29 February 2004
It amuses me to hear the debate about the appropriate name for people who rent residential units. On one end of the spectrum is the term "landlord" which some of the more hostile tenant activists equate to "greedy bloodsucker." The moniker used at the other end of the spectrum is "housing provider", a.k.a., "benevolent benefactor sent from high above."
The truth is that rental property owners are neither devils nor angels. They are business people who sell a product.
The commercial or business nature of landlords/housing providers will be put on full display this fall. In November, California voters will decide the Split Roll Tax Initiative that is being circulated by the California Teachers Association and universally regarded as a shoe-in to make the ballot.
SPLIT ROLL TAX - A BRIEF DESCRIPTION
The Split Roll Tax Initiative is a proposed constitutional amendment sponsored by the California Teachers Association (CTA) and Robert Reiner. It would scuttle the tax protection provisions of Proposition 13 and significantly increase taxes for all commercial property, including residential rental property valued over $700,000.
The initiative defines commercial residential property as "that portion of a building that contains one or more dwelling units that are not owner occupied." As to such property, it maintains the current property tax and imposes an additional ad valorem property tax on the assessed value of the property. The rate increases with the assessed valuation of the property from a rate of .10 ($700,000-$799,999) to .55 ($1,000,000 or more).
According to CTA, this measure is necessary to raise revenues for a new pre-school program and K-12 education, including teacher salaries. One third of the revenues are dedicated to the pre-school program. The remaining two-thirds goes to K-12 education.
HOW SPLIT ROLL AFFECTS APARTMENT OWNERS
Taxes will increase on residential rental properties that have assessed values of more than $700,000. This includes rented single-family homes and condominiums.
For properties assessed at $700,000, the increase will be an additional $700 per year. For properties with an assessed value of $1 million or more, the tax burden will increase by an additional $5,500 for every million dollars of assessed value.
For properties currently assessed below the $700,000 threshold, the major impact will be felt at point of sale. That is when properties will be reassessed and buyers who face new tax loads will undoubtedly try to reflect their added burdens in their offers.
Owners in rent control cities would have a really big problem. They cannot pass the cost of new taxes through to sitting tenants unless the local rent control law allows a pass through. Berkeley owners, for example, would have to absorb the costs for sitting tenants. Nor can rent controlled owners pass through increased costs under vacancy decontrol. Those units are already renting at market prices and, try as one might, owners cannot charge rents that are higher than market.
Owners in non-rent controlled cities will be able to pass some of their costs through to tenants who have long tenancies and pay below market rents.
SPLIT ROLL'S IMPACT ON TENANTS
The proponents of the measure argue that it is necessary to increase funding for pre-schools and teachers. What they don't tell voters is who pays for the tax. In the case of apartment tax increases, that would be, among others, the pre-school operators, teachers, and other long-term apartment residents who rent below market and cannot afford to buy California's medium priced $400,000 plus homes. 1
Unlike owners who may be able to take tax deductions on some of the loss, the tenant who pays for the increase just eats it. And it is a big bite. On a hypothetical eight-unit building valued at $1 million, the tax increase under the CTA Split Roll Initiative would be $5,500 per year. That translates into rent increases of approximately $57 per month and would necessitate a 5.7% increase on an average asking rent of $1,000 per month. This number will be compounded annually.
Teachers and pre-school operators who are long-term tenants with below market rents and who rank amongst the 75% of California residents who cannot afford to purchase a home will be hurt badly by this measure. I wonder if CTA and Rob Reiner thought this through? They raise taxes on the very people they say they want to help. Is this the kind of thinking that led Archie Bunker to call him "Meathead"?
I am sure that many people want to improve our schools. And, in fact, some readers of this column may think that raising taxes is morally the right thing to do. But, if that is the case, why did CTA and Rob Reiner not include new taxes for homeowners in the initiative? Don't homeowners who have kids in school benefit from the measure? The answer is simple. The proponents didn't include homeowners because they know that homeowners would vote the measure down.
Bottom line, this is just another deal that tries to pass things on to business people. If it succeeds, it will be another nail in the coffin of what was once a thriving and prominent state.
DEFEATING THE SPLIT ROLL TAX INTIATIVE
Over the next several months, we will report more about the CTA Split Roll Tax Initiative and efforts to defeat it and protect owners from its impact. Suffice it to say that this will be a huge battle that will unify California businesses in unprecedented ways. California apartment owners represented by The McConnell Group will play a significant role.
For now, you can view the full text of the measure on the Attorney General's website.
Greg McConnell heads The McConnell Group, a California Advocacy and Consulting firm. The McConnell Group represents and advises apartment associations, property management companies, and individual owners throughout California.
For more information please visit www.themcconnellgroup.com.
( This article is copyrighted and cannot be republished without the consent of the author.)
1 (California Association of Realtors puts that number at 75% of the population)