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Tuesday, Feb 27, 2024

Tax Increases Won’t Be Property Game-Changer

The jury remains out on the exact effects, but industry experts say newly passed California tax hikes could have long-term impacts on local retail center landlords and other commercial property owners looking to fill tenant vacancies.

“It’s probably too soon to tell,” said Jason White, a senior associate with equity research firm Green Street Advisors who tracks the retail property sector. “California is still a very desirable retail market, and it’s managed to go through other tax changes in the past without hitting a brick wall.”

California voters recently approved Proposition 30, raising the state’s sales tax from 7.25 percent to 7.5 percent. It also creates four high-income tax brackets — ranging from 10.3 percent to 13.3 percent — for those with incomes exceeding $250,000.

The new income tax rates are retroactive to Jan. 1, 2012, and will be in effect for seven years. Prop 30 is expected to raise $6 billion in annual revenue and help avoid funding cuts for California public schools and colleges.

In a post-election report from Newport Beach-based Green Street Advisors, analysts Mike Kirby and Jim Sullivan note that while Prop 30 “should be viewed as a negative for commercial property owners,” it likely won’t by itself warrant “sizable changes” in property values.

Business Climate Change

Higher income taxes are likely to adversely impact spending on luxury items and the attractiveness of California’s business climate, researchers said, but not enough to cause a mass exit of wealthy residents from the state.

Spencer Plumb, president of San Diego-based Excel Trust Inc., which invests in retail centers, said the firm has holdings spread across 14 states — around 95 percent leased overall — and does not expect significant financial fallout for its California properties.

In the long run, however, higher taxes could pose challenges in getting certain retailers to expand in California, especially those testing out newer concepts.

“We do wonder whether that might influence some retailers to go outside California — lots of companies test their concepts in places like Phoenix before they roll out nationally, and we could see more of that,” Plumb said.

“In the short run I don’t think Prop 30 will have a big impact, but in the long run it raises concerns about making it tougher to do business in California,” he said.

John Jarvis, principal and senior vice president with commercial brokerage firm Hughes Marino in San Diego, said he’s not overly concerned about the local region’s ability to compete for new businesses in retail or other commercial sectors, based solely on the new tax rates.

He said California has put programs in place to help mitigate the impact of taxes on businesses, including a statewide enterprise program offering tax credits and other incentives to companies that create local jobs. The San Diego regional enterprise zone was recently expanded to include North County and communities south of San Diego.

Opening the Tax Increase Door?

Still to be seen, according to Green Street, is the impact of California Democrats gaining a two-thirds “supermajority” in both statehouse chambers, which the analysts said could clear the way for more future spending and tax increases, including a possible repeal of Prop 13 on commercial properties.

Prop 13 limits the assessed value of properties to the initial basis, plus 2 percent a year. Changing Prop 13, however, would require the additional step of gaining approval of 50 percent of voters on a ballot initiative.

White noted that if property taxes on commercial centers were to rise, some tenants could see their overhead costs increase if they are under “triple net leases” requiring them — rather than the landlord — to pay certain taxes.

Tenants could be pressed to make a profit if their taxes rise and sales don’t increase to help make up the difference. Those tenants would not be able to renegotiate leases until they are set to expire, although competitive landlords would likely be flexible in order to keep long-paying, high-quality tenants on board.

“We just don’t know what the real impact will be yet,” White said of the California voting results.


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