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| 1 minute read

An Introduction to Proposition 13

While most property owners dread the day of their property reassessment due to rising property values, California commercial and residential property owners have become accustomed to the perks of Proposition 13. Proposition 13 was first introduced in the 1970s to address concerns surrounding increased property taxes due to soaring property values. Through Proposition 13, California property owners are afforded protection against the consequences of reassessments and face only limited increases in taxes per year. Such increases are limited to 2% each year from the base year. The base year is the later of (i) the date the property was purchased or undergoes new construction or (ii) 1975 (if the property has never been sold or had new construction). Upon the sale of the property, the property value is reassessed, which becomes the new base value. This presents a crucial incentive for property owners to hold onto property and as such should be a central focus when negotiating leases. 

While this introduction to Proposition 13 is not intended to be an exhaustive resource for tenants and landlords, tenants and landlords can keep in mind the following questions when negotiating leases: 

  1. Is there a substantial difference between the current base value and current market value? 
  2. Which party is responsible for the payment of taxes?  

If there is a substantial difference between the current base value and market value, a sale of the property would trigger a dramatic increase in taxes. In such cases, both tenants and landlords should closely monitor changes in tax-related provisions or triggers based on reassessment. If language is added that is triggered upon reassessment, the next step for both parties is identifying the party responsible for paying such taxes. Parties should determine whether they are comfortable with the risk of increases in taxes or if payment obligations can be negotiated with the other party. 

By keeping these two considerations in mind when negotiating California leases, tenants and landlords can avoid the headache of surprise increases upon a sale of the property by being aware of their respective obligations and the underlying triggering event for property tax increases. 


real estate, proposition 13, california