West Coast Real Estate Update - December 2017

by Holland & Knight LLP
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New California Ballot Initiative Targets Proposition 13 Tax Limit for Corporate Properties

Proposition 13, which was approved in California 40 years ago, could potentially be up for debate in 2018. A ballot initiative that was recently proposed and is supported by a handful of activist groups removes Proposition 13’s restrictions on reassessments and tax increases for commercial and industrial real properties.

Currently, Proposition 13 limits property taxes for corporate-owned properties to one percent of a property’s cash value and limits tax increases to two percent per year. A reassessment and an increase greater than two percent only occurs when the property’s title is transferred or new construction is completed. Proponents of this initiative have said that the money from regular reassessments and tax increases could provide more than $11 billion in revenue, which could be used to provide funding for California’s public schools, as well as for local city and county services.

Entitled “The California Schools and Local Communities Funding Act of 2018,” the measure does, however, provide an exemption for small commercial real property owners owning and operating their businesses on their properties.

Passage of the New Republican Tax Bill Is a Win for Real Estate

While there have been many staunch opponents to the Republican tax bill that was recently passed by Congress, those in the commercial real estate industry are likely not in that camp. For businesses set up as partnerships, limited liability companies and other types of pass-through companies, the passage of the bill on Dec. 20 was a win. Commercial real estate firms are almost always set up this way, and investments are almost always conducted through such entities.

One major benefit for those in the industry is that the new law allows a lower tax rate on money earned by the company that passes through to its owner, which is taxed at an individual tax rate. As of today, pass-through income is taxed as high as 39.6 percent, but under the new law, the income could be taxed as low as 29.6 percent. Additionally, real estate businesses also will avoid new limits on interest deductions while still retaining the ability to defer taxes on the trade of properties of a similar type.

Net Neutrality Repeal: Potential Impacts to the Real Estate Industry

On Dec. 14, 2017, the Federal Communications Commission (FCC) voted to end net neutrality rules that regulates how businesses connect consumers to the Internet, which could potentially impact the real estate industry. These potential impacts are primarily hinged on the outcomes of the following two focus areas: (1) the ability of smaller, less established businesses to compete with larger competitors, and (2) the threat posed to emerging real estate technology or property technology (proptech).

The repeal of net neutrality would appear to make it more expensive for smaller real estate operations by way of higher priced broadband usability and/or cost. This assumption is derived from the fact that broadband companies can, and likely will, increase prices for faster, better Internet services.

Additionally, the proptech industry, which has been thriving recently, is sure to be affected by this repeal. With the new lack of regulation, there is a possibility that telecommunication companies may throttle speeds based on the amount they are being paid, potentially making it harder for proptech startups to innovate.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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