REITs May See Effects
Of California's Problems
NEW YORK -- A handful of real-estate investment trusts with big holdings in California could take an earnings hit if the state turns to Proposition 13 to resolve its budget woes.
As California grapples with one of the largest state deficits in the country, calls are growing louder for politicians to revamp or even eliminate Proposition 13, which currently limits annual property-tax increases to 2%.
Proposition 13 was passed in 1978 as California residents were facing 20% to 30% annual property tax hikes. Stories of older and retired residents being forced to sell their homes to pay the rising property taxes fueled the fight.
With Proposition 13, property-tax increases are limited to 2% and property assessments can only be brought to market levels when a property is sold.
But now - 25 years later - there have been calls for politicians to revisit the law. The state currently gets about 21.9% of its revenue from property taxes - which is below the national average of 28.6%, noted Wachovia Securities Inc. analyst Stephen Swett. Instead, the tax burden has shifted toward income and sales tax, and some worry that the latest budget shortfall will push income and sales taxes even higher.
Some are suggesting that Proposition 13 be scrapped altogether, while others are asking that it only be removed from commercial properties.
Such a move requires two-thirds approval in the legislature.
"We believe an outright repeal to Prop 13 is unthinkable, at least as it pertains to residential real estate," said Mr. Swett. However, he believes many may be open to exempting commercial properties.
Some want Proposition 13 adjuste d to stop commercial-property owners from using loopholes to avoid paying taxes, he said. For example, some owners have sold off portions of a property over a couple of years so that 50% of a property doesn't change hands in one year. By doing this, the property is never deemed a "sale," and therefore property assessment values are not brought to current levels and higher taxes are never paid.
Mr. Swett cited a University of California study that indicated the state could collect an additional $4.5 billion in property tax revenue each year if commercial-property assessments were brought to market value.
If the state does overhaul Proposition 13 to exclude commercial properties, it would likely impact REITs with big holdings in California. Mr. Swett said Essex Property Trust Inc. would likely be affected most as its funds from operations would drop by about 22 cents a share, or 5%.
Other REITs affected would be Kilroy Realty Corp., Arden Realty Group Inc., CarrAmerica Realty Corp., BRE Properties Inc., and Bedford Property Investors Inc., whose FFO would be lowered by 14 cents, 13 cents, 12 cents, 11 cents and 10 cents respectively. Each would see property taxes increase between 34% and 67%, according to Mr. Swett.
Boston Properties Inc. would see property taxes rise 82% on its California properties. However, the impact would be smaller on the company's bottom line since its California holdings represent a small part of its overall portfolio.
If the state modified - but didn't exclude - commercial properties from Proposition 13 so that all properties would not be automatically brought up to full market assessment, the impact would be less, he noted.
In early 2003, Gov. Gray Davis unveiled a budget that contained a $34.6 billion deficit - one of the highest in the country.
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