California Apartment Association

By Mike Nemeth

A bill that would close a change-of-ownership “loophole” in California’s Proposition 13 has undergone significant business-friendly amendments, helping it gain momentum in the Assembly.

At the insistence of the California Apartment Association and other groups, Assembly Bill 2372 no longer contains wording that could prompt a flood of unnecessary reassessments.

In the revised version of AB 2372, authored by  Assemblyman Tom Ammiano, D-San Francisco, and Assemblyman Raul Bocanegra, D-Pacoima, reassessments would follow the sale of commercial property whenever 90 percent of the property is sold over any three-year period.

CAA strongly opposed the first version of the bill, which would have defined “ownership interest” as corporate voting stock, partnership capital, and profits interests, limited liability company membership interest, and other ownership interests in legal entities.

With these definitions, properties would have been reassessed much more frequently than the bill would now require.

Now the these definitions are out, AB 2372 more easily advanced this week from the Assembly Revenue and Taxation Committee. It needs two-thirds approval in the Legislature to reach the governor’s desk.

The focal point in the revamped AB 2372 is that the sale of commercial property is based on how much of the property is sold — not how much of the property an individual acquires in a transaction.

Currently,  changes in ownership occur only when one purchaser grabs more than 50 percent interest. This leaves room for orchestrating sales in ways that do not prompt a reassessment — or the higher taxes that go with it.

This type of maneuver made headlines after computer magnate Michael Dell secured a hotel in Santa Monica but kept his stake and others’ below 49 percent. Because Dell owned less than half of the hotel, no legal change in ownership occurred, and no reassessment followed, a scenario explained in this Los Angeles Times article.

In the grand scheme of Prop. 13, passed by voters in 1978, the changes under AB 2372 would be minor, and if the legislation becomes law, Californians can expect modest impacts on commercial property holders.

The proposition still sets strict limits on property taxes, basing them on 1 percent of a property’s value at the time of sale and capping increases in assessed value at 2 percent annually. This shields the owner from taxes tied to huge spikes in market value.