Are commercial property owners in California paying their fair share in taxes? That’s the basic question facing voters this November with Proposition 15.
The ballot measure aims to raise as much as $11.5 billion annually for California schools and local governments by raising taxes on many commercial properties — particularly those that have been held under the same ownership for many years.
Jennifer Ito, research director with USC’s Program for Environmental and Regional Equity, said under California’s current property tax system, “The kinds of businesses that get the most benefit are those that bought their properties years ago.”
The existing rules were created by Proposition 13, a ballot measure passed by California voters more than 40 years ago. It was a historic tax-cutting initiative that rewrote California politics and dramatically changed the way property taxes in the state are assessed.
Because of Prop 13, businesses and homeowners do not pay taxes based on what their properties are worth today. Generally, their taxes stem from what they originally paid for the property — even if they bought it decades ago.
“There are some [businesses] that have not been reassessed since Prop 13 passed,” Ito said. “They were last assessed at their market value in 1975.”
Now, Prop 15 is asking California voters to overturn parts of Prop 13.
The reform measure would leave residential properties untouched, but would tax larger commercial and industrial properties on their current market value. (Property owners with less than $3 million in holdings would be exempt.)
UCLA tax law professor Kirk Stark said that simple change could have a huge impact on older, legacy businesses in California. Taxes could rise sharply on Disney’s studios in Burbank, he said, or on the Silicon Valley land owned by Intel for decades.
“The major sources of the increased revenue we’re talking about are from those landowners,” Stark said.
A LIMA BEAN FARM GROWS INTO A HIGH-END MALL
South Coast Plaza in Costa Mesa isn’t like other malls. It’s unapologetically upscale.
With coronavirus restrictions in place, masked shoppers now line up to get inside boutiques like Gucci and Louis Vuitton.
“Certain stores, you’re not going to get in,” said Karen Watson, who was there to pick up a piece of jewelry from Chanel. “Tiffany is another one. You’re going to have to wait.”
Another way the Orange County mall is unique? In an industry dominated by large real estate investment trusts, South Coast Plaza has been privately held by the same family business for more than than half a century.
The Segerstroms built South Coast Plaza on a lima bean farm in the 1960s, and they maintain ownership today.
Under Prop 13, the longer you own commercial property in California, the lower your property taxes are likely to be. That could all change under Prop 15.
“South Coast Plaza is a good example of a situation where the property tax burden could increase very substantially,” said UCLA’s Kirk Stark.
A South Coast Plaza representative declined to comment for this story. (Campaign finance disclosures show that C.J. Segerstrom & Sons has contributed more than $500,000 to a political action committee opposing Prop 15.)
According to the Orange County Treasurer-Tax Collector’s office, South Coast Plaza was responsible for about $4.8 million in property taxes during the 2018-2019 fiscal year. So, how much would taxes on the mall rise if voters approve Prop 15?
“I would say it’s really difficult to determine,” Stark said.
PUTTING A PRICE ON ONE OF CALIFORNIA’S TOP MALLS
In order to know what South Coast Plaza’s tax bill would look like under Prop 15, you’d first need to figure out the mall’s current market value. That’s not an easy task.
Estimates do exist. An Orange County Register article from 2017 pegged the mall’s value at $3 billion.
In January of this year, a Newport Beach real estate analytics firm, Green Street, came up with a figure in the same ballpark, estimating the assets of the Segerstrom family business at $2.7 billion based on their ownership of one mall.
But that was before the coronavirus pandemic struck. Public health restrictions temporarily shut down mall activity. Many have now reopened with limited capacity, but many consumers are wary of shopping indoors. As a result, Green Street analysts have now reduced their estimate to approximately $2 billion.
“Malls may be the property type that’s been hit hardest,” said Richard Green, director of USC’s Lusk Center for Real Estate. “The possible exception is full service hotels. People are just not out shopping as much, even where they’re open.”
Still, all of those numbers are much higher than the current assessed value of South Coast Plaza as revealed in Orange County property records. Totaling up the net taxable value of all properties associated with the mall’s address of 3333 Bristol Street yields a figure close to $456 million.
But does that mean the mall is really worth four times its current assessed value … or more? Commercial real estate experts said that’s unclear. One appraiser even told LAist that determining the mall’s current market value was “nearly impossible.”
“The only way you can figure out the value of anything is if there’s a sale,” said UCLA’s Kirk Stark.
Without a sale, all we have are independent estimates. Stark said those estimates may be considering intangible assets such as the mall’s internationally recognized brand and its existing customer base — factors that have nothing to do with the value of the physical property itself.
“Will it be doubled, tripled, quadrupled as a result of Prop 15? I don’t know the exact number,” Stark said. “That’s going to take some determination by the Orange County Assessor.”
How much property taxes on South Coast Plaza could rise under Prop 15 isn’t clear. But right now, it is clear that some parts of the mall are paying much less than others.
TWO DEPARTMENT STORES, TWO VERY DIFFERENT TAX BILLS
In the eyes of Orange County’s tax system, South Coast Plaza isn’t just one piece of property. The mall is carved up into a bunch of different parcels.
Some parcels haven’t been assessed since 1975, while others have been reassessed within the past five years. (Reassessments can be triggered by a number of events, including building renovations and changes in legal ownership.)
When similar properties were last assessed decades apart, big gaps can emerge in their taxes.
For example, Orange County property records show that the parcel associated with the Macy’s Men’s store at South Coast Plaza was last assessed in 1995. Right next to it, there’s a Saks Fifth Avenue. The parcel for that department store was reassessed much more recently, in 2016.
In many ways, the two department stores are similar. They’re both blocky, three-story structures built in the late 1970s. The Saks buillding is about a third larger than the Macy’s. Otherwise, the two properties have a lot in common.
However, the Saks parcel has a tax bill that’s nearly five times higher than the tax bill associated with the Macy’s Men’s store.
Stark, the UCLA tax law professor, said the Saks property is probably not five times more valuable than the Macy’s property. The imbalance, he said, is “entirely attributable to Prop 13.”
DEBATING THE FAIRNESS OF CALIFORNIA’S TAX SYSTEM
Discussions of Prop 13 inevitably return to the question of fairness. In this case, is it fair that one department store should be taxed so much more than a similar property right next door?
University of North Texas adjunct professor of real estate Marc Moffitt said fairness is subjective. But he said that Prop 13, by design, does not treat similar properties equitably.
“This particular reform really goes to the heart of the issue of equity and equitable treatment,” Moffitt said.
If Prop 15 passes, both department store properties would be reassessed and taxed on their current market value — not according to assessments that happened more than 20 years apart.
“It will provide a level playing field,” Moffitt said, “to make sure that they’re being valued similarly, and being subject to similar tax liability.”
But business groups opposing Prop 15 contend there’s nothing unfair about California’s tax system.
They argue that the existing rules provide businesses with a level of certainty about their taxes. They say this predictability encourages long-term investment in California real estate.
California Business Roundtable president Rob Lapsley said stripping away those protections wouldn’t just hit large corporations.
“If you increase costs for South Coast Plaza, the tenants of South Coast Plaza are going to pay for it,” Lapsley said. “And they are in turn going to pass on all of the costs to the consumers.”
The effects of Prop 15 would not kick in until the 2022-2023 fiscal year (with a delay for retail centers made up of mostly small businesses). USC’s Richard Green said even if the pandemic abates by then, the cost increases could still be tough for retailers to absorb.
“Retail is fragile,” Green said. “Retail is barely hanging on now. I think that would be a problem.”
But USC sociology professor Manuel Pastor said Prop 13 discourages innovation by giving older businesses huge tax breaks while saddling their newer competitors with higher costs.
“I am not sure if someone could have devised a more dysfunctional tax system,” Pastor said. “You’ve got identical pieces of property right next to one another paying wildly different property tax bills.”
Pastor said because of those disparities, schools and local governments are losing out on about $11 billion per year in tax revenue. Whether or not that’s fair will — once again — be up to California voters to decide.