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Monday, December 10, 2012

Prop. 13: Willie Brown Offers Advice on Solving Problem He Helped Create

Posted By on Mon, Dec 10, 2012 at 10:59 AM

San Francisco voters are a forgiving lot. Local politicians can make huge messes, solve them years later -- and reap the credit for tackling the problems of their own making. Over the weekend, Willie Brown offered his advice on how to address one of the most burdensome and unfair rules of Proposition 13 -- rules codified by a task force he chaired.

Whenever Brown offers advice on how to solve the problems he helped create it's a pretty good bet he's been visited by the ghost of Jacob Marley.

Land-use -- particularly in this city, where there's so little land -- is a byzantine and beastly subject. Many locals, including, we're told, mayors less astute than Brown, would rather tune it out altogether. But it is the life blood of this city, just as water rights were the all-important issue in Los Angeles. You can't decipher San Francisco politics without addressing land-use any more than you can learn French without mastering grammar.

The thorny issue Brown helped codify was one we wrote a cover story about this year regarding the incongruous theft of a building.

See Also: 
The Building-Size Loopholes in Prop. 13 That Corporations Exploit

He can fix it!
  • He can fix it!

Back before Proposition 13, county assessors didn't much care who owned a building, as they reassessed them every year. This led to the complaint that elderly folks who bought low were being taxed into the streets. As we wrote in our cover story: Prop. 13 changed things with the subtlety of a thunderclap. Property values are now essentially frozen at the year the owner obtained the real estate, and only reassessed when it changes hands. Determining ownership -- and when it changes -- is paramount.

When you sell your home, it's a relatively straightforward transaction. A deed is recorded and the new owner will pay property taxes on the reassessed value. But corporations do things differently. Selling the land beneath a building is wholly different than selling the shares of a company that controls that land. It is possible for a company to sell 100 percent of its shares, but to engineer the transaction in such a way that a property reassessment is not triggered. There are still numerous corporate-owned properties in this state being taxed at the same rate they were when Gov. Jerry Brown had hair and dated Linda Ronstadt.

Corporations hoping to avoid higher taxes -- and that would likely be all of them -- have remarkable leeway to structure property sales in a manner that avoids triggering a reassessment. Per the rules Brown helped write, property is only re-appraised and taxed at a higher level if one individual is left controlling more than 50 percent of a legal entity. So Seller A can cash out and sell all his shares to Buyers B, C, and D as long as none of them holds a majority. Per our story:

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.

Closer to home, the Perini corporation sold every last share in the Golden Gateway center along the Embarcadero by 1994. But there has been no reassessment. The sale was conducted to a consortium of interconnected buyers and structured in such a way to take perfect advantage of the loophole. In fact, San Jose attorney Bernard Vogel III notes that corporations who bought real estate in a booming market may do well to intentionally trigger a Prop. 13 reassessment when the property values drop, then lock in that low tax base for the long haul.

It's a crazy way to run a state -- but that's the way we've been doing it since '78. Good thing Willie Brown's here to lead us back to sanity.

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About The Author

Joe Eskenazi

Joe Eskenazi

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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