Enacted by voters as a ballot initiative in 1978, California’s Proposition 13 gives property owners relief on their tax bills by limiting property taxes to one percent of a property’s value, with a maximum two percent increase for inflation per year. The property’s “base value”—used to calculate the one percent bill—may be reassessed when the property is sold. In 1982, voters approved a follow-up initiative, Proposition 3, to ensure that people don’t lose that protection—the frozen, base value of their property—if government takes their land by eminent domain. Absent Proposition 3, someone buying a new piece of property to replace what the government took would be subject to higher property taxes, because the sale would trigger a reassessment of the new property under its current, fair market value.
Given the rapid rate at which property values increase in California, it’s not difficult to imagine how this could cause severe hardship to someone forced to buy replacement property after losing a home to eminent domain, particularly someone living on a fixed income. Because the state constitution only allows government to take private property if it pays the owner just compensation, and because just compensation means putting the owner in the same position he would have been in had his land not been taken, he’s entitled to transfer the base value of the taken property to a replacement.
The California Fourth District Court of Appeal recently issued a published decision in Olive Lane Industrial Park, LLC v. County of San Diego, upholding that right. The Olive Lane Corporation lost an industrial park in an eminent domain action. It later bought some new land and petitioned the County tax assessor to transfer the base value as provided by Proposition 3. But the County denied Olive Lane’s petition, claiming it filed too late under the state tax code, which contains a four-year statute of limitations. Although Olive Lane purchased the replacement property within four years of the eminent domain action, it only filed the transfer application five and a half years later.
The court closely considered the tax code and said it was unclear whether the four-year limitations period applied to a property owner who, like Olive Lane, purchased property within four years but didn’t file the transfer application until later. To answer that question, the court turned to Proposition 3, which is now incorporated into article XIIIA of the California Constitution. It found significant the fact that Proposition 3 does not list any time period for transferring a base value following an eminent domain action. Therefore, “[a]rticle XIIIA’s clear mandate . . . is to treat eminent domain replacement property as outside the realm of [circumstances] . . . permitting reassessment, and thus to ensure a property owner will maintain the same property tax status for replacement property after his or her property is taken.” In light of that mandate, and the tax code’s ambiguity, the court held that the four-year limitations period was “nonmandatory,” a reading that supported voters’ intent in passing Proposition 3—to ensure that property owners are fully compensated when government takes their property. The Olive Lane Corporation, therefore, was entitled to transfer the base value of its old property to its new one.
While this decision is fairly narrow, it nonetheless upholds an important constitutional principle. When government uses eminent domain to take private property, it can’t short-change owners. It must provide them with just compensation, which includes the full panoply of Proposition 13’s tax-relief measures.
(Congratulations to former PLF attorney Tim Kassouni who represented the victorious property owners in this case).