LOS ANGELES -- The California Supreme Court ruled Thursday that property must be reassessed at full value when it is sold through a sale-leaseback arrangement, a decision that benefit localities.
The decision bars businesses from using sale-leaseback arrangements to freeze tax assessments on commercial property.
It also means the City of Los Angeles and Los Angeles County can keep about $10 million in property taxes resulting from the reassessment of a bank building in downtown Los Angeles after it was sold in 1984.
The ruling entailed an interpretation of Proposition 13, a property-tax initiative that froze assessments at 1975 levels. Proposition 13 only allows small annual adjustments to account for inflation, but it allows reassessment at full market value when a property is sold.
Last week's ruling involved a tax refund request by Pacific Southwest Realty Co., which sold the Security Pacific Plaza in 1984 but kept long-term leases on the bulk of the office complex. Pacific Southwest argued that under the arrangement there was no change of ownership that would trigger a reassessment at full market value.
Local and state tax officials had expressed concern over the precedent that would be set by granting a refund in the case. They were worried, for example, that sellers of commercial property could avoid reassessment by inserting leaseback language into sale documents that sidestepped a change-of-ownership definition.
A victory for property owners in the case could have opened a "horrible loophole," Albert Ramseyer, deputy counsel for Los Angeles County, noted last week.
In and of itself, the ruling does not have a major impact on municipal finances or suggest rating implications. It does, however, offer some comfort to local governments that already face budget pinches and potential cutbacks.
A home owner is challenging another aspect of the reassessment provision under Proposition 13, saying it is unconstitutional for her to pay much higher property taxes than neighbors simply because her property was reassessed when she bought it. The U.S. Supreme Court has agreed to hear that case next year.