Split Roll

By Brilliant Edward Manyere

In trying to keep legal entity owned property assessed near market value, the legislature added Subdivision C of Section 64 Revenue and Taxation Code providing that when there is a change in corporate control of more than 50%, it is considered a change in ownership.

In trying to keep legal entity owned property assessed near market value, the legislature added Subdivision C of Section 64 Revenue and Taxation Code providing that when there is a change in corporate control of more than 50%, it is considered a change in ownership. Several major firms doing business as legal entities in California have undergone changes in corporate control, resulting in reassessment of their properties at market value.

Additionally, some legal entities are primarily for investing funds in real estate for current benefits, such as rent and borrowing power, and in the future appreciation of the property value. On average, these legal entities hold the properties for a seven-year holding period. The arrival of these investors from Wall Street, pension funds, insurance companies, and other financial institutions stimulate the value of real property to appreciate. The investment pools include huge sums of money and primarily buy portfolios of properties. They often overpay but get huge underlying benefits. Once the portfolio has hit the targeted rate of return, it is sold, typically after a seven-year holding period. Both legal entities that have undergone changes in corporate control and investment pools properties are assessed at near market value.

When business establishments, such as a chain of supermarkets, discount stores, or restaurants, come to California, they often build their own structures but lease the land. Obviously, if they build a building, they prefer a long-term lease often over thirty-five years, and that is a reassessable event. Some businesses that came here, such as Smith Food and Drug Stores, failed. A new user acquires the property by either buying or leasing on a long-term basis, which is a reassessable event.

The split roll is not necessarily good during a weak economy when real property values are declining. During the past three decades, three out of the ten years during each decade has experienced severe real estate declines. If this pattern continues, the State of California could experience severe budget shortfalls during recessions if the properties are assessed at market. I am not sure the government will be disciplined enough to save in the good years to offset the shortfalls.

Opponents of the split roll say California will lose businesses. As long as there is a market for their products and services, businesses will stay but they will surely pass the additional tax load to the consumer. The consumer could be a customer or tenant exposed to a high cost of living as the prices of goods and services, and rent too, continue to rise. Usually renters are the less fortunate who cannot purchase a home and not protected by Proposition 13 and resort to renting. This is arguably a fact that renters will bear the increase cost of property taxes.

Even though legal entities have some Proposition 13 breaks, they are not necessarily getting away with paying lower amounts on all property tax components. A breakdown of current property taxes shows that a legal entity is charged the 1% of assessed value. The bond indebtedness and direct assessments derived by local community based agencies are not based necessarily on the assessed value of the property. The criteria vary among agencies.

My other concern is the failure of the split roll to make it to the ballot in 2003 after then Assemblywoman Loni Hancock's proposal to increase the property tax rate for legal entities to 3% of assessed value. The split roll sponsored attempts to change the law failed five times in the Legislature during 2005, and it could not make it to the ballot. Proposition 167, the only one to make it to the ballot, was defeated by a margin of 67% to 33%.

There are some reports stating that some proponents are doing studies that will be used to support arguments for another split roll initiative in November 2016. In theory, using the split roll concept may increase the revenue in California, but we are not sure if this could hold true in practice.

Should the split roll legislation pass and all properties owned by legal entities are assessed at market value, the businesses are not going to lay low. They will hire property tax agents who will file on every property. This would be an administrative nightmare for the Assessor to try to work the cases for the Assessment Appeals Board hearings. Additionally, the Assessment Appeals Board will also be overwhelmed with the number of cases.

The commercial and industrial sector is more lucrative for property Tax Agents and so are their savvy fighting assessed values at the Assessment Appeal Board. Appraisal is not an exact science, and a variety of ways, including adjusting factors, can persuade an Assessment Appeals Body to reduce values.

I developed my opinion to keep current assessment practices based on my work experience and knowledge gained while estimating and reviewing market and resulting assessed values of legal entities. On average, legal entity properties are often assessed at near market value.