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Wednesday, October 14, 2020

How California’s Prop 15 Could Impact Nonprofits


Proposition 15, the California Schools and Local Communities Funding Act of 2020, is on the ballot for California voters to decide on November 3. If passed, it could be a significant change to the longstanding California property tax regime.

Here’s where things stand now:

  • The current property tax regime taxes land, buildings and business equipment.
  • Proposition 13, passed in 1976, currently taxes property based on purchase price (with the tax capped at 1%) and allows for inflation adjustments of up to 2% increases per year, but over time, this 2% cap can keep the property tax assessment value very low compared to fair market value.
  • The property tax value assessment resets when property is sold, so similar properties could have significantly different property tax amounts depending on the date of purchase.

What Prop 15 Does

Key components of the proposed legislation include:

  • Increases funding sources for K-12 public schools, community colleges and local government through a change in how commercial and industrial property tax is calculated. Property tax would be based on assessed value and closer to fair market value instead of historical purchase price.
  • Provides an exemption for residential properties, agricultural land, and owners of commercial and industrial properties with a combined value of $3 million or less. This will create a “split roll” of properties, with some taxed under the old regime and others at fair value.
  • Existing exemptions from property tax are unchanged.
  • Provides an exemption for small business for personal property and provides a $500,000 exemption for other businesses.
  • The legislative analysts’ estimate of net state and local government impact is $6.5 billion to $11.5 billion per year in new property taxes for local governments.

Impact to Nonprofits

There is no blanket property tax exemption for nonprofit organizations, but there are tax exemptions under the 1) church, 2) religious and 3) welfare exemptions. Nonprofit organizations could be impacted by this proposed legislation in the following circumstances:

  • Organizations that don’t qualify under one of the three nonprofit exemptions and own more than $3 million in real property.
  • Some nonprofits only have a partial welfare exemption and may be impacted by the new proposal.
  • Nonprofit organizations that lease their properties under a net lease or, more commonly, a triple net lease may also be affected.
  • Under a net lease, tenants are not only responsible for the monthly rent but also some or all of the property taxes. In a triple net lease, tenants are responsible for paying property taxes, building insurance and building maintenance fees associated with the property.

If your nonprofit organization has property that is not currently exempt from property tax, you should consider how Proposition 15 may impact your property tax liability or net lease expenses going forward, if it passes.

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