California Property-Tax Measure Could Burden Owners of Self-Storage, Other Commercial Real Estate

Owners of self-storage and other commercial real estate in California could face significantly higher property taxes in years ahead due to a proposed change to Proposition 13, which will appear on the November 2020 election ballot. Under Prop. 13, originally enacted in 1978, residential and commercial properties are reassessed for property tax only when sold. If the proposed measure passes, the tax would be reviewed on large businesses every three years, with the frequency increased at the legislature’s discretion. Small businesses with 50 or fewer employees would be exempt, according to a source.

Though the measure would raise an estimated $11 billion annually for schools and local government bodies, opponents believe the financial impact might drive some companies out of business, a source reported. Some have pointed out that the infrequency of commercial property sales means some businesses are paying property taxes based on assessments from as long ago as the 1970s.

In self-storage sector, the industry’s largest operators would likely be hit the hardest, particularly real estate investment trusts (REITs) Extra Space Storage Inc. and Public Storage Inc. In March, analysts at real estate research firm Green Street Advisors LLC reported that California facilities represented 26 percent of net operating income at Extra Space and 28 percent for Public Storage. Though both would experience a jump in taxable value under the measure, the age of locations in the Public Storage portfolio would likely create the bigger burden.

The two REITs addressed the issue during their third-quarter earnings calls with financial analysts. Though both are assessing the potential impact on their operations, neither would speculate on its full effect. Scott Stubbs, chief financial officer at Extra Space, acknowledged the proposal would create some financial risk considering that some of the company’s oldest California properties have been limited to tax increases of 3 percent per year under Prop. 13.

For operators like Devon Self-Storage, which owns six California facilities, the threat of a major property-tax hike is daunting. “It would be a complete disaster for the self-storage business,” Ken Nitzberg, chairman and CEO of Devon, told a source.

A broad alliance of businesses and organizations is expected to fight the measure. “We have already established a strong and broad-based coalition to fight this assault on the most important taxpayer protection Californians have,” Jon Coupal, president of the Howard Jarvis Taxpayers Association, told a source. “A split-roll property tax is an $11 billion tax increase that will increase costs for everyone at a time when the high cost of living is already driving companies and residents out of the state.”

Sources:
San Francisco Chronicle, Change in California’s Prop. 13 Makes 2020 Ballot: Business Would Pay More
SpareFoot Storage Beat, California Storage Owners Face Potentially “Disastrous” Tax Hike

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