Most California office tenants know that commercial landlords typically pass on a pro-rata share of operating expenses, including property taxes, to their tenants. In the most common office lease, tenants are only responsible for property tax increases over the “base year” amount which is most often the year of the commencement date or the year following the commencement date.
In California, Proposition 13 currently limits property tax reassessments (increases) to 2% annually, but allows for full tax reassessments if the building is sold, more than 50% is transferred, or substantial new construction is completed. Under the proposed California “split roll” ballot measure, office, industrial and retail buildings would be to be regularly reassessed and taxed at their full value. As a result, property tax reassessments could have a devastating effect on California office tenants.
Buildings that have been owned and managed by the same entities for a long period of time may not have been reassessed under Proposition 13 for years and in some cases decades. As a result, these buildings carry a potentially large operating expense/tax liability that buildings with high resale turnover do not. Tenants in buildings with the most stable long-term ownership will have the largest tax reassessment liability under the split roll ballot measure.
At a minimum, it’s important to do the math on your potential split roll and/or Proposition 13 reassessment liability before entering any new lease or renewal in any building in California. Tenants need to know when the property was last reassessed for Proposition 13 purposes, what its assessed value was and what its assessed value is today in order to forecast the potential liability due to a transfer of ownership under Proposition 13 or a mandatory reassessment under the split roll initiative. The longer it’s been since the last reassessment, the greater your exposure to property tax increases.