California Split Property Tax Role-- A Guest Post From Jerry Manpearl

Jerry Manpearl is a civil rights and civil litigation attorney who has argued both in the California courts and the United States Supreme Court. Jerry is has been an expert in real estate law expert for 4 decades so I went to him for advice on California State Measure 13, which is on the ballot next week and which everyone has been asking me about. This is what Jerry wrote up for us:

The effort to have a split property tax roll is finally coming to fruition after many years and will be on the Nov 2020 ballot.

The purpose of the split role is to separate commercial and industrial properties from the benefits of proposition 13. Under a split roll some industrial and some commercial properties (over $3 million in value) will lose the protection of proposition 13, and would have their assessed basis increased to market value (with certain exemptions).

This would not affect residential property (both single family and multi-residential) which would retain the benefits of proposition 13.

Real estate brokers are now sending out warnings to the public and particularly their commercial and industrial clients outlining the alleged tragedy of a split roll, and the dangers it presents to their investments and to the economy.

This may be very wrong and an effort should be made to inform brokers of the potential benefits of a split role.

• a split role may be one of the largest benefits and windfalls to real estate brokers in decades, as a result of increased turnover.
• a split role will benefit all of California by benefiting our grade schools and our universities.
• a split role will benefit the California economy, it’s citizens, and the welfare of the state.
• a split role will increase economic activity, increase real estate sales, improve neighbourhoods, and benefit the poor and rich.
• yes there will be losers under a split role, but far more winners. 

How Will All This Happen:

First it must be understood how proposition 13 damaged the California economy, and particularly the school and university systems.

Prior to 13 California spent one of the highest rates per student in the country and had a university system that was envied and admired world wide.

California now spends about what Mississippi spends per grade school student. Depending on the study you use California is 27th - 42nd nationally, spending about $10,000 per student. New York spends $20,000 per student.

Our universities in the 1950, 60s & 70s attracted the world’s best professors and was virtually free to residents. The system made California the envy of the world, a world class development and industrial power, with an educated population and scholars flocking.

California is still a scientific and industrial power, but that will be lost without a highly educated population. And a great deal of blame can be attributed directly to 13, and the decline of our educational system. (The United States is first in gun violence, violence of all kinds, prisons, and military spending. We are 27th - 42nd in education and health care.)

When a country or a state has a depression or even a recession everyone is hurt and suffers. The poor suffer tremulously, the middle less, but jobs are lost and wages decrease. The rich may not have their standard of living drop, but their investments, assets and income will suffer.

However, when real estate goes up or down, it does not necessarily affect the entire economy. Yes there will be winners and losers. Some investors will gain and other will lose. But real estate doesn’t go away. It simply changes hands as rents, profits, and earnings go up or down.

Take a simple case: an area is rezoned to a higher use. The land owner may profit, but the commercial or residential tenants may suffer as they are displaced by a higher use.

Conversely, if restrictions are imposed on the use, building codes are tighten, or use is downgraded, some landowner will suffer, but the property is still there, still useful, and other businesses and other investors will benefit. Owners with highly leveraged properties may suffer or even lose their investment. But the economy does not necessarily suffer.

In both cases economic activity increases. Properties sell more often, brokers sell more, and development increases.

Prior to proposition 13 industrial and commercial property contributed about 65% of the property tax revenue. Now they contribution about 35%. Commercial and industrial property does not turn over as often as residential.

There is a great incentive for an owner to retain property with a low tax base under 13. The owner can charge and keep more rent and more profit. Why sell when the owner would now pay full taxes on any replacement investment, and would keep less profit.

Sometimes property tax increases can be passed on to the tenant, but often the landlord just has to pay more. That is the economics of real estate ownership, economics of 13 and the disincentive to selling.

Again, a split role would increase economic activity and certainly benefit brokers.

Don’t be fooled. Large landowners and developers will spend billions to defeat this measure. They will use scare tactics claiming it will hurt small business, employees, and the public. They will quote BS studies they paid for, telling you how much business will be lost. How many jobs will be lost. Not true. It will hurt them!!!!

Large land owners may have to lower rents. The may have to lower their selling price. But the businesses will stay. The employees will stay. Business will continue as usual.

Yes, some landlords will not make as much money.  Some may have to sell for less. But everyone else will benefit, sales activity will increase, brokers will do more deals.

As you know, during economic downturns landlords often have to lower rents. Periodically landlords have to actually lower rent as the economy changes. We have seen this over and over for many reasons. Nothing terrible happens.

The buildings don’t go away. Business and life goes on. Just some win and some lose. I am a landlord that will be seriously affected by this change. I have buildings I have held for over 35 years, and a large incentive for not selling has always been the low tax assessments.

But I am also a father, a grandfather, a member of this community, and a concerned citizen. It is the right thing to do, and the economic thing to do.