Prop. 13 Split Roll Would Be Ripoff

JUNE 20, 2011


Democrats in the California Legislature want to repeal the property tax reassessment protections of Proposition 13 for commercial properties under the dubious notion that there is a pot of California 49er gold at the end of the rainbow. Prop. 13’s existing protections for homeowners would remain the same.

If the commercial protections are removed, this would create what’s called a “split roll”: different tax rates would apply to home and commercial property.

The vehicle being used to create split roll is  AB 448. But Democrats, to twist a phrase from Mark Twain when he was in California, may find that “there’s no gold in them thar hills.”

The current system of property taxation in California under Prop. 13 is based on reassessing all properties in the state only when there is a valid sales transaction, just as capital gains taxes are paid only when stock is sold.

Under AB 448, all 494,693 commercial properties in the state would be reassessed annually, while residential properties would still be reassessed only upon resale. It is uncertain if the existing 1 percent base tax rate and 2 percent annual maximum inflation adjustment under Prop. 13 would stay the same.

Proponents of increased taxation as a solution to California’s structural budget deficit have clamored for years for adoption of a more “equitable” split commercial-residential property roll tax. They say it would raise the assessed value of all non-residential property to the property’s market value. To such taxation advocates, “rich” commercial property owners are being granted an unfair subsidy that is robbing public schools and the medically needy.

However, the recent real estate market crash has seen commercial property values falling to levels that now are generally at the same level with assessed value ratios.

The problem with the proposal currently being floated about the state legislature is that no one seems to have done some simple arithmetic.

In 2008 economists William Hamm and Jose Alberro completed a study, “The Economic Effects of Adopting a Split Roll Property Tax.” It concluded that, as of 2007, commercial properties were assessed at 60 percent of their market value and residential properties at about 53 percent of market value.

We asked Co-Star Real Estate Market Data service to trend commercial real estate values in California from 2007, which was near the peak of the Real Estate Bubble, and coincident with the market data that Hamm and Alberro relied on in their study.

35 Percent Commercial Property Decline

The results of Co-Star’s analysis of 11,145 sold properties indicate that average unit values for all commercial properties have declined about 35 percent from 2007 to the end of 2010. This is generally consistent with other national commercial property value indexes, such as Moody’s Commercial Property Index.

Co-Star reported that the average unit price of all sold commercial properties dropped from about $185 in 2007 to $117 per square foot (36 percent) by the end of 2010. Smaller owner-user properties declined from $142 to $100 per square foot (30 percent).

California Commercial Property Unit Price Trend

Year Price Per Sq. Ft.
2007 $184.48
2008 $175.16
2009 $123.10
2010 $117.25
Source: Co-Star Real Estate Data.  Data reflects sold commercial properties 10,000 to 100,000 sq. ft. in size from 2007 to end of 2010.


If commercial property values have declined about 35 percent since 2007, their market value today would be about 65 percent of the value at that time.

We additionally contacted the California State Board of Equalization for the commercial property tax assessment ratio they used for the years 2006 to 2010, which were:

2006 — 65.6 percent
2007 — 61.0 percent
2008 — 59.9 percent
2009 — 58.0 percent
2010 — 65.1 percent

Change in Commercial Market Values and Assessment Ratios

2007 Percent Change End of 2010
Market Value 100 percent -35 percent 65 percent
Assessed Value Ratio 65 percent 0 percent 65 percent
Added Revenue Potential 35 percent 0 percent
Source: California Board of Equalization; Co-Star Real Estate Data


Split-Roll: No New Revenues

Thus, extinguishing Prop. 13 reassessment protections for commercial properties would be a non-starter. It would not yield any large increase in tax revenue, as shown in the table above.  It would be another California Gold Rush, but for fool’s gold.

From 1850 to 2011, California has gone from “gold country” to “tax country.” The Party of Government in California is like the opposite of Rumpelstiltskin — they know how to turn gold into straw.

Perhaps poet John Greenleaf Whittier, one of the early founders of the Republican Party, said it best:

Give fools their gold, and knaves their power;
let fortune’s bubbles rise and fall;
who sows a field, or trains a flower,
or plants a tree, is more than all.

Note: This is the first in a series of stories on California’s proposal to eliminate the protections of Proposition 13 for commercial properties.  We won’t be responding to comments until subsequent articles are also posted expanding and clarifying the above.  However, please leave comments.

Next: Part 2 – “Dunning Commercial Prop 13 is King Midas in Reverse.”

Wayne Lusvardi is former chief appraiser for a large water district in Southern California and writer at  Charles B. Warren, ASA, MRICS (Urban-Real Property), is a former county assessor and currently an appraiser in San Francisco.



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  1. Stanley K.
    Stanley K. 21 June, 2011, 14:42

    What a revelation to find that commercial and apartment properties as a whole are already being assessed at 100% of their market value. So much for Michael Hiltzik and Steve Lopez at the L.A. Times and their crusade to persuade us otherwise.

    Reply this comment
    ONTIME 24 June, 2011, 16:32

    I have a better plan and it would cut the cost off doing biz in Ca tremendously and save our essential services, it’s called common sense. We need a part time legislature on a salary, no perks, no retirement, an end to the progressive tax to be replaced with 10 year ballot plans based on flat or national sales tax, an end to government unions and yearly public audits for those holding office elected and appointed and no more career politicians based on incumbency. We the people want to control the government, we do not want elites to become the government, those elected are there to serve and I beleive this thinking could be applied to all Federal government as well as state.

    Reply this comment
  3. Jennifer
    Jennifer 25 June, 2011, 12:11

    Fascinating use of statistics — using your methodology on 2010 Census results, I see the average age in the US is 37.2 years, up 1.9 since 2000. So that means I’m less than two years older than I was ten years ago! Hooray. And, from a tax perspective, since the average age is just over 37, we don’t need either Medicare or public schools, because we’re all too young AND too old to benefit from them!

    Come on, guys. Prop 13 has created a very uneven playing field — which discriminates against new and growing businesses in California. Hiding behind faux statistics is as bad as hiding behind widows and retirees to perpetrate commercial free-ridership on the backs of new businesses and the vast majority of residential property owners. Take one look at the Los Angeles or Santa Clara County assessor’s annual reports and you’ll see that one in five commercial property owners is enjoying an 80% subsidy on his taxes — funded by his customers, clients, and employees.

    Reply this comment
  4. Wayne Lusvardi
    Wayne Lusvardi 26 June, 2011, 00:09

    Suggest you contact William Hamm, PhD and Jose Alberro, PhD, regarding their 2008 study
    “The Economic Effects of Adopting a Split-Roll Property Tax System” –


    You keep leaving comments but never cite your sources. The methodology you use to support your assertion that shopping centers, gas stations and other commercial properties are undertaxed is MISLEADING and would not meet professional appraisal standards. You lack the professional competence necessary to support your assertions.

    No one can take seriously the comments of those who have no understanding of finance, real estate markets, or economics.

    Your complaint, if I understand it correctly, is that every shopping mall, gas station, and retail store does not pay the same taxes. This is Leftist thinking that everything must be equal. But not every commercial property is equal.
    Some are new, some old. Some are inside malls, some are free-standing, some are mom and pop operations.

    Some have land leases on them which means the landlords pays taxes on the rent received and the tenant separately pays property taxes, income taxes, and corporate taxes. Your methodology is to find the tax, say, for the tenant who pays property taxes but does not consider that the landlord separately also pays taxes on the land rent received from the tenant. Then you erroneously claim the property is undertaxed. This is unethical.

    You failed to mention that commercial enterprises are quadruple taxed by property taxes, income taxes, corporate taxes, and real estate capital gains taxes upon sale, to say nothing of business license fees and utility user’s taxes.

    Nothing will convince you otherwise however. This comment is for readers who are not knowledgeable of your tricks.

    Reply this comment
  5. Democrats Against UN Agenda 21
    Democrats Against UN Agenda 21 24 September, 2011, 23:30

    Elegantly done. The hounds howling at Prop 13 are out to destroy private property ownership. It’s obvious that the hope is that no one will come to the rescue of the big bad commercial property owners (who have committed the crime of wanting to make a profit). Once the boot is in the door residential properties will be next. The vilification of private property ‘because it is inequitable and enriches some people’ is the keystone of United Nations Agenda 21. I hope that you, Wayne and Chuck, have looked into it. As a commercial appraiser specializing in eminent domain valuation I was stunned to find UN Agenda 21 at the heart of the planning revolution we’ve seen over the past 10 years. Smart Growth is the result.

    Reply this comment
  6. Kimberly
    Kimberly 6 January, 2012, 16:29

    Wait, what? You’re saying the commercial properties don’t take advantage of legal and accounting loopholes to avoid reassessment?

    I am reassured.

    Reply this comment

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