Big Prop. 13 Loophole Closed, Assessor Says

Los Angeles County Assessor Alexander H. Pope said Tuesday that a new interpretation of Proposition 13 from the state Board of Equalization has closed a major loophole in the law that threatened to cost county governments throughout the state millions of dollars in property taxes.

As a result, Pope said, he has increased the appraisal of the Security Pacific National Bank tower in downtown Los Angeles by $152 million. Pope said the new legal interpretation, which may yet be challenged by property owners, will permit reappraisal of all commercial buildings involved in transactions known as “sale/leasebacks.”

The change in appraised value to $323 million from $171 million would require Metropolitan Life Insurance Co., which bought the bank building from Security Pacific for $310 million in September, 1984, to pay an additional $1.6 million in property taxes annually.

According to the assessor’s office, within the next two months, Metropolitan will receive revised tax bills that will include the $1.6-million tax hike for this year and a supplemental bill of $1.2 million to cover a nine-month deficiency for 1984.

Under the terms of Proposition 13, the 1978 tax-cutting initiative, only the sale of a property triggers a reappraisal to reflect an increase in value. However, in the last two years, an increasing number of large corporate landowners have claimed exemption from full reappraisal under a provision originally designed to help parents avoid immediate tax hikes in giving family homes to their children.

Same Exemption

Some owners of large office buildings are claiming that if they sell the buildings and then lease them back, they have not transferred their ownership to the buyer. They say they are entitled to the same exemption that the law provides to a parent who remains in his home until death, after deeding it to his son or daughter. Thus, they argue, the portion of the building that they continue to lease should not be subject to reappraisal.

Calling the office building exemption “a wolf in sheep’s clothing,” Pope said Tuesday that from now on, he will reappraise all buildings involved in transactions structured as sale/leasebacks.

Pope took credit for winning “a reversal” of the state Board of Equalization’s position on the exemption issue, pointing to a letter that the board sent last week to all assessors in the state advising them to fully reappraise commercial buildings involved in sale/leaseback transactions.

Board of Equalization staff members said, however, that the letter sent to assessors was intended only to “clarify” what had always been the board’s policy regarding the tax status of sale/leasebacks.

Pope, who has expressed an interest in running for a vacancy on the Board of Equalization next year, said he previously allowed a 73% exemption on the Security Pacific building, because he was following a policy outlined by the Board of Equalization’s staff in a letter dated last Feb. 14, which the county interpreted to mean that it cannot reappraise property when the leaseback is specified as part of the deed of sale.

Follow Suit

Since the Security Pacific transaction, owners and major tenants of several other major properties, including the Bank of America headquarters and Crocker Bank Plaza in San Francisco, and the Fluor Corp. headquarters in Irvine, have said they also will claim exemptions. Some of the landowners have also said that because the monetary stakes are so high, they will take on the assessors in court if necessary to prove that they are entitled to the tax break.

Metropolitan Life spokeswoman Elisabeth Gabrynowicz said that because the company has not received “official notification” of the tax hike, it was not prepared to comment.

Officials at Security Pacific, which would see any tax hike reflected in higher rent on the portion of the Los Angeles building it leases, were “surprised and disappointed with the Board of Equalization letter to the assessors,” bank spokeswoman Susan Taha said. However, until the bank’s “legal and tax authorities” receive information directly from Pope, she said, they will not be able to decide whether to appeal.

“We feel strongly we are in conformity with the letter of the law today and at the time of the transaction (sale to Metropolitan),” Taha said.

Pope recalled at Tuesday’s press conference that the Board of Equalization and much of the Legislature had opposed his efforts to gain passage of a bill, carried by Assemblyman David Elder (D-Long Beach), to limit the appraisal exemption to residential properties.

“We have been in a battle over a year now with the state Board of Equalization staff and the Legislature on how the transaction (sale/leaseback) should be treated,” Pope said.

In light of the Board of Equalization’s letter, Pope said, he is putting his legislation--now stalemated in the state Senate--”on hold.”

Current Law

The Board of Equalization has taken the position that there is no need for additional regulations or legislation, contending that the current law is sufficient.

However, Jim Delaney, the board’s chief counsel, acknowledged Tuesday that while the new board letter gives support to assessors wanting to fully reappraise sale/leaseback buildings, it does not necessarily resolve the debate over the correctness of the board’s legal interpretation.

In 1983, a Los Angeles Superior Court judge ruled against Los Angeles County when it tried to reappraise a leased-back building in West Los Angeles that was sold by City Equities Corp. to Cal-American Income Property Fund IV. That case was never appealed to a higher court, which would have determined legal precedent on the matter.

Court Case

“Now it is up to the courts to say whether this letter or the previous court case in Los Angeles has more weight in their eyes,” Delaney said.

Pope said that if the board’s legal interpretation is rejected by assessment appeals boards and the courts, he would expect the board to change its administrative rules or push for new legislation.