Senator Patricia Bates (R-Laguna Niguel) announced today that she has reintroduced legislation to correct an outdated interpretation of property “change of ownership” that has been part of the long running debate around commercial property and Proposition 13 (the 1978 initiative that limited property tax increases).
“Proposition 13 ensures that property taxes do not skyrocket for any California homeowner or business,” said Senator Bates. “But it is not right that some people have exploited an outdated interpretation of Prop. 13 to avoid paying the property taxes that they legitimately owe. While some people tried to use extreme examples last November as a pretext to wipe out Prop. 13’s tax protections for commercial property, the Legislature can instead use a scalpel to prevent further abuses.”
Senate Bill 706 changes the definition of “change of control” of a corporate entity to include situations where 90 percent of the ownership interests changes hands in a single transaction within any three-year period. The bill will prevent a repeat of examples similar to the 2006 purchase of Santa Monica’s Miramar Hotel where the purchaser realized he could structure the transaction without any one entity owning a 50 percent majority share in the property.
Despite the fact that 100 percent of the hotel’s ownership changed hands, reassessment of the property did not occur, resulting in a tax loss to Los Angeles County of over $1 million annually. Had SB 706 been in effect in 2006, Los Angeles County would have reassessed the Miramar Hotel.
SB 706 also increases the penalty for failure to file a “change in ownership” statement, from 10 to 15 percent of the taxes applicable to the new base year value (or old base year value, if there is no change in ownership). The bill requires the State Board of Equalization (BOE) to report to the Legislature, no later than January 1, 2024, regarding the implementation of these changes in ownership, including, but not limited to, the revenue impact and frequency of reassessments of real property owned by legal entities. SB 706 also requires the Legislative Analyst’s Office to report to the Legislature no later than January 1, 2024, regarding the economic impact of the bill.
Democratic-controlled legislative committees previously killed similar bills from Senator Bates: SB 1319 (2020), SB 1237 (2018), and SB 259 (2015). The BOE estimated that SB 1237 could have generated $269 million annually in new tax revenue.
SB 706 is also similar to a 2014 bill authored by former Democratic Assembly Members Tom Ammiano and Raul Bocanegra. Their bill, AB 2372 (2014), cleared the Assembly with bipartisan support, only to die in the Senate.
California’s voters rejected Prop. 15 (2020) last November that would have created a “split-roll” to separate commercial and industrial property from Prop. 13, leading to massive tax increases for California’s job creators. Prop. 15’s supporters framed their effort as ending abuses, when in truth their real goal was to eviscerate Prop. 13’s tax protections for most job creators in the middle of the COVID-19 pandemic.
Even the Los Angeles Times’ editorial board, which endorsed Prop. 15, wrote after its defeat:
“If Proposition 15 was too ambitious a first step, here’s a more modest one: closing the loophole that allows businesses to game the system and avoid being taxed on the full value of the properties they buy. Bills to do so have been unable to gain any traction in Sacramento in recent years, despite the stories of deep-pocketed buyers of commercial property coming up with schemes to prevent newly purchased buildings from being reassessed.”
Senator Bates authored most of the bills that “have been unable to gain any traction in Sacramento” due to opposition from groups who wanted to use the few cases of abuses as a pretext to gut Prop. 13. Her SB 706 will prevent further abuses of Prop. 13 while preserving its tax protections for job creators.
The following stakeholders made statements in support of Senator Bates’ bill:
Jon Coupal, President of the Howard Jarvis Taxpayers Association:
“The sort of abuse of the ‘change of ownership’ rules that occurred with the purchase of the Santa Monica hotel can easily be remedied by this legislation. Opposition to this bill exposes progressive tax and spend interests as not being serious about corrective action that is consistent with the letter and spirit of Prop. 13. What they really want is wholesale destruction of Prop. 13 in a way that generates $12 billion in higher taxes for the purposes of funding their narrow interests.”
Rob Lapsley, President of the California Business Roundtable (@CalRoundtable):
“SB 706 guarantees the original intent of Prop. 13 by eliminating a misinterpretation made by the Legislature when the measure first passed more than 40 years ago. Prop. 13 continues to be the most important protection homeowners and businesses have against higher property taxes. It provides certainty that homeowners can afford to stay in their homes and businesses can continue to operate, especially now when there is so much pandemic-related uncertainty.
“The Business Roundtable supported the four previous bills related to this and strongly supports SB 706. We thank Senator Bates for continuing her efforts to address this critically important issue.”
Rex Hime, President and CEO of the California Business Properties Association:
“Enacting Senator Bates’ bill into law would be a good example of policy over politics. It would provide local governments with resources to meet their many needs.”
SB 706 is currently awaiting referral to a Senate policy committee.