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Prop 13: The Building-Sized Loopholes Corporations Exploit 

Wednesday, Jan 4 2012
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So what did it take to nail those intent on defrauding San Francisco? Nearly 20 years, for starters. It also required a series of chance discoveries triggered by the complaints of a disgruntled sandwich-maker and legwork undertaken by private individuals — which city employees blew off. It took a hardheaded deputy assessor willing to overrule his lazy subordinates and spend months rooting through heaps of documents. It required an AAB unwilling to accept lenient settlements. And it took a pair of lawyers who would toil for well over a decade and end up receiving nothing in return.

Absent these random and lucky circumstances, San Francisco will not snare the next One Market Plaza. Yet even when bizarre real-estate transactions do come to the city's attention, often it finds there's nothing to be done about them.


After months spent elbow-deep in financial statements and federal filings, the whistleblower thought he'd assembled an airtight case. In a detailed packet he sent to Assessor Phil Ting, he outlined how the Perini Corporation incrementally transferred shares of the company controlling the sprawling Golden Gateway Center "urban residential community" on the Embarcadero to a consortium of interconnected investors. By 1994, Perini was completely divested — but no deed indicated a change of ownership. Nor was the property, currently appraised at $66.8 million per the assessor's website, reassessed as a result.

Yet the assessor and state Board of Equalization noted nothing amiss. The whistleblower uncovered a textbook example of an element of Prop. 13 allowing corporate-owned properties to turn over repeatedly without triggering reassessments. Even when assessors get wind of such events, they're relegated to referees at a professional wrestling match, approving outrageous move after outrageous move, all of which fall within the purview of the rules.

If the sale of the Golden Gateway Center had been of the land, each transaction may have resulted in a reassessment of that chunk of property and an adjusted tax bill. But it was a deal involving the corporation controlling the land — and that made all the difference. Under state law, only transactions resulting in a single person or body obtaining 50 percent or more of a legal entity qualify as a "change in control." State lawmakers never intended for savvy companies to permanently lock in low property taxes by buying in groups. But that's what's happened, repeatedly, since Prop. 13 took effect. In 2002, for example, wine barons E&J Gallo purchased 1,765 acres of vineyards in Napa and Sonoma from Louis M. Martini. But the deal avoided a reassessment, because 12 Gallo family members individually obtained minority interests. "It's not a loophole that was intended," Board of Equalization Executive Director Kristine Cazadd told the Orange County Register. "It smells like, it looks like an acquisition, but we are scratching our heads." Structuring deals to avoid reassessments isn't a cottage industry — it's a skyscraper industry.

One could question the ethics of engaging in such shenanigans, but lawyers failing to exploit the shortcomings of the law are failing their clients. "Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury," wrote former federal appeals court Judge Learned Hand in the 1930s. "There is not even a patriotic duty to increase one's taxes.... Nobody owes any public duty to pay more than the law demands."

What the law demands can be most malleable. There's money in avoiding property reassessments, and in not avoiding one. "How to Permanently Reduce Your Property Taxes" reads the headline in a December article by San Jose attorney Bernard Vogel III in a Southern California legal paper. This is no hyperbole, Vogel says. Companies that bought property at top dollar several years ago could be well served to intentionally rejigger their corporate structure in a manner leading to a reassessment, then lock in today's low property values. Even if the market skyrockets, those companies will be paying property taxes based on a current low-end appraisal. Using this maneuver, Vogel says, he lowered the assessment on a client's Santa Clara property from $80 million to $38 million. It's all perfectly legal.

Ambulance-chasing may have been the stock-in-trade of the legal profession for centuries. But building-chasing is where the money is.


Tracking how many assessable events — how many One Market Plazas — slip past the assessor's office is befuddling; it recalls Donald Rumsfeld's "known unknowns" and "unknown unknowns." Stephen Dunbar knows, though.

"I'm contacted by attorneys quite often asking me to look at a transaction and see if it's something that should result in a reassessment and higher tax bill," says Dunbar, now a private appraiser. "Often I do say there should be a reassessment. But it's their choice whether to report that to the appropriate authority. And quite often they don't." And in that case, the assessor probably doesn't find out. "The assessor is so busy doing the easy, slam-dunk stuff, they don't look at these other events."

Catching the next One Market Plaza without the benefit of a disgruntled sandwich-maker would require a vastly different approach. The assessor "is managing the day-to-day stuff. But is he looking where he should be to make sure people are afraid of them?" asks Ron Chun, a tax lawyer and former deputy assessor. Chun chaired the Assessment Appeals Board that ruled on One Market Plaza and twice ran unsuccessfully for assessor. A former IRS agent, he thinks the assessor should emulate the tax men. "They need troops on the ground. They need people saying 'Hey, we'd like to audit you.' 'What'd I do wrong?' 'Nothing. We'd like to do it anyway.'"

Focus on downtown; it's where the money is, continues Chun. Randomly choose a handful of big buildings. And if you ferreted out even one transaction — well, "that'd indicate how widespread the problem is." Dunbar agrees. "One Market Plaza had no event that brought it to the assessor's attention. There are a lot of properties in San Francisco that are never looked at because they don't have that trigger event. Their bills could be bigger."

About The Author

Joe Eskenazi

Joe Eskenazi

Bio:
Joe Eskenazi was born in San Francisco, raised in the Bay Area, and attended U.C. Berkeley. He never left. "Your humble narrator" was a staff writer and columnist for SF Weekly from 2007 to 2015. He resides in the Excelsior with his wife, 4.3 miles from his birthplace and 5,474 from hers.

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