3 ms·

In commercial real estate, it's become standard practice in California to never allow properties to legally change hands, in order to avoid the Prop-13 reset. I

In commercial real estate, it's become standard practice in California to never allow properties to legally change hands, in order to avoid the Prop-13 reset. Instead, commercial property is owned by holding companies, and ownership of the holding companies is bought and sold, but the property itself doesn't undergo an official real-estate sale.

throwaway6497 11y ago
It doesn't make sense to allow commercial real-estate companies to take advantage of prop-13. I thought, the whole point of Prop-13 was to ensure that old folks don't get thrown out their homes.
- epicureanideal 11y ago
  Theoretically it could also be a 75 year old man in his 55 year old corner grocery store. Just playing devil's advocate here. I agree with you.
maxerickson 11y ago
Is this process well documented? This is like leaving the front door off the law, not like putting a back door into it, so I wonder if it is more of an internet rumor than an actual way to avoid change of ownership. Maybe people do it but it is fraud?
- _delirium 11y ago
  There was at least one court case over it, in 2008, regarding Michael Dell buying a hotel in Santa Monica via a holding company, where he prevailed in court: http://www.santamonicadispatch.com/2013/05/prop-13-gives-edge-to-dell/ http://www.santamonicadispatch.com/2013/05/prop-13-gives-edg... It seems it's more complex than what I implied, though. The property needs to not only be owned by a holding company, but sales of the holding company have to be structured in such a way that overall ownership of the holding company isn't deemed to have changed. If the above article is correct, that's triggered when a new owner acquires a majority stake. So to avoid triggering a change in ownership in this case, Dell structured the sale so that he, his wife, and another business partner all bought interests in the company, split so that no single purchaser acquired more than 49%.
ForHackernews 11y ago
...that sounds like a legal loophole that should be closed.
prostoalex 11y ago
I could see how a publicly-traded REIT would argue that the property it owns changes owners every second, and in that case it makes little sense to include rental properties under Prop 13 umbrella. Couple of arguments against such exemption that I can see are * major real estate property owners can make a case (in court of necessary) that their property prices have not increased as much as single-family residential prices, due to the nature of the commercial market (fewer buyers, larger amounts, larger variety of the market to find decent comparables) * as property tax is deductible, the revenue would just restructure - what will be collected via property tax would then be deducted at the end of the year from income tax. I guess even in that case owners would be supportive, as property taxes typically go directly to the municipalities, while income taxes are spent by some politicians in Sacramento, but then why would Sacramento be in favor of the exemption that would lower its collected revenue?

throwaway6497 11y ago

It doesn't make sense to allow commercial real-estate companies to take advantage of prop-13. I thought, the whole point of Prop-13 was to ensure that old folks don't get thrown out their homes.

epicureanideal 11y ago
Theoretically it could also be a 75 year old man in his 55 year old corner grocery store. Just playing devil's advocate here. I agree with you.

maxerickson 11y ago

Is this process well documented? This is like leaving the front door off the law, not like putting a back door into it, so I wonder if it is more of an internet rumor than an actual way to avoid change of ownership. Maybe people do it but it is fraud?

_delirium 11y ago
There was at least one court case over it, in 2008, regarding Michael Dell buying a hotel in Santa Monica via a holding company, where he prevailed in court: http://www.santamonicadispatch.com/2013/05/prop-13-gives-edge-to-dell/ http://www.santamonicadispatch.com/2013/05/prop-13-gives-edg... It seems it's more complex than what I implied, though. The property needs to not only be owned by a holding company, but sales of the holding company have to be structured in such a way that overall ownership of the holding company isn't deemed to have changed. If the above article is correct, that's triggered when a new owner acquires a majority stake. So to avoid triggering a change in ownership in this case, Dell structured the sale so that he, his wife, and another business partner all bought interests in the company, split so that no single purchaser acquired more than 49%.

ForHackernews 11y ago

...that sounds like a legal loophole that should be closed.

prostoalex 11y ago

I could see how a publicly-traded REIT would argue that the property it owns changes owners every second, and in that case it makes little sense to include rental properties under Prop 13 umbrella. Couple of arguments against such exemption that I can see are * major real estate property owners can make a case (in court of necessary) that their property prices have not increased as much as single-family residential prices, due to the nature of the commercial market (fewer buyers, larger amounts, larger variety of the market to find decent comparables) * as property tax is deductible, the revenue would just restructure - what will be collected via property tax would then be deducted at the end of the year from income tax. I guess even in that case owners would be supportive, as property taxes typically go directly to the municipalities, while income taxes are spent by some politicians in Sacramento, but then why would Sacramento be in favor of the exemption that would lower its collected revenue?