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New measure may eliminate cap on commercial property taxes

Real estate in California is expensive. Various rules and regulations are present to help businesses thrive in this market. Without certain protections, these businesses could potentially drown due to excessive real estate costs.

One such protection is Proposition 13. Proposition 13 was passed in 1978 to protect commercial, industrial and residential property owners from excessive property taxes. Essentially, this law created a cap on property taxes.

A new proposal could remove this cap for certain properties.

Which CA properties are subject to a tax hike? Commercial and industrial properties are at risk. These properties are defined within the proposal as:

[P]roperty that is either used or zoned as commercial or as industrial property, or is vacant land not used or zoned for residential use or used for commercial agricultural production. For purposes of this paragraph vacant land shall not include land zoned for open space or the equivalent designation for land essentially free of structures, natural in character to provide opportunities for recreation and education, and intended to preserves scenic, cultural and historic values.

The measure specifically states that the changes would not impact homeowners and rental properties used for residential purposes. Attorney General Xavier Becerra is currently taking the proposal under review.

How is this different than current law? Property taxes are generally determined with a calculation that uses 1 percent of the purchase price. This tax is then subject to an increase of up to 2 percent on an annual basis within a certain, preset cap.

Commercial and industry properties throughout the state are likely to experience a significant increase in their tax bill if the referendum passes. The tax would no longer be set based on purchase price with a cap. The new proposal bases the tax calculation on the assessed value and does not include a cap. The potential tax increase could impact negotiations for commercial real estate transactions.

Will the referendum pass? Before the referendum becomes law, it must first make it to the ballot. At that point, a majority of voters must vote in favor for the proposal to become law. At this time, it is too early in the process to determine if the proposal will move forward or fail. However, it is important that entrepreneurs keep the progress of this proposal in mind during business negotiations.

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