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?

8 comments

Write a comment
  1. Rex The Wonder Dog!
    Rex The Wonder Dog! 19 April, 2012, 14:04

    I would LOVE to end Prop 13 for commercial properties-or at least re-value them every 10 years, but the problem is ANY extra cash from the increase in taxes will go straight into the public unions pockets and pensions-so I would rather Big Business keep the money and try to expand in the US and try to create more jobs.

    Reply this comment
  2. queeg
    queeg 19 April, 2012, 14:12

    Property values drop….loans foreclose…real estate taxes drop….rents rise…evictions rise….real ner worth drops dramactically…..then massive job loss…..credit crunch…

    Reply this comment
  3. Rex The Wonder Dog!
    Rex The Wonder Dog! 19 April, 2012, 16:03

    Actually when we had the commercial RE crash of the late 80’s and early 90’s residential rentals went thru the floor, rents dropped by over 50% in many areas. And they stayed there for years.

    Reply this comment
  4. queeg
    queeg 20 April, 2012, 10:40

    Not this time.. landlords will clean out every renter to survive….get ready….rent a room for a grand a month!!!

    Reply this comment
  5. Rex The Wonder Dog!
    Rex The Wonder Dog! 20 April, 2012, 11:54

    Yes-this time it is different, but once the REO homes are all sold off and that residential opens up rents will retreat.

    Reply this comment
  6. Meow
    Meow 20 April, 2012, 13:34

    The elephant in the room is not where the revenues will go but that property ought to be treated equally when assessing taxes. Using the small business owner ruse is dead in the water.

    Reply this comment
  7. Rex The Wonder Dog!
    Rex The Wonder Dog! 20 April, 2012, 14:11

    Well, when the revenue is only going into multi million dollar gov pensions I don’t have much reason or sympathy for those that claim unequal treatment.

    Reply this comment
  8. queeg
    queeg 21 April, 2012, 14:21

    Marist tinged posts must come from the California University educated majoring in MISERY for the MASSES…

    Reply this comment

Write a Comment

<



Related Articles

Supermajority can’t legislate away reality

Nov. 15, 2012 By Wayne Lusvardi Since the election, several acquaintances of mine have gone out of their way to

Crime jumps as prisoners flood into county jails

July 13, 2012 By Dave Roberts California’s experiment in incarcerating tens of thousands of criminals in local jails or their

Controller Chiang pounds California municipalities

Aug. 29, 2012 By Chriss Street California State Controller John Chiang announced that the cities of Milpitas and Morgan Hill