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Prop 13: The Building-Sized Loopholes Corporations Exploit 

Wednesday, Jan 4 2012
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Illustration by David Flaherty.

Copper thieves are pilfering copper. Carjackers are jacking cars. Home burglars, however, are not making off with homes. The plot of the recent film Tower Heist did not involve stealing an office tower. It remains challenging to abscond with a building.

But what if you could? Bolt-cutters and a flatbed are always handy, but you wouldn't need them. All it would take is a pen and a sheaf of documents to sign — and the ability to keep the facts away from the county assessor's office. That's how it worked here in San Francisco, where billion-dollar companies conspired to conceal a skyscraper's change of ownership, depriving the city of millions of dollars in tax payments.

The towering case of fraud was yet another unforeseen consequence of Proposition 13. Thirty-three years ago, the specter of indigent grandparents being taxed into the streets led Californians to overwhelmingly approve the ballot measure. Prior to 1978, assessors didn't much care who owned a building — property was appraised yearly and taxed based on that valuation. Prop. 13 changed things with the subtlety of a thunderclap. Property values are now essentially frozen at the year the owner obtained the real estate, and only reassessed when it changes hands. Determining ownership — and when it changes — is paramount.

In most cases, it's relatively straightforward: Gavin Newsom sells his home for $2.75 million, a deed is recorded, and the new owner pays property taxes on a reassessed base. But, under state and federal law, corporations are afforded the same rights enjoyed by individuals; Mitt Romney was artless when he told a crowd "Corporations are people, my friend" — yet he was factually correct. And while it's fairly simple to ascertain when the Newsoms sell their house, determining the ownership of property held by massive conglomerates or intricate partnerships can be maddening. Especially when they want it to be.

Most new buyers are left with little recourse but to grumble that their property taxes are many times higher than those paid by longstanding residents and businesses. Recent buyers in every California city are subsidizing their neighbors. But corporations with no overriding desire to shell out millions in taxes do have options — and access to sharp legal minds. The definition of what constitutes a change of control of corporate property allows for remarkable leeway in avoiding a reassessment, shrinking needy cities' tax hauls by billions. Assessors awaiting deeds as a result of mergers, acquisitions, and other corporate transactions may wait forever.

A business selling 100 percent of its real-estate interest without triggering a reassessment isn't hypothetical — or even an oddity. "These kinds of transactions are being done all the time," says USF law professor Dan Lathrope. "Anyone doing a big real-estate transaction knows what triggers reassessments." It's all perfectly legal — companies can effectively change hands many times over, but never in a way resulting in a deed heading to the assessor's office, and buildings' tax bases remain at levels from the Carter administration.

That's the case even when the line between cunning and devious is breached. In San Francisco, a pair of Fortune 500 companies fraudulently cloaked a change of ownership of One Market Plaza, one of the city's largest office buildings — to prevent a reappraisal that would have upped the structure's value from some $113 million to around $400 million. These firms were caught and made to pay — astoundingly, in retrospect — but not in a manner inspiring hope for nabbing future purveyors of fraud. The scheme was sniffed out not by proactive city employees but private attorneys. Even once the machinations were laid bare, the city repeatedly attempted to go easy on the guilty parties. The case plodded through court for nearly 18 years, spinning such a convoluted web of litigation that, at one point, the city sued itself.

One Market Plaza remains the city's only instance of fraud penalties being levied following a concealed change of ownership; the California Assessors' Association can't recall another case statewide involving commercial property. And after all these years, Assessor Phil Ting admits the city is no less vulnerable. "It would be great to review a lot more properties to determine if we're missing changes of ownership," he says. "But it would be very, very difficult to detect."

In the meantime, society's wealthiest and most powerful — "the 1 percent" in the parlance of those who were until recently encamped in the shadow of One Market Plaza — exploit loopholes in Prop. 13 to grow wealthier and more powerful still.

Loopholes large enough to push a building through.


Attorney Wayne Lesser had been in any number of contentious legal meetings — but usually he knew whom he was meeting with. In a sit-down with One Market Plaza officials, everyone introduced himself — save for one guy at the end of the table. When asked who he was, he responded "That's not important." Then things got weird.

Lesser's client, Joe Abouab, was a Moroccan-born sandwich-maker whom One Market Plaza was evicting in order to install a food court. Abouab had three years left on his lease. All Lesser wanted was "some moving expenses, some juice." It wouldn't have taken much. But the guy without a name wasn't having it. Twenty years have passed, but Lesser recalls exactly what came next. "He looked at me and said 'We're not gonna pay him a dime. We're gonna bury him.'"

That concluded the meeting. But it started so much more. Because when the eviction papers came, Lesser noticed the company name didn't match the registered owner of One Market Plaza. Lesser later learned the man without a name worked for the Yarmouth Group, a property management firm contracted by IBM — also not a registered owner. Even after Abouab went out of business and his proceedings became moot, Lesser and fellow attorney Michael Mendelson continued digging into who owned One Market Plaza.

On paper, One Market Plaza was 90 percent owned by Equitable Life Assurance and 10 percent the property of Southern Pacific, and controlled by a joint venture between the companies. But when Lesser and Mendelson buttonholed building tenants, they claimed the IBM Pension Plan — a subsidiary of the computer giant — was calling the shots. "A friend of mine works for Equitable," says Lesser. "And I said 'Would you do some checking for me? Does Equitable own this building?' He got back to me and said, 'On the QT, no!'"

About The Author

Joe Eskenazi

Joe Eskenazi

Bio:
Joe Eskenazi was born in San Francisco, raised in the Bay Area, and attended U.C. Berkeley. He never left. "Your humble narrator" is a staff writer and columnist for SF Weekly, which he has written for since 2007. He resides in the Excelsior with his wife, 4.3 miles from his birthplace and 5,474 from hers... more

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