BILL ANALYSIS �
AB 2372
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Date of Hearing: May 21, 2014
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Mike Gatto, Chair
AB 2372 (Ammiano) - As Amended: May 19, 2014
Policy Committee: Revenue &
Taxation Vote: 6-2
Urgency: No State Mandated Local Program:
Yes Reimbursable: Yes
SUMMARY
This bill amends the circumstances under which a "change in
ownership" of real property owned by a legal entity is deemed to
have occurred. In particular the bill states that a "change of
ownership" is deemed to have occurred with respect to: (i) the
acquisition of a majority ownership interest in a legal entity
that owns the property; or (ii) a purchase or transfer of 90% or
more of the ownership interests in a legal entity that owns the
property whether or not any single person or legal entity
acquires more than 50% of the ownership interests.
Specifically, this bill:
1)Specifies that a purchase or transfer of ownership interests
includes a merger, acquisition, private equity buyout,
transfer of partnership shares, or any other means by which a
legal entity acquires the ownership interests of another legal
entity, including the subsidiaries or affiliates of the legal
entity and the property owned by those subsidiaries and
affiliates.
2)Specifies that a single transaction for purposes of change in
ownership transaction includes those in which 90% or more of
the ownership interests are transferred in either one calendar
year or within a three-year period from the date of the
original transaction.
3)Specifies that sales or transfers of ownership interests do
not include sales of stock or interests in a publicly traded
company in the regular course of trading, unless the stock or
interests are acquired as party of a merger, acquisition, or
buyout.
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4)Requires persons acquiring ownership interests in a legal
entity to record a deed with the county recorder and report
the acquisition to the Board of Equalization (BOE); requires
legal entities to report original co-owners interest changes
to the assessor.
5)Increases the penalty for failure to file a change in
ownership statement with the BOE from 10% to 15%.
FISCAL EFFECT
1)Potentially significant GF costs to the BOE to administer the
changes to forms and systems.
2)Potentially significant state mandated reimbursement of local
costs for additional activity generated for county recorders
and assessors.
3)Estimated annual increase in property tax revenue of up to $73
million, though estimating the revenue impact with any
precision is difficult.
COMMENTS
1) Purpose. Currently, properties owned by legal entities are
taxed under a "separate entity" theory; as long as the
property is owned by the same legal entity it will not be
reassessed, even if most or all of the ownership interests in
that entity change hands.
According to the author, this bill is designed to close this
loophole by providing that the transfer or sale of 90% or more
of the ownership interests in a legal entity holding real
property in a "single transaction" (i.e., transferred in
either one calendar year or within a three-year period from
the date of the original transaction) must result in a
reassessment of the property, regardless of whether any one
person or legal entity acquires more than 50% of the ownership
interests. Under current law, only a transaction that results
in a change of control in the legal entity will trigger a
reassessment of the property.
2) Existing Law. The California constitution provides that all
property is taxable, and following the passage of Proposition
13, limits ad valorem taxes on real property to 1% of its full
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cash value. The constitution requires real property to be
reassessed to its current fair market value whenever a "change
in ownership" occurs. Current statutory law sets for the
general rule that, when real property is owned by a legal
entity, the purchase or transfer of ownership interests in
that legal entity does not trigger a change in ownership of
the property unless there is a change of control of the legal
entity or a cumulative transfer of more than 50% of the
ownership interest by the "original co-owners."
3) Opposition. Opponents contend the current rules provide a
bright-line test for determining when property ownership has
changed, and is consistent with the underlying purpose of
Proposition 13, which was intended to provide property owners
with certainty and stability about the amount of property
taxes due.
This bill amends the "change in ownership" rules such that the
transfer of any legal entity that owns commercial property
over a three year period, regardless of whether any person or
entity actually obtains control through direct or indirect
ownership will trigger a reassessment of the property held,
and will result in higher property taxes even when control has
not necessarily changed.
Additionally, opponents argue a switch to market valuation
taxation would create upward pressure on rents. Increasing
property taxes on commercial properties will add to the costs
of production and affect other business decisions, such as
hiring personnel, expanding operations, and creating new
products.
Analysis Prepared by : Joel Tashjian / APPR. / (916) 319-2081