Ending Prop. 13 would slam small business

April 19, 2012

By Wayne Lusvardi

There is a big elephant in the room when it comes to a conversation about getting rid of Proposition 13, the 1978 tax limitation measure, by instituting a “split roll.” Under such a change, business property would be taxed at higher rates than residences.

The elephant in the room is that it is not big business that mainly would get socked with higher taxes, but the 857,167 small businesses, which represent 97 percent of the total of 878,129 businesses in California.

Those advocates for ending Prop. 13 for commercial properties say it is big business that is not paying its fair share of taxes.  But the owners of large commercial properties — shopping centers, recreational theme parks like Disneyland, and large Class A apartment complexes — would just pass higher rents through to tenants, who in turn would raise prices on goods and services.

Property owners would also pass through higher property taxes to tenants when leases are renegotiated. This is perhaps why the Dataquick real estate information service reports that in the First Quarter of 2012 “the only real positive seen in the retail sector is that the triple net or absolute net, single tenant, long corporate-backed leased property, with investment grade tenants continues to sell briskly.”

Owners of small businesses would have to suck up the higher taxes.  And it is those small commercial properties that have been most affected by the economic recession.

Proposition

The proponents of Ballot Initiative No. 1560 to end Prop. 13 for commercial properties claim it would generate $4 billion in new tax revenues. That would be $4,555 per year added tax burden on average for the 857,167 small businesses in California. That would equate to an average increase of $455,000 in assessed value for each small commercial property.

According to data from a U.S. Small Business Administration study, 74 percent of all small business loans in California in 2010 — or 587,225 loans — were for $100,000 or less.

Eighty-three percent,

Of 659,617 loans made by Wells Fargo Bank as of June 2010, 547,727 were “micro loans” of less than $100,000. And the average micro loan averaged just $17,335.  Most of these “micro” loans were not loans backed by the Small Business Administration.  This indicates that a preponderance of small businesses with bank loans could not easily absorb an increase of property taxes of $4,555 per year.

Wells Fargo Bank Small Business Loan Data 2010

	Total   Dollar Amount of Small Business Loans	Total   Number of Loans	Percent
Micro-business   loans($100,000   or less)	$9,495,000,000 ($17,335 average)	547,727	83%
Macro-business   loans($100,000   to $1 million)	$29,300,000,000 ($261,864 average)	111,890	17%
Total   All Small Business Lending	$38,800,000,000	659,617	100%
Source:   http://www.sba.gov/sites/default/files/files/sbl_10study.pdf

And the actual added tax burden on small businesses is bound to be much higher than $4,555 per year. That is because about only about 20 percent of all commercial properties would actually have their taxes raised if Prop. 13 were ended.

Change of ownership

Most commercial properties have changed ownership since 1993 and have been reassessed at close to full market price.  The median sales year for most commercial properties is 1993.  It is those properties with old assessments frozen at pre-1993 base values that are going to end up paying the bulk of the $4 billion in added taxes per year.  And by and large, those properties with old assessments are small commercial properties with gross leases or owned by mom and pop business proprietors.

In a “gross lease,” the landowner pays the property taxes.  In a “net lease.” the tenant typically pays the property taxes.

Let’s assume 50 percent of all commercial properties are going to roughly end up paying 80 percent of the added taxes. Consequently, small business properties with old assessments roughly would have their taxes increased by $7,466 per year. Once again, small businesses with low profit margins easily eroded by economic adversity are not going to be able to easily absorb that magnitude of a tax increase.

Larger commercial properties with net leases typically have caps on the amount taxes and other expenses that can be passed through to the tenant. So the landowner, not the tenants, will be socked with more taxes on commercial properties.  Higher property taxes won’t be able to be passed through to commercial tenants until their lease is renewed for larger commercial properties.

The reason the public can’t seem to see the proverbial “elephant in the room” when it comes to ending Prop. 13 for commercial properties is that it is a midget elephant symbolic of a small businessperson. And for the little man, who speaks truth to those in power?