L.A. skyscraper deal raises tax questions
Provisions of California’s landmark Proposition 13 property tax measure are stoking ire again as reform activists say a high-profile commercial property deal is being structured to avoid tax increases by taking advantage of a loophole.
A group of unions and anti-poverty organizations accuses real estate giant Brookfield Office Properties Inc. of trying to skate on potentially millions of dollars in new property taxes on downtown Los Angeles skyscrapers the company is buying by taking less than a 50% stake in a new entity that will take title to the properties and others now held by Brookfield.
Brookfield agreed in April to pay about $430 million for four prominent buildings, including Gas Co. Tower and Wells Fargo Tower on Bunker Hill. Selling the towers is Los Angeles landlord MPG Office Trust Inc., which is winding down its business after taking steep losses during the economic downturn.
The transaction, which is expected to close in the next few weeks, would make Brookfield the dominant operator of prime space in the city’s financial district and give it a major role in setting office rents downtown.
A group called ReFund LA Coalition says Brookfield has structured the deal in a way that will enable the company to avoid having the properties reassessed at fair market value as required by Proposition 13 when a change of ownership occurs.
If the properties are not reassessed, they will be taxed according to their older — and presumably lower — assessed value.
“We believe that wealthy corporations shouldn’t be allowed to engage in schemes that result in less funding for vital public services,” said group spokesman Ian Thompson of the Service Employees International Union. “If Brookfield makes this deal, it will literally be stealing services away from the most vulnerable people our members serve.”
The union is one of several members of the ReFund LA Coalition. Other members include the Alliance of Californians for Community Empowerment, the California Federation of Teachers and People Organized for Westside Renewal.
A representative of Brookfield declined to comment, saying the company does not publicly discuss pending transactions.
ReFund LA’s objections to the Brookfield office purchase are intended to prompt changes in California tax laws, said Keenan Sheedy, who works at Los Angeles County-USC Medical Center and is a member of SEIU.
“We want the county supervisors to support legislation in Sacramento,” Sheedy said. “We want them to go on record supporting a change in state law that would close the loophole.”
Funding shortages at the tax-supported hospital are hurting patients, he said.
“I see every day the impact,” he said. “Long waits in emergency room, long waits to get appointments.”
The structure of Brookfield’s deal did not come as a surprise to real estate financial analysts.
“Brookfield’s duty is to its shareholders, including people with mutual funds in the stock market,” said analyst Craig Silvers, president of Bricks & Mortar Capital. “Their shareholders could be SEIU members.”
The Proposition 13 law allows businesses to avoid reassessment if no one acquires a majority stake in a firm that owns the property.
Under terms of the Brookfield deal, the buyer of record will be a new fund called DTLA Holdings. Brookfield will own about 47% of DTLA Holdings, with institutional financial partners holding the rest.
DTLA Holdings will own the former MPG properties and Brookfield’s current assets downtown that include other office buildings and a shopping mall in the financial district. The activist group says Brookfield would underpay taxes by about $10 million a year based on the total value of the transaction, which the group estimated at $2.1 billion.
“Brookfield is a savvy real estate player. Do they know the ins and outs of Proposition 13, including the 50% threshold? Assuredly,” said analyst Michael Knott of Green Street Advisors.
“However, raising and deploying other investors’ capital into real estate investments is a prominent part of their business model,” Knott said. “So the way they structured the MPG deal is consistent with that, including places outside California where there isn’t this thing called Proposition 13.”
Proposition 13’s arcane rules on reassessment have stoked other controversies. In 2006, computer magnate Michael Dell agreed to pay $200 million for the Fairmont Hotel in Santa Monica and then tore up the contract a few month later.
He brought in his wife and two of his investment advisors as partners — with no one taking more than 49% control of the hotel company. By restructuring the deal to avoid taking full ownership he escaped paying more than $1 million in taxes.
Los Angeles County assessors called Dell’s move a tax dodge, but a Superior Court judge disagreed, finding in December that the deal met the letter of the law.
Last month, Refund LA accused mall giant Westfield Group of underpaying taxes by taking advantage of Proposition 13 provisions. Westfield said it pays its taxes in accordance with the law.
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