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Prop 15 May Imperil Lots Of Tenants

By Michael Aushenker Staff Reporter at The San Fernando Valley Business Journal

Voters to decide on split-roll tax system in November

Proposition 15, an initiative to tax commercial and industrial properties at a higher rate for education and local government funding, will have a negative domino effect on the market, commercial real estate experts told the Business Journal.

That’s because landlords will pass along hiked property taxes to tenants, who will charge customers more.

If approved by voters on Nov. 3, Prop 15 will create a split-roll tax, or separate tax rules for commercial and retail property versus residential property. The ballot measure intends to upend what voters approved in 1978 with Proposition 13, in which all assessed property values are based on the most recent purchase. Prop 13 caps property tax rates at 1 percent of the assessed value with annual increases not to exceed 2 percent.

John Loper, associate professor at USC Lusk Center for Real Estate, said passage of Prop 15 will add more financial burden to restaurant and retail tenants already responsible for triple-net (property taxes, insurance and operating costs) leases.

“If property taxes go up, the tenants pay, not the landlords,” Loper said.

With non-chain restaurants, small shops, cabinet makers, carpenters and plumbers —

“all of the small businesses are going to be paying those property taxes,” Loper continued.

Entrepreneurial business owners have already

“been hurt the most by COVID. They don’t have deep pockets.”

There are some exemptions, according to Loper, such as small companies that own their property.

“But most of the time, they’re renting at a shopping center or multi-tenant industrial park and (tax hikes are) not going to help,” he said.

Union groups have backed Prop 15, which promises $11 billion in revenue in a 60-40 split between municipal governments and local schools from K-12 to community colleges.

While that might sound ideal on paper, broker Yair Haimoff, founder of Spectrum Real Estate Services in Encino and Valencia, questions whether the funds will truly go where intended.

“Who is going to be in charge of appropriating the funds?” Haimoff asked.

“County assessors, they’re already behind. … Where are they going to get the manpower to do this?”

If landlords raise rents and tenants can’t pay or go out of business, landlords will stumble in paying their mortgage lenders, Haimoff said. Loper thinks Prop 15 could exert a large influence on the economy at large.

“This could be the thing that tips (business owners to say) ‘I can’t do this anymore,’” he said.

Eventually, customers will pay for the tax hike, the broker and academic agreed.

“The tenants are going to have to raise prices and the consumers are going to have to pay for it,” Haimoff said.

Added Loper:

“This is going to severely hurt a lot of small businesses. On top of COVID, this is scary.”