Lenny Goldberg Prop 13 Presentation for Marcus & Millichap Bay Area Multifamily Forum: San Francisco & Beyond

1. Commercial property assessment:
is a rational discussion possible?
Lenny Goldberg
California Tax Reform Association
www.caltaxreform.org
California Apartment Owners Association

2. A flawed system
 Bad economics: we tax new investment heavily
and fail to tax windfall land rents—the opposite of
sound economics
 Loophole-ridden law: easy to avoid reassessment, particularly on land; incredibly
complex enforcement and law.
 Land use impacted negatively: increases price
of land, promotes speculation
 Failed fiscal policy: fails to fund
infrastructure, detaches revenues from economic
growth, burden shift to residential property

3. The law: ships in the night
 Complexity of property holding: llc’s,
partnerships, sub S, publicly-traded, reits, ipo’s,
etc
 Purpose of organization: capitalization, liquidity,
income or corporate tax benefits
 Change of ownership: difficult to define and
enforce, no relationship between assessed value
and capital structure, “ships in the night”

4. Dell Exploits the Purchase
loophole
Current law allows
businesses to sidestep
reassessment if no one
acquires a majority stake in
a company that owns the
property

8. Bad for New Investment(!)
 Increases land costs—primary area of California




non-competitiveness
New investor pays tax on full value of land,
buildings
Yearly property tax on business equipment (aka
business personal property tax)
Fees, exactions, mitigations: negative regulatory
climate
Failure to cover costs of infrastructure

9. Flawed fiscal and land use policy
 Failure to keep up with economic growth
 Shifts burden to residential property
 Fails to fund infrastructure—short-circuits the
virtuous cycle of infrastructure investment
 Promotes speculation and sprawl—no cost of
retaining land, holding it off market

10. Burden shift to residential property in
55 of 58 counties

11. Los Angeles County
Residential vs. Non-Residential Property
Residential %
80.00%
Non-Residential %
75.55%
69.96%
70.00%
62.67%
60.52%
62.45%
64.81%
69.09%
66.20%
60.00%
53.37%
50.00%
46.63%
40.00%
37.33%
39.48%
37.55%
35.19%
33.80%
30.04%
30.91%
30.00%
24.45%
20.00%
10.00%
0.00%
1975
1980
1985
1990
1995
2000
2005
2009
2011-2012

12. Numbers from Los Angeles

13. San Francisco County
Residential vs. Non-Residential Property
Residential %
Non-Residential %
80%
73.16%
70%
63%
61%
60%
68%
67%
65%
58%
56%
54%
54%
50%
44%
42%
46%
46%
39%
40%
37%
35%
33%
30%
32%
26.84%
20%
10%
0%
1974-1975
1980-1981
1985-1986
1990-1991
1999-2000
2005-2006
2007-2008
2009-2010
2011-2012
2012-2013

14. The evidence
 Primary differences are in LAND VALUE, not buildings (50x vs.
3x)
 Why? Buildings reassessed when improved, land holdings held
forever, or in different arrangements
 Shift to residential, including non-HOE single family homes, in
most counties since 1978
 2008 crisis slowed the trend but did not reverse it
 Already have a “split roll”
 State-assessed vs. county assessed
 Timber yield vs. complex (and nonsensical) oil valuations
 Business equipment (aka personal property) at full market value:
small business, high-tech tax
 Buildings reassessed upon improvement, land not
 Simple system for homeowners, complex rules for “legal entities”

15. Thought experiment: “Smart Roll”
 Tax windfalls, not new investment: basic principle




of economics, conservative or liberal
Reassess commercial land on periodic basis
Eliminate business equipment tax (aka personal
property tax)
Phase-ins, examine equity issues
Best tax: land value only
 Every economist would agree
 Take tax off new investment to extent possible
(buildings?)
 Easy to implement, good economics, captures
benefits of growth, finances infrastructure

16. Is a rational discussion possible?
 Empirical: analyze benefits and costs of different
approaches to solving these problems
 Fiscal policy: Revenues and offsets
 Allocation: cities, counties, schools, special
districts, community colleges, infrastructure—
currently a mess, can change be discussed?
(CaForward)
 Since the issue is going to become more
prominent, will business groups join a
conversation?