[quote=gzz]Prop 15 will generally not lead to rent increases on small businesses.
Rents are determined by supply and demand for rentable space, NOT BY COSTS.
The only way Prop 15 leads to rent increases is landlords do not behave with economic rationality.
Who are these irrational commercial landlords?
Now there might be some soft n mild landlords like myself who will use a property tax increase as an excuse to raise below-market rent. And then you have those “NNN” or whatever leases that pass on property taxes to tenants. But tenants will demand lower base rent in such circumstances.
Ultimately these are all red herrings and insignificant in the long-run. Rents are determined by supply and demand. Prop 15 ending false and ultralow valuations on old commercial properties taxes don’t change either supply or demand.
The real question is “what is the incidence and dead-wight loss” of Prop 15. The answer is that it is the tax that hit non-residents and the rentier ultra-rich the most. For example, the publicly traded REITS that own a ton of California’s best commercial property are more than 90% owned by out of state people. They will pay the tax increase.
I view the only good argument against it that it should be directly paired with a cut of another tax to prevent the government from wasting the new revenue.[/quote]
Have to disagree here, depending on property type. I’ve financed a ton of commercial properties around California over the years and will tell you that if an owner’s annual property tax expense increases materially, they’re going to find any way they can to share that cost with someone else, most logical person being the tenant. NNN leases are very common in commercial property and it will be on the tenant, who is responsible for paying the property tax, to negotiate with the landlord to change the lease. Obviously this will be subject to supply & demand forces. Retail & office where demand is currently soft the tenants are in a better negotiating position, but for apartments and industrial properties where demand is high and vacancy rates are low, you better believe tenant rent or NNN costs are going up.
