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Proposition 15 (Split-Roll Initiative): How It Could Affect Commercial Property Taxes

Update as of November 23, 2020: 

By a narrow margin (52% to 48%), it appears that California voters have rejected Proposition 15, the “split roll” initiative that would have eliminated the limitation on real property tax increases under Proposition 13 for many commercial and industrial properties.  The majority of voters in Santa Clara County and other Bay Area counties and in Los Angeles County voted in favor of Proposition 15.  Those counties would have likely benefited significantly in additional property tax revenue generated by Proposition 15.  In contrast, the majority of voters in many counties in the Central and Sacramento Valleys and in the Sierra Nevada Mountains voted against Proposition 15.  It was predicted that, if Proposition 15 had passed, the property tax revenue for many of the small and rural counties in those regions would have resulted in a net decline because of the comparatively small number of commercial and industrial properties that would have been reassessed as opposed to the number of farms and small businesses that would have benefited from either a full exemption or $500,000 yearly exemption from business tangible property tax under Proposition 15.  With the defeat of Proposition 15, Proposition 13 will continue to govern how all real property will be taxed based on its “base year value”.

Origiinal Article, published October 28, 2020: 

Proposition 15, The California Schools and Local Communities Funding Act of 2020 (Initiative No. 19-0008), is on the November 3, 2020 ballot.  If enacted, Proposition 15, which is often referred to as the “split roll” tax initiative, would partially repeal Proposition 13, which itself was an initiative measure passed by California voters and added to the California Constitution in 1978.

Existing Law: Proposition 13

Under Proposition 13, which is incorporated in Article XIII A of the California Constitution, ad valorem taxes on real property cannot exceed 1% of the base year value, with an annual adjustment of not more than 2%.  The “base year value” of real property is usually the purchase price of the property until a change of ownership or the completion of new construction occurs, upon which event, the property is then subject to reassessment to the then current market value.  The impetus for Proposition 13 was to temper the acceleration of property taxes caused by soaring property values in California.

Proposed New Law: Proposition 15

If Proposition 15 is passed by voters in November and adopted, there would be a “split” in the tax assessment roll which would require most commercial and industrial properties to be reassessed at market value while allowing residential properties (and other properties as discussed below) to be valued according to the current property tax regime under Proposition 13.  Under the new split-roll system, all non-exempt commercial and industrial properties (including “raw” commercial and industrial land) would be subject to an initial reassessment to the current market value, then periodically reassessed no less frequently than every three years thereafter.  The 1% limitation on tax rates would remain unchanged under Proposition 15. 

As used under the proposed new law, the term “commercial and industrial real property” means (i) real property that is used as commercial or industrial property (however, real property zoned as commercial or industrial but used as long-term residential property would be classified as residential for purposes of the new law), or (ii) vacant land that is not zoned for residential use and is not used for commercial agricultural production, and is not protected open space. 

For residential properties, whether owner-occupied or rental properties (including single-family homes, multi-unit dwellings, land on which single-family homes or multi-unit dwellings may be constructed or placed and property zoned as commercial or industrial but used as long-term residential property), the protection under Proposition 13 will remain in place.  Consequently, residential property would continue to be taxed based only on its base year value (subject to the annual adjustments not to exceed 2%) until a change of ownership or the completion of new construction occurs.

For properties that have mixed commercial/industrial and residential uses, only the portion used for commercial or industrial purposes would be subject to reassessment under Proposition 15.  If 75% or more of the mixed-use property is residential, then the entire property can be excluded from reassessment.

Agricultural Land Exemption

Proposition 15 expressly provides that real property used for commercial agricultural production shall not be reassessed at market value.  However, the term “real property used for commercial agricultural production” is narrowly defined to mean only the land that is used for producing commercial agricultural commodities.  Therefore, commercial and industrial structures, fixtures and other improvements located on commercial agricultural real property would be subject to Proposition 15 reassessments.  Some opponents of the initiative argue that farmers, ranchers and other agricultural businesses could be adversely impacted by Proposition 15 because agriculture-related structures, facilities and other improvements such as fruit/nut trees, barns, packinghouses, processing facilities, dairies and vineyards, would trigger reassessments at market value under the measure.

Small Property Exclusion

Commercial and industrial real property that has a fair market value of $3 million or less would qualify for exclusion from the reassessment under Proposition 15.  However, if any direct or indirect owner(s) of such property owns other commercial or industrial property in California, and all properties have an aggregate value in excess of $3 million, then all such properties would be subject to reassessment under Proposition 15.  The $3 million threshold would be adjusted for inflation every two years commencing January 1, 2025.  In an independent study conducted for the California Assessors’ Association, it was noted that there is currently no statewide database that would enable county assessors to access the assessed value of properties in other counties.  In order to administer the small property exclusion, such a database would need to be instituted.  The lack of appropriate technology is but one part of the overall complexity of implementing Proposition 15 as further discussed below.

“Small Business” Temporary Deferral

If enacted, the split-roll system would take effect commencing on the lien date for the 2022-23 fiscal year.  However, Proposition 15 provides for a temporary deferral of the reassessment until the 2025-2026 fiscal year for commercial and industrial property in which 50% or more of the occupied square footage of the property is occupied by a “small business”, as specifically defined in Proposition 15.  The initiative defines a “small business” as one that (i) has fewer than 50 annual full-time equivalent employees, (ii) is independently owned and operated such that the business ownership interests, management and operation are not subject to the control, restriction, modification or limitation of outside sources, individuals or other businesses and (iii) owns real property located in California.  Notably, under the “purpose and intent” section of Proposition 15, it states that reassessments for qualifying commercial and industrial properties occupied by small businesses are deferred until the 2025-2026 lien date “to provide those small business tenants additional time to choose the leasing option that works for them…”  But, if Proposition 15 requires that the small business owns real property in order to qualify, it is unclear how most tenants, who are less likely to own real property, would benefit from the deferred reassessment.

Perhaps as a means to offset the potential adverse effects on businesses in the State, Proposition 15 also contains an exemption for taxes on tangible personal property.  For a taxpayer that is a small business as defined in the initiative, all tangible personal property owned by such taxpayer and used for business purposes is exempt from taxation.  For all other taxpayers, the exemption is up to $500,000 of combined tangible personal property and fixtures. 

Arguments For and Against Proposition 15

Advocates of Proposition 15 argue that it would generate between $8 billion and $12 billion in new revenues for schools, community colleges, cities, counties and special districts every year by 2025.  They also argue that the initiative would close a loophole that allows corporations and other entity owners to sell and transfer less than 49% interests to avoid a change in control of the entity, and thereby avoid triggering the reassessment that occurs upon a change in ownership.

Opponents of Proposition 15 contend that, among other things, it would (1) result in higher rents for small businesses (by way of property taxes being “passed through” to tenants, as is typical in most commercial leases), many of which are already struggling with the financial impact of the COVID-19 pandemic, and (2) hurt farmers (through increased property taxes on agricultural improvements and fixtures) and ultimately cause higher prices on goods and services for consumers. 

Earlier this year, the California Assessors’ Association (CAA), a statewide non-profit professional association for county assessors, came out in opposition of Proposition 15.  The CAA determined that the Proposition would be extremely costly to implement and would require additional and adequately trained staff, both of which are made more difficult by budget cuts and hiring freezes.  In a policy briefing paper issued by the CAA, it was noted that, currently, Santa Clara County reassess approximately 2,000 commercial and industrial properties annually for changes in ownership or new construction.  Under the proposed new law, the annual number would increase to approximately 24,000 commercial and industrial properties.

According to an independent analysis prepared for the CAA, the estimated cost to implement Proposition 15 over the course of the proposed three-year phase-in period, to assessors alone, is over $1 billion.  The projected cost consists of the costs to reassess all commercial and industrial properties and to administer the new rules and requirements under the Proposition.  This projection does not include the anticipated increase in costs for County Controller, Tax Collectors, Assessment Appeal Boards or County Counsel as it is expected that there would be an influx of assessment appeals requiring revaluation upon every periodic reassessment.  It also does not account for an increase in staff salary expenses necessary to recruit and retain new appraisers.  Those in favor of Proposition 15 counter this burdensome-cost argument by pointing out that the measure sets aside money for various costs created by the measure.  This includes allocating several hundred million dollars per year to counties to pay their costs of carrying out Proposition 15.  However, counties would likely incur costs to administer Proposition 15 before the tax revenue from Proposition 15 is available to cover these costs.  If this were to occur, the state would loan money to counties to cover these initial costs until the new property tax revenue is available.


If Proposition 15 is approved by voters in November, it could have a major impact on many owners of commercial and industrial property and their small business tenants.  

To learn more about how Proposition 15 could affect your business or real estate holdings, please feel free to contact one of the real estate or tax attorneys at Berliner Cohen LLP. at 408.286.5800.