Market Insight: Guest Articles Special District Fees and Similar Charges—The California Supreme Court Resuscitates Stealth Property Taxes by Theodore F. Bayer, Esq.
January 2001

California voters overwhelmingly passed Proposition 218, the 1996 initiative that was intended to prevent local government agencies from imposing real property-related taxes, fees and related charges without the approval of two-thirds of the electorate. The initiative was well-drafted and contained a clear statement of intent: no new taxes, fees or similar charges on California property unless expressly approved by a super-majority of the affected taxpayers. In a January 9, 2001, decision reminiscent of the Florida ballot debacle (Apartment Association of Los Angeles County, Inc. v. City of Los Angeles, 01 C.D.O.S. 209), the California Supreme Court reversed a lower court and, through a tortured analysis of the distinction between “on” and “of,” upheld a $12 per unit fee imposed by the City of Los Angeles on residential apartment properties. You can almost hear the new fee legislation being drafted by the ninety California cities that urged the Court to uphold the fee!

Proposition 218 had as its genesis the grandfather of modern California property taxation, Proposition 13. A frequently-overlooked section of Proposition 13 prohibited local governments from enacting any special tax without a two-thirds vote of the electorate. Local government agencies methodically chipped away at the initiative, utilizing artificial court-created distinctions between “special” and “general” taxes, and between “taxes” and “fees.” While Proposition 13 has limited annual increases in ad valorem taxes to two percent, by 1996, the number of local special districts imposing fees and assessments without the consent of the affected voters increased to over 5,000; and exactions imposed by those districts soared by over 2400%. In some cities, in fact, the amount of “special” taxes imposed annually on property owners almost equaled the amount of their “regular” assessments.

With no sign of relief from the legislature or the courts, Californians sought protection through the initiative process. The drafters of Proposition 218 understood the problem—and the need for a well-crafted proposition. The results of their efforts appear to address squarely the issue: “[N]o tax, assessment, fee or charge shall be assessed by any agency upon any parcel of property or upon any person as an incident of property ownership except…as provided in this article [Fn 1].” The initiative further defined an “agency” as any local or regional governmental entity. So how did the California Supreme Court, in a 5-2 opinion, manage to override the mandate of the voters and uphold a $12 per unit per year “inspection fee” imposed—without voter approval —on owners of Los Angeles apartment buildings?

The Court first noted that the initiative applies to any levy upon a parcel or upon a person as an incident of property ownership, including a user fee or charge for property-related service. But it then found that Proposition 218 only restricts fees imposed directly on property owners “in their capacity as such,” and, therefore, since the inspection fee is not imposed solely because a person owns property but rather because the property is being rented, the fee is really more in the nature of a charge for a business license and therefore not subject to the constraints of the initiative. Got that? If an apartment building owner should stop renting the units, no fee would be payable; but so long as that activity continues, the fee is imposed on the business of property rental and thus not subject to Proposition 218.

Still confused? The Court attempted to clarify its position. Proposition 218 “did not refer to fees linked more indirectly to property ownership.” Fees imposed on a parcel or a person as an incident of property ownership are subject to the initiative while fees imposed on an incident of property ownership are not within the ambit of Proposition 218. The business of renting apartments is an incident of owning an apartment building—“[O]ne can own apartments without renting them but no one can rent them without owning them!” Substitute “use” or “paint” or “develop” or “landscape” in place of “rent” and you begin to understand the clear impact of the Court’s decision. Notably, the Court gave no examples of the type of exactions that would be imposed “as an incident of property ownership” and thus proscribed under the initiative.

By its decision, the Court has created a huge loophole that essentially guts Proposition 218. Local governments now have a template for the creation of new special districts and the imposition of new fees and charges. Enabling legislation will need to establish only that the proposed fee will have an “indirect” relationship to property ownership and that its imposition is not upon the property owner in its capacity as a property owner but rather in some other capacity. Since the owners of every commercial property, as well as every residential income property, wear multiple “hats,” e.g., property owner, business owner, employer, special service user, the second requirement can be readily satisfied with respect to such properties. It will be a simple task for any local agency to establish that the affected charge has only an indirect relationship to property ownership, merely by ensuring that its imposition is against some non-protected “capacity."

Owners of business properties, in particular, should brace for an onslaught of new fees and charges. The Court’s decision clearly upholds such exactions, and it will require some creativity—and audacity—on the part of local governments to formulate more than one hat for homeowners (who were the primary supporters of Proposition 218). In any event, this latest voter attempt to restrain the voracious appetite of local governments for revenue has been compromised. The dissenting opinion in Apartment Association of Los Angeles County, Inc. succinctly portrays this unfortunate saga:

“When the voters passed Proposition 13…, they sought to restrict the ability of government to impose taxes and other charges on property owners without their approval. For almost two decades, however, they witnessed politicians evade this constitutional limitation. The message of Proposition 218 is that they meant what they said. With the majority’s turning a deaf ear to that message, we may well expect a future effort to ’stop politicians’ end-runs around Proposition 13.’”

Given the track record to date, can Californians realistically expect a better fate for any “future effort?”

Footnotes:

  1. The only exceptions enumerated under Proposition 218 include (i) ad valorem property taxes, (ii) any special tax receiving a two-thirds vote, as provided under Proposition 13, (iii) assessments upon real property for a special benefit conferred upon that real property, as provided under Proposition 218, (iv) fees or charges for property-related services, as provided under Proposition 218 and (v) fees for the provision of electrical or gas service.

About the Author

Theodore F. Bayer is a graduate of Lehigh University and Golden Gate University School of Law. His practice specializes in transactional real estate matters, with a focus on property taxation, commercial leasing and commercial property sales. Mr. Bayer is also a Principal in the San Francisco-based property tax consulting firm, Ad Valorem Solutions, LLC (AVS). AVS represents owners of office, industrial, retail, multi-family residential and R&D properties, including numerous publicly-traded REITs. He has been a speaker at event sponsored by IREM, the San Francisco Bar Association, the State Bar of California Real Property Law Section and the California Assessors’ Association and has authored numerous articles concerning property taxation.

Ted Bayer, Esq.
Paradigm Tax Group
P: 415-951-6204
E: tbayer@paradigmtax.com
W: www.paradigmtax.com
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