It seems that every year, there is an attempt to implement a “split roll” for property taxes in California, leaving residential alone with the 2% maximum annual increase mandated by 1979’s Proposition 13 but erasing this cap for commercial property. That it is being proposed once again is no surprise. So why is everyone talking like it is really going to happen this year? In a word…homelessness.
The homeless crisis has become so front and center in California that the case for jacking up property taxes may have finally reached the tipping point. This is an issue that should be a cause of great concern to every commercial property owner and tenant.
The politically convenient argument to soak “rich” commercial landlords to help fund a fix for homelessness and the overall affordable housing shortage in California is shortsighted, as it is the tenants at these properties that are going to take the hit. Whether a lease is “triple net” or “full service gross”, increases in operating expenses are typically passed through to the tenant. Think about it: if market forces have established rents around $4.00 per square foot with the possibility of only small, incremental increases in property taxes, the burden on tenants of a $.50 per square foot per month pass through charge resulting from a spike in property taxes will force asking base rents downward by that same $.50; otherwise, there will be an affordability crisis and a tidal wave of lease defaults.
This will be a mess. Something has got to give. In next month’s installment, I will examine how this is likely to play out in the rental market.
Landlords and tenants, time to refill your Xanax prescription.