What Californians Need to Know About Prop 15

What is Prop 15? Proposition 15 is a proposed amendment to the state constitution that is on the November 3 ballot. Currently, commercial property owners in California pay taxes based on the price originally paid for the property with annual increases limited to no more than two percent of the assessed value. As you might imagine, that amount is typically much lower than if the assessed value were to be based on current market value. Prop 15 would require that taxes be assessed on the current market value of many commercial properties.

The new law would not apply to homeowners (residential property), or to commercial properties valued at less than $3 million. Farmland would also be exempt from the tax hike. If passed the change will not take effect until fiscal year 2022-23, and properties with occupants containing 50% or more small businesses would not be affected until fiscal year 2025-26.

What is the motivation behind Prop 15? Proponents of Prop 15 say that the new tax structure would raise an additional $6.5 to $11.5 billion for the state budget. Those funds would be allocated to cities, counties, and special districts (60 percent) and to schools (40 percent). An estimated 10 percent of property owners would pay 92 percent of the new taxes, according to some estimates.

What is the potential downside? Those who oppose Prop 15 recognize that imposing higher taxes on certain property owners could result in higher rents for tenants and/or customers. This would likely be an unpopular idea at any time, but with the state currently reeling from the economic effects of the pandemic, the opposition says now is not the time for increases on rent and/or prices.

How will the law pass? With the 2020 election already underway, Prop 15 is on the ballot. In order to pass the amendment, the proposition must receive a “yes” vote from a majority of voters.

How will Proposition 15 affect me? If you’re a commercial property owner, your taxes could be adjusted to reflect the current market value of your property rather than the price you originally paid. If that value amounts to more than $3 million, you may be subject to the new property tax rate.

As real estate attorneys, we strive to keep our clients informed of policy changes that might affect them. This is the case with Proposition 15. For more information on Prop 15 and its potential impact on your business, contact our real estate attorneys.

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