Suit Offers Test of Loophole in Proposition 13

A potentially costly loophole in Proposition 13, the 1978 property tax-cutting initiative, was referred to the courts in a lawsuit filed Tuesday challenging a $110-million property tax reassessment on the Security Pacific Plaza that was triggered when the property was sold in 1984.

The issue raised in the Los Angeles Superior Court suit is whether property owners selling a building can avoid reassessment, and subsequent property tax increases, by leasing back large portions of the building from the new owners.

Looking for Exemption

A law passed shortly after Proposition 13 and originally designed to make it easier for parents to give their homes to their children, has been cited by a number of large commercial landowners claiming exemption from reassessment when they sell their property but continue to occupy it through lease arrangements with the new owners.

Pacific Southwest Realty Co., which filed the suit, said it sold its Security Pacific Plaza Towers property on Hope Street to Metropolitan Life Insurance Co. for $310 million, but agreed to lease more than 1 million square feet of the property for several years and thus should not be subject to reassessment for property tax purposes.

The county assessment appeals board disagreed, ruling that the assessed value of the property had increased from $112.7 million to $323 million as a result of the sale.