Capital Rivers Commercial

Goodbye Prop 13? A Guide To California’s Split Tax Roll: Part 2

This lengthy analysis by Capital Rivers Commercial of the “split roll” measure, a California initiative constitutional amendment appearing on the November 2020 statewide ballot, is presented as a 3-part series. In Part 1, we presented the issue and exactly where we are today. Here, in Part 2, we examine the proposed measure in detail. Part 3 will discuss what the new taxation system would mean for the CRE industry and beyond.

How The Split Tax Roll Will Work If Passed

If passed, the California Schools and Local Community Funding Act of 2020 will become effective January 1, 2022.1 Following is a look at the highlights (or lowlights) of how the Act would change the system of commercial real estate property taxation in California.

Properties Affected

The Act’s change to real property taxation, if passed, can be summed up as follows: most “commercial and industrial real property”2 will be assessed at current3 market value rather than based on acquisition value, as at present. “Commercial and industrial real property” is defined as “any real property that is used as commercial or industrial property, or is vacant land not zoned for residential use and not used for commercial agricultural production.”  Breaking this down:

  • The modifier “used” in “used as commercial or industrial property” means legal status (such as zoning and entitlements) is ignored in this context.
  • In addition to the exclusion for vacant land that applies when the land is “zoned for residential use” or “used for commercial agricultural production”, the Act goes on to exclude vacant land if “used or protected for open space, a park, or the equivalent designation for land essentially free of structures, natural in character to provide opportunities for recreation and education, and intended to preserve scenic, cultural, or historic values.”
  • The term “vacant land” itself is not defined and is open to various interpretations. For example, the definition of “commercial or industrial property” itself considers land used for commercial agricultural production as being “vacant” in at least some cases, whereas one could argue otherwise. The Legislature and/or California Department of Tax and Fee Administration is liable to clarify this (see “Legislative Action” below).
  • The Act provides clarification (albeit small) for “real property used for commercial agricultural production”, defining it as “land that is used for producing commercial agricultural commodities”. By specifying “land”, the Act leaves open the (perhaps strong) possibility that above-ground facilities associated with commercial agricultural use will be assessed under the new system. Again, we may ultimately look to the Legislature and/or California Department of Tax and Fee Administration.

In addition to these clarifications and exclusions, the Act speaks to the following exclusions from its coverage: (a) residential property is excluded (see “Residential”), (b) mixed-use property to at least the extent of its residential portion is excluded (see “Mixed-Use”), and (c) small value properties are excluded under certain criteria (see “Small Value Exemption (With a Catch)”). The Act makes clear that properties already exempt from real property tax under the Constitution – for example, state and local government-owned property, libraries, and museums – are excluded.


As the Act makes very clear, Prop 13 treatment is retained for “residential property”. Any property used as residential, including single-family and multi-unit structures and the land on which they are situated, whether it is occupied by a homeowner or a renter, is included within the meaning of “residential”.

The Act also directs the Legislature to pass legislation providing that “property zoned as commercial or industrial but used as long-term residential property shall be classified as residential” and that “limited commercial uses of residential property, such as home offices, home-based businesses or short-term rentals, shall be classified as residential”.

These provisions seem to resolve most grey areas on the side the taxpayer (i.e., treatment of property as “residential”), although hotels, motels, and other lodging facilities seem to be without much hope of avoiding the new taxation system.


For “mixed-use” property – defined as “real property on which both residential and commercial or industrial uses are permitted”, the Act provides that “the Legislature shall ensure only that portion of the property that is used for commercial and industrial purposes shall be subject” to the new system. The Act permits the Legislature, should it so decide, to exclude from reassessment the commercial portion of mixed-use property if at least 75% of the property (by square footage or value) is residential.

$3 Million or Less Exemption

A special exemption is made for commercial property if its market value does not exceed $3 million, which figure will be adjusted for inflation every two years on a County-by-County basis. This will likely be a strong selling point of the Act’s backers this Fall.

However, the details reveal a big “catch”: for purposes of this exemption, a property’s market value must be combined with the market value of all other commercial properties in the State in which any direct or indirect beneficial owner of the property owns a direct or indirect beneficial ownership interest, and if the aggregate sum of all the properties exceeds the $3 million (as later adjusted) cap, then the exemption does not apply.

This exception threatens to swallow the rule. Commercial properties are frequently owned on a direct (tenants-in-common) or indirect (LLC or limited partnership, for example) basis by multiple parties, who may or may not even be acquainted with one another. And this exception requires that the entire portfolio of California commercial properties in which any of those parties owns any direct or indirect interest must be aggregated to determine qualification for the “smaller value” exemption.

Phase-In (A “Legislative Lottery”)

If passed, the first tax year for which the new system would be in place is the 2022-23 tax year (i.e., July 1, 2022 – June 30, 2023). Some properties will be reassessed for the 2022-23 tax year, but the Act provides for a phase-in of the reassessment process over at least four tax years, under a process to be determined, for the most part, by the Legislature.

Though the Legislature will determine most of the phase-in process, one aspect is laid out specifically: properties where “fifty percent (50%) or more of the occupied square footage … is occupied by a small business” may not be reassessed under the new system until at least the 2025-26 tax year, where “small business” means a business: (a) with “fewer than 50 annual full-time equivalent employees”, (b) that is “independently owned and operated such that the business ownership interests, management and operation are not subject to control, restriction, modification or limitation by an outside source, individual or another business”, and (c) that “owns real property located in California”.4

Side note: These “small business” criteria could be difficult to apply in some cases, and in some cases a timing question will arise as to when the occupancy criterion is to be applied.5 But the larger issue created by this portion of the Act is the question of whether “occupied by a small business” is to be taken 100% literally (i.e., a single occupant must fill at least 50% of the space by itself). Some or all of these matters that may be addressed by Legislation (see “Legislative Action” below)

As to the phase-in generally, the Legislature is directed to pass legislation to implement the phase-in, in consultation with the Task Force they create (see “Legislative Action” below). We only have an outline as to how this will look:  the legislation must “provide for reassessment of a percentage of all commercial and industrial real properties within each county commencing with [the 2022-23 tax year] and extending over two or more [tax years] thereafter, to ensure a reasonable workload and implementation period for county assessors, including provision for processing and timing of assessment appeals”.

The phase-in means certain lucky owners will win a phase-in lottery where the Legislature decides whose taxes increase when.6 If the aforementioned USC study is even remotely accurate, this means billions of dollars will hang in the balance when the Legislature decides how to implement the phase-in.

After Initial Reassessment

After the initial reassessment of a commercial property under the new system, the property is required to “be periodically reassessed no less frequently than every three years as determined by the Legislature.”7 Thus, it will remain up to the Legislature to decide whether, once properties have been reassessed at fair market value, they will be reassessed at market value every year, every two years, or every three years. Less frequent reassessment will result in less tax revenue (assuming an increasing market), but make County Assessors’ lives much easier.

Claims Required

For taxpayers looking to benefit from the smaller value exemption (see “$3 Million or Less Exemption”) or the small business occupancy reassessment deferral (see “Phase-In”), the procedural requirements are critical. The Act provides that any failure to make a claim for either of these “loopholes” in a given year, in the manner required by the laws in effect at the time the claim is required to be made, will be deemed a waiver of the right to the benefit for that year.

And although the specific claim forms and procedures are unknown, there are inherent problems:

The Act provides that, in the case of both benefits, each year, a claim must be filed and certification made to the county assessor — under penalty of perjury — that the property meets the required conditions for same. The Act further requires, in relation to both benefits, that if “there is any change in the direct or indirect beneficial ownership of such real property, a new claim and certification must be made to the county assessor”.

Now consider the context of these benefits:

  • With regard to the smaller value exemption, it is likely that some individual, on behalf of the entire ownership, will be required to certify – under penalty of perjury – as to matters the accuracy of which they may have no direct personal knowledge, because they relate to co-owners of the property (or of the entity that owns the property).8
  • With regard to the small business occupancy deferral, except in owner-occupancy situations, the burden will be placed on a property owner to certify – again, under penalty of perjury – as to the “small business” qualification status of their tenant, which involves matters of which the owner is unlikely to have any direct personal knowledge.9
  • In calculating the aggregate market value figure for purposes of falling within the smaller value exemption limitation, the Act requires property valuations to come from the assessors of the applicable California counties in which the relevant properties are located.  What the Act leaves unanswered is how the taxpayer can file a claim if the other counties’ assessors have yet to reassess the properties in question to market value – something that will clearly occur frequently during the above-described phase-in process of 4 or more years.

Appeals Favor Assessor

The Act requires that the Legislature develop a taxpayer appeal process for all reassessments made under the new system, which process is also required to apply to taxpayer appeals of decisions to deny a smaller value exemption. The Act requires that the process includes such taxpayer-unfriendly elements as placing the burden of proof on the taxpayer and a requirement that judicial review of valuation decisions by local administrative hearing bodies such as assessment appeals boards be reviewed under the “substantial evidence” standard. In other words, assessors will have the legal upper-hand when determining assessed values under the new system.

Interpretation and Implementation

As shown above, the Act has certain flaws, or at the very least raises many questions.  But the Act, if passed, becomes part of the State Constitution10 and is therefore not easily changed. So answers will probably come in the form of court decisions, to some degree, but more so the task should fall to the Legislature (by statute) and the California Department of Tax and Fee Administration (by regulation).11

The Act lays the groundwork for this by directing the Legislature to immediately establish a “Task Force on Property Tax Administration”,12 which Task Force is directed to then “publicly convene immediately … to examine and recommend to the Legislature all statutory and regulatory changes necessary for the equitable implementation of this measure consistent with its purpose and intent.” [emphasis added]  Thus the purpose and intent of the Act, as spelled out in its Section 3, becomes an important consideration, as it will guide the statutory and regulatory process. Furthermore, Section 3 is intended to guide the courts, as the very last line of the Act reads: “This Act shall be liberally construed in order to effectuate it [sic] purposes as articulated in Section 3 of this Act.”

In the context of the interpretation and implementation of the real property tax sections of the Act, a pair of Section 3 concepts stand out: (1) an expression of concern for small business tenants needing time to choose the right leasing option (apparently directed towards phase-in issues), and (2) an egalitarian/communal concept expressed as an intention that “all businesses to compete on a more level playing field and make sure all businesses are paying their share to support the schools and local communities from which they benefit”. The obvious expectation is to drive the phase-in process in a certain direction, but perhaps we will see some surprises elsewhere.

Stay Tuned For Part Three

Stay tuned for Part 3, where we will address the impact, and opportunities, that would result from passage of the Act. If you missed Part 1 analyzing the issue and where we stand today, read it here.

Be the first to read the next installment of our in-depth analysis of this all-important legal development. Sign up to receive Capital Rivers news updates.


This article is general in nature and is intended only as background material for informational purposes. It does not constitute legal advice. It may not apply to your specific situation or may be incomplete or outdated. You should not act or rely on any information in this article. You are not authorized to treat this article as legal advice, and it does not create any sort of attorney-client relationship. Before acting or delaying action, you should first seek the advice of an attorney qualified in the applicable subject matter and jurisdiction.

  1. With two exceptions not relevant here; see Section 9 of the Act.
  2.  See footnote 7.
  3. “Current” is an oversimplification.  County Assessors base valuations of real property as of the “lien date” (the date the tax lien attaches to the property, which is the January 1 immediately preceding the applicable tax year).  In addition, these valuations may be made as infrequently as every third year (see “After Initial Reassessment”) and will be phased in following the Act’s effective date (see “Phase-In”).
  4.  This third criterion seems odd.  Our best guess is that it is somehow related to the smaller value property exclusion, such that an owner-occupant will not in most cases benefit from both the small business phase-in deferral and the smaller value exclusion.
  5.  The “lien date” (the date the tax lien attaches to the property, which is the January 1 immediately preceding the applicable tax year) seems like the proper answer here.
  6.  This inherent inequality seems very ripe for a legal challenge.
  7.  See proposed new Section 2.5(b) of Article XIIIA of the California Constitution.
  8.  In such circumstances, an express indemnification of the certifying individual from the co-owners is appropriate.
  9.  That is, unless tenants are to be legally compelled to certify on owners’ behalf, which seems unlikely.  Sophisticated landlords will begin including provisions to address this conundrum in their leases. 
  10.  By becoming part of the State Constitution, the Legislature cannot enact law in conflict with the Act and any existing statutes that may conflict with the Act would be superseded.
  11.  In 2017, the California Department of Tax and Fee Administration became the successor to the more well-known Board of Equalization in the regulation-promulgation area.
  12.  The Act describes the required composition of the Task Force as “including a county assessor or designee, a Board of Equalization member or designee, a proponent of this Act or designee, a taxpayer representative, and a member of the Legislature or designee”.  It is open to interpretation whether the composition of the Task Force is limited to these persons. 
  13.  In one area, as discussed above (see “Phase-In”), the Legislature is actually required to enact legislation – to implement the reassessment phase-in process.

Have Questions About Commercial Real Estate?

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