consumer because demand for what they sell is inelastic at the given price levels, or have reduced profit and lay off people in the time honored tradition. Short term these changes will have a negative impact on business in California, lenders, incomes (think lower income tax revenue for the state) and in the long term, impact rents and depress property values. There will be less development long term which impacts the economy The size of the impact will depend on the area, and I expect stronger demand areas the tenant is picking-up some portion of the tax increase, where in less desirable locations the landlord is picking up the entire increase. I do think long term most commercial tenants will still bear the risks of property taxes, albeit at less rent. Most states base property tax on value, and retail tenants and many office tenants in those state are on triple net leases (or at least pay their prorata portion of tax).

I wasn't talking long term when I discussed the impacts and what I thought will be political fall out. Particularly with respect the small company exemption being set on the "property owner.". I think the analysis applies to office, though long run is a shorter time period because lease terms are shorter than retail.

That said, I called a higher-up at AIR. He said that they believe the group pushing the initiative intends that the small company exemption actually apply to the tenant, not the owner, and that the draft legislation is in error, and will be corrected. I'm not sure how this will work functionally with small tenants somehow having the expertise to report value to government, and how complex this will get with small business. But with the small company exemption on the tenant:

1) I guess apartment tenants will have to provide balance sheets, but likely Prop 13 stays in place for almost all apartments. They should just exempt all residential, rather than bring on this administrative nightmare, but hey, this is California, the most bureaucratic state in the nation.
2) Some family and boutique retail will qualify for the exemption, and good luck trying to value start-ups. But this is far more politically palatable than having the exemption apply to "property owners."

We don't do much industrial, but I know it is somewhat a hodge-pod of single, double or triple net. Large industrial, like warehouses, is really just a must off balance financing for the Amazons of the world and the tenant just takes over all costs and rent is based on debt service. In this case, the extra tax cost is just passed on to the tenant, who then passes in on the California consumer. I think with smaller industrial, again in the long run, the impact of the extra tax will vary, but this is not my area of expertise. In the long run, some industrial simply will leave or not come to California as it becomes an even higher cost state.

We have not discussed this, but business does own properties and let me suggest that a small business over the tiny $3 million threshold, presently with a low property tax base, fails or shrinks.

Finally, there is the long run negative impacts on the economy already discussed.

Stepping back, California already is high cost, high tax state. In the short run, existing business will bear most of the brunt of the tax increase and will either pass on the cost to consumers, fail or have lower profit. as their leases mature or they take the tax hit directly on property they own. A big negative to California economy.

If you said we were increasing property taxes rates (which are relatively low compared to other states) and making them more equal, and lowering other taxes where California is the highest, I would say great public policy. For example, California is way too reliant on income taxes, which vary dramatically during business cycles and create fiscal crises for a State that loves to spend. The State needs a more stable tax base. But that is not what these liberal union groups want. The just want more and more taxes.

Unit2Sucks said:

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Sorry WIAF I was not arguing that people would raise rents on existing tenants. I was referring to new leases.

My last company's main corporate lease recently was renewed and the price went up by around 50%. We looked at other spaces in the area with the help of our broker and were always presented with total cost.

If pass through costs rise, rents will either rise slower or go down to compensate. Will it be immediate? Of course not. But the real estate market will adjust. Just like rents go down in a tough market and rise in a strong market.

I keep harping on this but last year you predicted that when Trump cut corporate taxes, businesses would use that money to make long-term investments. Many of us, myself included, said that it didn't make sense because company's already had excess cash and if they wanted to invest there was nothing stopping them. We all know what happened there.

I believe this is similar. Perhaps you are blinded by experience in the strong California real estate market, I don't know. But you still haven't provided any fundamental reason why over time landlords won't bear their share of higher real estate taxes. And frankly, it's quite obvious that they will since commercial property owners are fighting this tax increase. I don't believe it's because they are worried about their tenants having to pay more.

EDIT: I just looked at some decks from our broker and the other thing I would add is that many of the spaces we looked at were industrial gross and that there was an obvious price difference between full service, industrial gross and triple net, which is exactly what you would expect in a fluid market.

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given the length of my response, it seems advisable to summarize:

1) Basic economics say tax increase imposed on business are shared by consumers and the business based on price inelasticity. That is the California consumer.

2) this case is somewhat unique in that the tax is imposed on property, and that under many leases that means a third party, the tenant, will pay the increased tax for some time. That means the tenant and the California consumer will pay the tax, and to the extent you have a tenant operating on small profit margins (like many retailer now) it will fail if it can not pass on the tax increase.

3) This proposition will have a major short term disruptive impact on the California economy.

4) This will have a negative impact on incomes and property values undercutting the level of net tax revenues the measure purports to raise.

wifeisafurd said:

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You didn't say that. Go back - you were talking about right now. Also, some news discussed below that changes the analysis big time.

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I thought it was pretty obvious I acknowledged there would be a short-term dislocation. I specifically referred to how landlords would fill vacancies as well and that ultimately the market would determine prices and that the burden will depend on relevant market forces.

Of course in the short term, the brunt of the burden for existing triple net leases will fall on tenants (and, to some extent, consumers as the burden is shared by relevant parties). Even there, landlords will be incentivized to work things out with tenants rather than force tenants out of business if the market weakens.

To your final point - having a rational property tax system is crucial to fixing California's tax base. California's property taxes rank 36th in the nation and overall our tax burden is 6th highest. I think we can all do the math there. What I am specifically rejecting is this alarmist notion that right-sizing the property tax burden (so that it is shared fairly by long-term commercial property owners and new commercial property owners) somehow will destroy our positive business climate. It will make things worse for the owners currently benefiting from this and probably will make it more competitive for new owners. It will likely lead to lower asset prices and a more fluid commercial real estate market.

Commercial real estate special interest groups are gearing up to spend $100M in marketing fighting this change. I am sure we will be inundated with stories of how this will drive minority-owned groceries, restaurants and specialty shops out of business (like we've seen with the cigarette and soda lobby in recent years) and it will be equally shameless. I sympathize with the owners who will be hurt by this change because they are losing protection but I would prefer they argue from an honest place rather than making up all of these chicken little arguments. We need to do what's best for California, not just what's best for one group of advantaged property owners.

Quote:

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1) Basic economics say tax increase imposed on business are shared by consumers and the business based on price inelasticity. That is the California consumer.

2) this case is somewhat unique in that the tax is imposed on property, and that under many leases that means a third party, the tenant, will pay the increased tax for some time. That means the tenant and the California consumer will pay the tax, and to the extent you have a tenant operating on small profit margins (like many retailer now) it will fail if it can not pass on the tax increase.

3) This proposition will have a major short term disruptive impact on the California economy.

4) This will have a negative impact on incomes and property values undercutting the level of net tax revenues the measure purports to raise.

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This is a good summary and doesn't differ greatly from what I have been saying. The question is the extent to which the long-term benefits outweigh the short-term dislocation. I would also note that to your point 2, many leases do not pass through taxes. I would love to know exactly what percentage of small businesses will directly bear the tax increases. I am positive that the lobbyists will pretend that it is 100%.

By the way, thank you for engaging in this discussion.

Decades can be a long short term and failing businesses are bad politics, and that if the measure passes, Democrats can kiss state offices good bye or some time.

Will the measure pass? Not sure. This is a state that likes to pass things and worry about the consequences later. Exhibit 1: prop 13.

wifeisafurd said:

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Decades can be a long short term and failing businesses are bad politics, and that if the measure passes, Democrats can kiss state offices good bye or some time.

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There are so few Republicans left in CA that I wouldn't be confident about that prediction.

Some negative electoral consequences, yes possibly. Kissing state offices goodbye? Nah.

sycasey said:

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wifeisafurd said:

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Decades can be a long short term and failing businesses are bad politics, and that if the measure passes, Democrats can kiss state offices good bye or some time.

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There are so few Republicans left in CA that I wouldn't be confident about that prediction.

Some negative electoral consequences, yes possibly. Kissing state offices goodbye? Nah.

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Maybe. A lot of the politics is anti-Trump, and he will be gone in two years or 6, Politics tend to go in cycles here. Same state that elects Reagan and various GOP governors also elected both Browns and liberal governors.

BTW, enjoyed the discussion. Guess we will see if the voters make the discussion relevant. Also don't be surprised if the legislation changes some as gruops close to the unions provide input.

wifeisafurd said:

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sycasey said:

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wifeisafurd said:

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Decades can be a long short term and failing businesses are bad politics, and that if the measure passes, Democrats can kiss state offices good bye or some time.

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There are so few Republicans left in CA that I wouldn't be confident about that prediction.

Some negative electoral consequences, yes possibly. Kissing state offices goodbye? Nah.

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Maybe. A lot of the politics is anti-Trump, and he will be gone in two years or 6, Politics tend to go in cycles here. Same state that elects Reagan and various GOP governors also elected both Browns and liberal governors.

BTW, enjoyed the discussion. Guess we will see if the voters make the discussion relevant. Also don't be surprised if the legislation changes some as gruops close to the unions provide input.

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Sure, it wasn't that long ago that CA had a Republican governor. I could see such a thing happening again. But a wholesale rejection of Democrats statewide seems very unlikely in the short term. In the long term . . . anything is possible.

People still remember Prop 187, which essentially killed the GOP in California. Unless California's Latino and Asian population suddenly leave, I don't see a traditional GOP like Pete Wilson, who was on the moderate side, as in not a full blown Freedom Caucus guy...yet Wilson got behind it. Perhaps it's the San Diego thing or he felt he had to...but it really did kill the GOP in California.

The question I'd ask is there such thing as a truly moderate, immigration friendly GOP in the current Party of Trump?

I certainly think the GOP will soften after Trump...but he has pulled them so far right and with run away corruption and against tradition GOP (like the deficit), not sure they can get back to a reasonable place to get California voters.

The other thing...major demographic shifts going on right now. Boomers on the way out...Millennials and Gen Z on the way in...and they now tilt Democratic Socialist.

Then there's the income gap...which keeps guys like Steyer and other VC types out because people just don't trust that any longer.

A GOP can be governor but it would be like an unicorn showing up during a solar eclipse...not great odds while LOT change going on. I don't see it for a while. The GOP lack depth in a major way, mostly women and POC. Seriously, no non-white congressional reps and Ithink GOP women in the House is like 11-12. That's not good.

Unit2Sucks said:

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wifeisafurd said:

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I would also note that to your point 2, many leases do not pass through taxes. I would love to know exactly what percentage of small businesses will directly bear the tax increases. I am positive that the lobbyists will pretend that it is 100%.

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For commercial rentals generally a tenant of any size pays the taxes in one way or the other, either directly or through reimbursement. I think the limited stats bear that out.

CoStar says on average that 88% of the listed leases are triple net. As you no doubt are aware, CoStar is primarily retail. The remaining 12% most likely are retail single or double net, meaning the tenant pays taxes. Retail of any size to make CoStar is going to have the tenant paying taxes, directly or by reimbursement..

Residential is almost always a true gross lease (tenant does't pay naytig but rent). There are strange exceptions that happen under regulated (Section 8) housing, rent control ordinances , etc., that the landlord gets to pass through increase in taxes. None of this probably is applicable since almost all residential housing will be exempt and continue under Prop 13.

Office varies by sector. Almost all medical office is triple net for reasons peculiar to that type of space. The reasoning applies to most unique types of office requiring specialized improvements. I can cite you to articles. Ziman (UCLA) has an annual study that says most general office is a modified gross lease where the tenant pays base rent at the lease's inception, but it takes on a "proportional share of some of the other costs associated with the property as well, such as property taxes,....Modified gross leases are typically used for commercial spaces such as office buildings, where there is more than one tenant." My guess is that most single office space depends on whether a bondable or financing lease is intended, in winch case a "bond lease" where the tenant pays everything is intended (this is what happens when a large company like Apple uses off balance sheet financing its office buildings in something that technically looks like a lease). Small tenants in a stand alone office more often that not probably have a true gross lease, though the is just what I hear, I can't find any sources.

The AIR form most used for Industrial tends to be a gross lease per AIR, and I suspect this is representative of the market. There still is a lot of tenants that are under the net lease form however. Under the Industrial Gross Lease, the landlord collects fixed rents and pays the expenses out of them with a very big proviso. As costs increase over time, many gross and even full servie leases, including the AIR form, will contain escalation clauses that increase rents over time to offset tax increases and higher insurance and maintenance costs. So even in industrial gross, the tenant conceptually is paying for increased taxes. The escalations clauses would not cover the entire amount of changing from Prop 13 to FMV tax basis for most properties IMO.

I'm not aware of what portion of small business (this would first require a definition for small business) will be impacted, and I don't know how you would get the information, I don't know any place this information is aggregated. Even CoStar, which you pay major coin for, doesn't have financial information on non-public company tenants, which almost all "small companies" will be.

I agree that opponents will point to small companies as being hurt. Much more sympathetic, even though the pain to the California economy will be much more felt by California consumers of large companies. I just don't know how you could defend any percentage from zero to 100%, because the information just doesn't exist.

going4roses said:

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g4r

Thanks for posting another video of Beau of The Fifth Column (TFC). One of the reasons I couldn't find
more on him is that I was hearing/thinking "Bo" like Bo Didly, Bo Jackson.....Nope it's like Beau Baldwin.

Even though he ends up righteously calling Trump out, I still think his arguments can be circuitous;
but he says what he thinks....which is a BIG deal.

Here is the TFC website

https://thefifthcolumnnews.com