SAN FRANCISCO – With the exception of Proposition 15, most of the state and city fiscal reconciliation measures were passed in the last election. Recently, Allen Matkins Partners Bill Ahern, Associate Anosh Ali and Associate Jared Kassan shared some insights into what denying and passing these measures means to commercial real estate at the local and state levels.
GlobeSt.com: California voters were asked to consider a number of different fiscal state and local voting policies. Which proposal was the most controversial?
Kassan: Proposition 15 was the most competitive campaign that was narrowly rejected by voters. She asked voters if, in relation to industrial and commercial property alone, they should change longstanding property tax rules, which generally limit a county’s ability to tax real estate based on its purchase value plus an inflation factor.
Proposition 15 was an attempt to create a split role. Under the proposed shared role, commercial and industrial properties with a fair market value of more than $ 3 million would be reviewed for their current fair market value at least every three years. In the case of commercial and industrial properties that had not changed ownership over a long period of time, this would probably have led to a significant increase in the property tax burden for these owners. In an attempt to get the support needed, Proposition 15 excluded both residential properties (single-family and multi-family houses) and agricultural properties, and those properties would have continued to be subject to the same property tax rules that have been in place for over 40 years.
GlobeSt.com: What happens now if Proposition 15 fails?
Kassan: Currently, all California property remains subject to the current property tax regime, which generally states that property is taxed at a percentage of its estimated value. If a property does not change ownership or there is a new building on the property, the estimated value of the property corresponds to the base value of the property, i.e. the value of the property at the time of purchase, plus an inflation factor that must not exceed 2% per year. The general tax rate is 1%, but the tax rate can go above 1% to pay the voter-approved debt, and in most California counties the tax rate is slightly above 1%. Under the current property tax system, the property value of a property can be significantly lower than its current market value, which in turn can reduce the amount of property tax that might otherwise be owed if property were valued at fair value.The current regime gives the owner an assurance of how much will be the expected tax liability of the owner in relation to ownership of such real estate.
Because of the way the current California property tax system has been implemented, any material changes must be approved by a majority of California’s voters. Therefore, any future attempt to change the current regime would have to be through a future electoral initiative similar to that attempted in Proposal 15.
GlobeSt.com: What other statewide tax measures were on the ballot and what impact will they have?
Ahern: California Voted and Approved Proposition 19, a complex property tax initiative that gives certain California residents certain increased property tax benefits when moving their primary residence and reduces certain property tax benefits on certain intergenerational real estate transfers.
According to these property tax rules, the property is revalued when the owner changes and the base value of the property is reset to the then current market value. Under applicable California law, transfers of primary residence from parent to child (and in certain cases from grandparent to grandchild) may be exempt from revaluation regardless of the property’s current market value and whether or not it is a transferred property subsequently used by the child as the child’s primary residence or for some other purpose such as a rental property. In addition, current law provides that the first $ 1 million of the appraised value (not market value) of any property that is not the parent’s primary residence (vacation rentals and rental / investment properties) without incurring property tax dated Parent can be transferred to the child reassessment. These exceptions are commonly referred to collectively as parent / child exemption.
Proposition 19 severely limits the possibility of claiming the parent / child exemption. Specifically, Proposition 19 provides that parent and child exemption is limited to primary residence transfer provided the child uses the transferred property as their primary residence and the difference between the estimated value and the current market value of the transferred property does not exceed US $ 1 million -Dollar. If the value exceeds $ 1 million, a partial revaluation is triggered. It also eliminates the ability to transfer an additional estimated value of $ 1 million without initiating a revaluation. Voters narrowly agreed to Proposal 19, and the parent / child leave updates apply to broadcasts on or after February 16, 2021.
Proposal 19 also increases certain property tax benefits. It provides that homeowners over 55 years of age, those with severe disabilities, or victims of natural disasters can transfer the property tax value of their primary residence to another primary residence across the state up to three times. If the new main residence is more valuable than the previous main residence, the calculated value only increases by this difference. This is a change from current law which provides that these individuals may only transfer their estimated value if the replacement home is of equal or lesser value and is in the same county or county that accepts inter-county transfers, and can do this only once. These updated terms apply to transfers made on or after April 1, 2021.
GlobeSt.com: San Francisco voters approved several fiscal voting measures. What impact will this have on businesses?
But: The approval of certain fiscal reconciliation measures in San Francisco will result in an increase in the overall tax burden on businesses in the city through higher taxes on property transfers, higher gross income taxes, and a creative new executive compensation tax. The increased transfer tax and updated gross income tax will come into effect on January 1, 2021. The new tax, which is aimed at executive compensation, will come into effect for tax years beginning on or after January 1, 2022.
GlobeSt.com: What are the details of these three approved San Francisco elections?
But: Proposal I doubles the transfer tax on property transfers in San Francisco to more than $ 10 million. Specifically, the transfer tax rates for real estate transfers in San Francisco with fair market values between $ 10 million and $ 25 million will be increased from 2.75 to 5.5% and for real estate transfers with fair market values of $ 25 from 3 to 6% increased millions or more. The events that trigger the transfer tax remain unchanged, and a sale creates a significant transfer tax liability even if lost.
Proposal F is a revision of the San Francisco business tax regime and will primarily increase the tax rates of the existing gross income tax levied by the city, abolish the wage tax levied by the city, and reduce the annual business registration fee for businesses by $ 1 million or less in gross revenue City attributable, increase the small business exemption cap for gross income tax to $ 2 million and increase the annual business registration fee for businesses benefiting from the increased exemption cap above (businesses with gross revenue between $ 1 million and USD 1 million) USD 2 million). Due to the ongoing litigation regarding the validity of Proposition C, which was passed in 2018 and generated additional gross revenue for large companies as well as gross revenue from commercial rentals, Proposition F also includes a back-up to reintroduce the taxes created by Proposition C if the existing litigation persists To invalidate sentence C.
Proposal L imposes additional gross income tax on any person doing business in San Francisco if the compensation rate for that person (or combined group) exceeds 100: 1 for the tax year. The term Executive Pay Ratio refers to the ratio of the annual compensation paid to the highest-paid executive in a person (or a combined group) for a tax year and the average compensation paid to the employees of a person (or a combined group) within the city is paid tax year. The highest-paid executive doesn’t have to be a San Francisco resident. Compensation is a broad term that includes wages, commissions, bonuses, and property spent in exchange for services, and specifically includes compensation for services paid to owners of transit businesses.
The tax levied by Proposition L is not limited to large or publicly traded companies. Because the tax is levied on gross receipts as opposed to profits, even businesses that are making a loss can face a significant tax liability. The tax rate imposed by Proposition L is between 0.1% and 0.6% on the gross taxable income of a company or combined group attributable to the city for executive pay ratios in the range of 100: 1 to 600: 1. In the event that an individual is doing business as an administrative office in San Francisco, the tax rate is between 0.4% and 2.4% of the total wage and salary expense of the individual or combined group of the San Francisco area executive pay from 100: 1 to 600: 1 is to be added.