By Dennis Kaiser

L.A. Fitness’ Bill Horner, ICSC Western Division VP and Trustee, shares insights about a critical issue for the retail industry. California voters will decide next fall to change how property taxes are collected, and should the ballot measure pass, property owners would see tax bills increase by as much as double or even higher. Connect Media asked Horner to explain what the “Split Roll” tax is and what some of the impacts will be, as well as what advice he has for retailers and property owners facing the potential reality of higher occupancy costs in our latest CRE Q&A.

Q: What is California’s split roll tax?
A: The “Split Roll” Ballot Initiative, which will be on the November 2020 California Ballot, removes the tax protections for commercial property currently in place under Proposition 13. This initiative would eliminate the ceiling on commercial property taxes, which is currently capped at 1% of the purchase price of the property, and would require all commercial property taxes to be re-assessed to 2021 market values. The initiative would also require commercial and industrial properties to be re-assessed every three years and taxed at market value.

This means that commercial property taxes could double (or even triple) over the next two years. Passing of the measure would harm California’s economy, hurt local businesses, reduce jobs and increase costs for consumers and property owners.

Q: What is the stated purpose of this initiative?
A: After spending millions to qualify for the November 2020 ballot, “The Schools and Communities First” campaign withdrew their initiative to attempt to make it more “small-business friendly.”

Groups including the California Teachers Association, Service Employees International Union (SEIU) and others have spent over $5-million to re-qualify for the November 2020 election, where they anticipate spending over $100-million in support of this measure. They believe that, in spite of California’s large budget surpluses, that more money is needed to support their pension liabilities and schools.

Q: Why is this initiative important to retailers in California?
A: The “Split Roll” Ballot Initiative would target already struggling retailers through harmful tax increases, and have a major impact on the industry and the overall economy as a typical retail lease passes property taxes directly through to the retailer.

The tax increase will result in higher occupancy costs for retailers, who are already challenged by online sales, a minimum wage increase, and other fees and costs imposed by the state and local governments. This will lead to low-margin businesses failing, residents losing jobs and more businesses leaving California or deciding against opening locations in the state.

Q: What will some of the impacts be for retailers?
A: Retailers will be forced to bear the burden of the split roll.

The increase in taxes will be passed down to tenants, who may then pass the cost along to consumers. Retailers unable to absorb the additional tax burden may be forced out of business. Even if they can afford it, they may choose to scale back or close down brick and mortar locations throughout the state.

Retail tenants are already affected by increasing expenses and lower sales. If further burdened with double or triple property taxes in such a short period of time, it will force everyone to look at other things to cut, including employment numbers and size of locations.

It is not hyperbole to state that every retailer in California will be negatively affected by this law.

Q: Why is the California’s Split Roll issue being watched closely nationally? Or why should it be?
A: California is currently the world’s 5th largest economy, and the leader in business nationally. Policies that are passed here are closely watched by the entire nation.

If the initiative passes, investors may be hesitant to come to California, as the state will be viewed as less business-friendly and more prohibitive for new businesses.

“Split Roll” will result in destabilized and higher occupancy costs, which will make recruitment of new retailers and businesses difficult. Existing businesses may be forced to shut down, as the shock of such a dramatic rent increase due to the new tax structure will endanger businesses with already thin margins.

For comments, questions or concerns, please contact Dennis Kaiser