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Michael Dell: Poster boy for a Proposition 13 tweak?

Real EstateLaws and LegislationHotel and Accommodation IndustryTaxationTom Ammiano
How about a 'Michael's Law' to stop businesses from maneuvering around Prop. 13?
It's a Prop. 13 loophole that has been evident to tax lawyers for years. Can it be closed?

Here's a suggestion for Assemblymen Raul Bocanegra (D-Pacoima) and Tom Ammiano (D-San Francisco) as they push a bill to close an outrageous loophole in Proposition 13: Call it "Michael's Law."

Lawmakers routinely play on the public's sentiments when advancing legislation, tying their proposals to sympathetic individuals whose plights exemplify the need to change policy. For example, young Ryan White, a hemophiliac who contracted HIV through a blood transfusion, became the symbol driving Congress to provide more support for people with AIDS. Nine-year-old Amber Hagerman, who was abducted and murdered in Texas, became the poster child for the Amber Alert system. Laura Wilcox, a temporary worker gunned down at a mental health clinic, because the inspiration for Laura's Law. The list goes on and on.

So why shouldn't the same be true when one person brings attention to a problem not by being a victim but by taking advantage of a flaw in the law? When his actions persuade legislators to gin up enforcement, raise penalties or address unintended consequences?

In short, why can't Bocanegra and Ammiano name their bill after Michael Dell, the billionaire founder of the computer manufacturer that bears his name? Because his purchase of the Fairmont Miramar Hotel in Santa Monica seems to be their Exhibit A.

California voters enacted Proposition 13 in 1978 to cap property taxes at 1% of the assessed value of a property at the time it is sold, with the value allowed to rise no more than 2% per year. This protected property owners in at least two ways: no longer could multiple jurisdictions jack up a resident's property taxes by piling on levies, and owners wouldn't have to worry about their tax bills skyrocketing if their neighborhood became a hot market.

The measure wasn't meant to keep property taxes artificially low in perpetuity, however. As soon as a home or building is sold, it gets a new assessment based on the full cash value at the time of sale.

Nevertheless, buyers of commercial property have found a way to avoid this reassessment. Instead of buying the property, they buy the legal entity that owns the property. Under rules set by the Board of Equalization, a change in ownership of such an entity doesn't trigger a new assessment of its properties unless more than 50% of the entity is acquired by a single person or business.

Think of it this way: Say an entity owns five multiplexes across the city. If one investor buys the entity, the multiplexes are reassessed. But if four investors each take a 25% interest in the entity, the multiplexes hold on to their previous assessment.

How that squares with the language of Proposition 13 is a mystery to me, but that's how the Board of Equalization rolls. Defenders of the system argue that buying the entity that owns a commercial property amounts to buying the business, and the value of the business doesn't rise just because the property value might have increased since its last sale. But that doesn't explain why a sole purchaser of the entity would face a reassessment but a partnership wouldn't.

At any rate, the loophole has been evident to tax lawyers for years. But it wasn't until The Times wrote last year about Dell's purchase of the Fairmont Miramar that efforts to change the law started to gain traction.

According to that article, Dell agreed to buy the entity that owns the Fairmont Miramar for $200 million in 2006. But after the deal was struck, Dell rewrote the contract, bringing in his wife and two investment advisors as partners. Because none of them held more than a 49% interest in the entity that owned the hotel, the hotel kept its assessment from 1999: $86 million, or 43% of its cash value.

County assessors tried to raise the valuation, only to be rebuked by a Superior Court judge, who said Dell had followed the rules laid down by the Board of Equalization. The lower valuation saves Dell about $1 million a year.

To be fair, Dell plans a major renovation of the property, and that investment will trigger a reassessment and generate a significant amount of revenue for the city. Is it such a bad thing that Dell structured his deal in a way that minimized his property taxes prior to the renovation? I'd say no, if those savings were crucial to Dell being able to achieve his ultimate goal of transforming the aging hotel into a high-rise hotel and condo complex. Because over the long run, the city stands to gain much more than is being lost in the short term.

Yet there's something grating about commercial real estate buyers being able to avoid reassessments that a typical home-buyer can't. That strikes at least some lawmakers as unfair. The bill by Ammiano and Bocanegra would require a property to be reassessed whenever 100% of the entity that owns it is sold over a three-year period, regardless of how the buyers divvy up their shares.

Even business groups are supporting the proposal, although they may be simply trying to defend themselves against something more drastic: say, a ballot measure to eliminate Proposition 13 protections entirely for commercial real estate. Meanwhile, real estate attorneys are no doubt figuring out a way to keep future sales of commercial properties below the 100% threshold, just in case the bill becomes law.

Copyright © 2014, Los Angeles Times
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Real EstateLaws and LegislationHotel and Accommodation IndustryTaxationTom Ammiano
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