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Inheriting a Triple Net Lease Property? See How Prop 19 Could Hit Your Wallet!

Updated: Apr 30

By: Marc Perlof

Updated April 30, 2024

Monday, April 29, 2024

 

Hey, Retail Real Estate Rockstars!

 

Welcome to a quick guide on California's Proposition 19, or Prop 19, which is changing things up for property taxes and who pays them. This is really important for retail and other commercial property owners to know, especially if you're the kids or grandkids from the Greatest Generation (1901–1927), the Silent Generation (1928–1945), or the Baby Boomers (1946–1964). Even some kids or grandkids from Generation X (1965–1980) might be affected if they bought property before Prop 19 started in November 2020.

 

What is California's Proposition 19?

Prop 19, which voters said yes to in 2020, has shaken up the rules on property taxes, especially when properties are passed on or inherited. It essentially wipes out the low property tax basis from Proposition 13. Here's what you should keep an eye on:

 

  • Property Tax Reassessment Exemption: This part of the law makes it tougher to get tax breaks when passing on California real estate within the family, which will lead to higher property taxes when you inherit property.

  • Prop 19 Inheritance Tax: This will mean higher property taxes on properties you inherit that aren't used as main homes.

 

What Happens When Property Taxes Go Up for Tenants on Triple Net Leases?

If you have tenants on a triple net lease, they have to pay property taxes along with other costs. If Proposition 19 causes property taxes to jump by a large amount, this big bump in costs might make it tough for them to keep making money, and some businesses might need to move to cheaper spots or could even shut down if it gets too expensive.

 

For property owners, this could mean more empty spaces as tenants leave to find better deals. More vacancies mean less rent money coming in, and it could be harder to find new tenants who are willing to pay high costs. As well, while there is a vacancy, the property owner has to cover the property tax and other operating expenses associated with that space until the space is released. This could lead to less income from the property and make it harder to keep the property profitable.


For those property owners where they pay the property taxes with there is no reimbursement from the tenant, when the property taxes increase for your heirs, the net income for the property will drop dramatically.

 

What About Rent Clauses in Leases?

If you have leases where your tenants' rent depends on their sales, and they can deduct property taxes from this rent, Prop 19 will affect your income. If property taxes go up because of a reassessment when your kids or grandkids inherit a property, it will mean they get less rent money. This will also dramatically make the property less valuable if they decide to sell it because buyers will see it as less profitable.

 

This mix of higher property taxes and how they affect rent and property value is a big deal for retail and other commercial real estate owners. It means you need to plan carefully, especially when thinking about passing properties to the next generation or changing lease terms to protect your income.

 

Understanding all this can be tricky but super important if you own retail or other commercial real estate or are thinking about buying or inheriting a property. If you need more details on how to make the most of your investments with these new rules, just call or DM me.

 

With Prop 19 changing how property taxes work, what are you doing to make sure the money you make now will be just as good or even better for your family in the future?

 

Remember, this is just a quick overview, so if you have specific questions or need advice tailored to your situation, it's a good idea to talk with me and then your Estate tax planner or real estate attorney.

 

 

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