A massive real-estate scam could force counties to give cash rebates to giant commercial landlords

The state Board of Equalization, a little-know agency that among other things oversees local property tax assessors, is about to consider some tax-law changes that would be a huge boon to big commercial property owners and a disaster for cities and counties.

The proposals, developed in secret, are immensely complicated and involve some arcane elements of tax law, but in essence the amount to this:

California counties could be required to give immediate tax rebates – that is, cash payments – to private commercial property owners who say that the COVID-19 pandemic has hurt their property values.

Santa Clara County Assessor Lawrence Stone laid out the problem in May 12 letter to the state board:

 Consideration of proposals, such as mandating through rules and LTA’s [Letters to the Assessors] that assessors immediately provide property tax refunds for major corporations, is the apex of irresponsibility, in direct violation of the State Constitution.

I cannot underscore enough, the impact these recommendations will have on schools and local government. If assessors adhere to these directives, the BOE would contribute to California’s exploding budget deficit. For every dollar of property tax revenue the BOE diverts away from normal channels, the state, schools, counties and cities will have to cut an equal amount in order to balance local budgets.

“There are always people who try to take advantage of a crisis, and that’s what’s going on here,” San Francisco Supervisor Aaron Peskin told me.

The measures were set for consideration at the board May 13, but were delayed, and are not on the May 27 agenda.

But if they come back and are approved, along with state legislation that would implement some of them, local government could be forced to use desperately scarce money to bail out some of the largest corporations in the country.

Among those that would potentially benefit: Donald Trump’s real-estate operation, which owns part of the Bank of America building.

All of this goes back to Prop. 13, which in 1978 changed the way real-estate assessment and property taxes happen in California. That law established that property can’t be reassessed for tax purposes until it’s sold, and that taxes can only go up by a tiny amount every year.

But the law also allows property owners to file for a reduction in their taxes if their property is damaged or for other reasons is worth less than it had been. That’s a scam that big commercial owners have used for years; current records show that the Bank of America building, which is probably worth close to $4 billion today, is assessed at less than the $1.06 billion that Trump and a real-estate-investment syndicate paid for it in 2006.

Those assessment appeals pit huge corporations with massive budgets for legal teams against the very modest budget of the Assessment Appeals Board, which often settles on terms favorable to the landlords.

There’s no doubt that some of the commercial property owners in San Francisco will claim in the next year that the value of their buildings has decreased; as more people work from home, it makes less sense for corporations to spend money on office space that won’t be used. That means rents go down.

But the law already allows those owners to file an appeal and ask that their taxes be reduced in the future.

That’s not what’s before the BOE.

One of the proposals would allow landlords to claim that the pandemic is the equivalent to, say, a fire or an earthquake that actually damaged the property. From Stone:

Working Group Team 3: Section 170 Disaster Relief for Covid-19 Calamity. Issue I: What constitutes “property physically damaged or destroyed” as outlined in the California Constitution Article XIII, Section 15 and implemented in Revenue and Taxation Code Section 170, Disaster Relief, in which the Legislature defined damage to include a diminution in value “as a result of restricted access to the property”? 

I strongly oppose any legislative proposals, such as SB 1431, or board actions that attempt to irresponsibly manipulate the plain and unambiguous language of the Constitution to provide Section 170 relief. The property tax system is built upon the general public’s confidence that the law will be fairly and accurately administered without bias or prejudice, in good times and in bad times. Article XIII Section 15 of the State Constitution states:

“The Legislature may authorize local government to provide for the assessment or reassessment of taxable property physically damaged or destroyed after the lien date to which the assessment or reassessment relates.” [Emphasis added.]

The Constitution is not a malleable piece of clay that can be molded at will to fit whatever is most politically expedient in the moment to curry favor with a handful of business owners at the expense of all 40 million citizens in the State of California. The legislature can no more define “property physically damaged” then it can define Proposition 13’s annual 2% limit on assessed value to mean 10% should the state’s budget face a crisis. These changes require a change to the Constitution. … Again, the primary purpose of this radical change is to provide property tax relief faster than allowed by the California Constitution.

There’s nothing in any state law that says that counties have to give cash back, now, to commercial landlords who say their properly has dropped in value. Stone is hardly a radical leftist; in fact, he’s a landlord. But he says that the BOE is discussing is not and has never been the role of local government:

As an income property owner, I am sympathetic to the plight of business owners. However, the federal government is providing the near-term response with $2.3 trillion in stimulus aid to business and local governments. The Federal Reserve extended $600 billion in loans through its Main Street Lending Program to small and medium-sized businesses impacted by the coronavirus pandemic. The bank’s corporate credit facilities and Term Asset-Backed Securities Loan Facility are now collectively offering up to $850 billion to households, employers, and companies.

With such assistance, the federal government is facilitating its traditional role as the sole entity in the nation that can literally print money. The statewide property tax system is designed to provide longer term relief as it has done historically.

The actions recommended by the BOE subcommittee will have direct, immediate and dramatic adverse financial impact on property tax revenue in California. At risk is billions of dollars in property tax revenue with impacts as early as August 31, the deadline for payment of property taxes for business equipment and machinery. Moreover, they will trigger unnecessary downstream chaos throughout the property tax system.

They were also developed behind closed doors:

I was outraged that the meetings of the sub-committees were not open to the public, nor were interested stakeholders like cities, counties and schools invited to participate. Unlike all other BOE deliberations, over far more inconsequential items, there is an interested parties process in which professional staff and board legal counsel is sought. In light of the magnitude of the proposals it is inconceivable that members of the BOE’s professional and legal staff were not permitted to participate in these hearings.

Malia Cohen, a former SF supervisor, now serves on the BOE, and I am told she is not in support of this plan. I left her a message and haven’t heard back.

Carmen Chu, San Francisco’s assessor, is also opposed, I am told, but I haven’t heard from her either.

This is a potentially catastrophic move to help big real-estate operations and devastate local budgets. And it’s happening with almost no media attention.