[polalavik]

We need land value tax bad [1]

In Los Angeles I’ve watched business after business close because their rent was increased by their commercial landlord only for the property to sit vacant in some cases (no exaggeration) for over 5 years!

Thats absurd. Also as a business owner who would like some space to work out of your only options are endless swaths of vacant industrial buildings that are tens of thousands in rent a month. I don’t quite get how anyone runs a brick and mortar or has space to do anything profitable.

[1] https://en.wikipedia.org/wiki/Land_value_tax

[harmmonica]

I’d support a land value tax myself so don’t take this following comment as criticism, but you don’t even need a land value tax in the case of LA. You do need to repeal Prop 13 for investment properties. I wager most of those years-vacant properties have a generous Prop 13 assessment and so the owner can just sit on it because their carrying cost is closer to zero than what it would be in any other tax regime. Then all of us folks around them continue to make the adjacent area nicer and they just ride off into the sunset while the absurd delta between their taxable value and market value increases.

Prop 13 is like the anti land value tax. Makes places like Texas look downright progressive.

[epistasis]

We were very close to repealing Prop 13 on commercial property a few years ago (via Prop 15).

One of the biggest objections to a straight repeal Prop 13 on commercial property is that most commercial leases are triple-net, meaning that the businesses directly pay the taxes. Which means that a bunch of small businesses that are just barely on the edge of profitability will shut down when they finally have to pay their fair share of property tax.

Agreed on the need to do it though (and also Texas typically has higher taxes for a normal person, with worse services than California). We might just want to pass a gradual phase in or a requirement that landowners pay it without increasing rent )and doing reach through to modify all those triple net leases... or something. Or we just let the businesses fail, but the public tends to not like lots of small businesses failing.

[avidiax]

The inability to pay a high tax increase constantly comes up in discussions on Prop 13, and it seems like a willful failure to find a solution.

For personal property, raise the taxes, and give the home owner the option to defer the raise as a lien against the property, accruing fair interest. Nobody gets kicked out of their home, and the taxes get paid when the home is sold. If it is inherited, then the inheritors will have to increase their taxes paid at least so that the lien amount no longer increases relative to the home value.

For commercial property, cap the property tax paid by the lease-holder to the historic rate + a several percent growth to gradually meet the current tax bill. The rest of the tax becomes a lien on the property to be paid on sale, with forced payment increases if the lien to value ratio becomes too large. It would be up to the property owner whether they pay the additional tax or take it as a lien. Ultimately, commercial prop 13 was a mistake, and businesses that can't compete on a level playing field need to be gradually pressured to improve profitability or make the space available to someone that can.

Edit: one more thing that people seem to forget is that if we repeal Prop 13, we can reduce the property tax rate and keep the same tax income. So the unpayable increase is much more affordable than a naive analysis would suggest.

[harmmonica]

Yeah, I feel like the yimby's are going to take another run at repealing it for investment properties (5+ units of multifamily and all of commercially-zoned property) and it stands a much greater chance of passing the next time because of how close it was last time. The messaging will be much sharper.

Re your NNN comment, would you mind sharing a source for that? My gut says it's not accurate, but happy to be proven wrong. If you meant total square footage of leased space, that would make more sense, but having a hard time believing most leases are NNN (and since your point was about businesses going under what I think matters is the number of leases because (a bit over-simplified) 1 lease = 1 business regardless of the square footage leased by the business.

The ironic thing about this whole topic of businesses going under is that there's no rent control, for the most part, for businesses and yet Prop 13 acts as rent control (i.e., carried cost control) for landlords. If the landlords only charged the market rent that was achievable at the time they bought the property with a nominal capped annual increase that'd be pretty good for operating businesses, just not for the landlord's real estate business.

P.s. I personally benefit from Prop 13 and would be happy to have its market-distorting bullshit eliminated!

[toast0]

> We might just want to pass a gradual phase in

You could probably adjust the annual percentage increase and find a balance between pre-prop13 problems of rapidly increasing property tax and the post-prop13 problems of significant gap between capped assessment and actual value.

Probably also need to do something about transfers via holding companies as well, since there's a ton of commercial properties that have never had their assessment cap reset because of the way the beneficial holding rules apply to corporations. OTOH, if the capped assessment grows at something like 5% per year, maybe it can catch up soon enough anyway.

[ifyoubuildit]

What is the limiting principle here?

You note that a bunch of small business just won't be viable if you up the taxes, but you agree on the need to do it. So do you just keep upping the taxes until nothing is profitable except giant soulless corporations (who will then probably subvert the tax system anyway)?

[epistasis]

Profitability doesn't only come from large corporations. And it's likely that many large corporations would shut down businesses too if it impacted them.

The limit is that if no other more profitable business exists, the landlord lowers rent until they get some one. But that's often a multi year discovery process. And it's very likely that person will be some other small business that wouldn't have had a chance if the same spot was occupied.

It's hard to overstate just how much the random subsidy is for Prop 13 taxes; there is literally a 20x difference purely based on when a property was purchased or a building was built. This leads to very poor and inefficient allocation of real estate to businesses.

[spankalee]

We need to repeal Prop 13 completely. The fact that my neighbors pay 1/10th the property tax that I do, despite being younger and less at risk of being forced out of their home due to going fixed income or some financial crisis, is absurd.

[margalabargala]

Doing that would be good policy but bad politics. The people it would hurt the worst are the ones who vote most (older people) and the people most responsible for cities being the way they are (people who have lived in one spot a long time). So it's unlikely to directly happen, for that reason.

Piecemeal reform is much easier to swallow. Especially if you start with something like commercial properties, and especially since the increased income that results can be used to create tangible community improvements.

So even if your ultimate goal is full repeal, the correct strategy to make that come about is piecemeal reform, and pushing for a full repeal is counterproductive to that happening.

[nradov]

Prop 13 passed originally as a taxpayer revolt against uncontrolled spending increases by local governments. I agree that reform is needed but I'll only support changes if they maintain some sort of reasonable revenue limits on local governments. Otherwise the money will just be wasted giving fat raises to public employees.

[ricksunny]

I'm a former (i.e. not irrelevant to the question) Californian who also thinks Prop 13 should be repealed, and am probably supportive of LVT;

Can you walk through the scenario that younger neighbors pay a tech of the property tax you do? Are they legacies and benefiting from some sort of inherited trust or something?

[shaftway]

Not OP, but it's probably about inheritance rules. If you inherit a property then you inherit its tax basis. In fact, if I remember correctly, you inherit the tax basis, but the capital gains basis resets. You effectively inherit a property that has a low property tax, but face zero capital gains if you turn around and sell it.

All of this is subject to limits and rules and stuff. I think prop 19 made it so that you have to use it for your primary residence for the first year. And I think there's a cap on the difference between property value and tax basis of ~$1m.

[dragonwriter]

That's a soft cap, you get the full benefit if the value difference is up to $1m (in 2021, adjusted biennally for inflation since) or less, and if its greater you get the amount of value increase beyond the limit is added at full value (but the amount below the limit is still waived) in setting the tax basis value at transfer.

[epistasis]

As the parallel comment said, this is probably inheritance, and the low tax basis can be passed to children and grandchildren.

This was recently modified, due to Prop 19, so that only the first million of property value can escape fair taxation. Since it was passed, there have been two attempts to bring back the landed gentry aspect of Prop 13, and there is a third attempt under way:

https://www.mercurynews.com/2025/11/30/third-attempt-to-repe...

The example house used in the story was taxed at $1,300/year before inheritance, on a $2M home value. After inheritance, it's an annual $18,000 bill, discounted from something like $30k-$40k.

[PaulHoule]

The article points that adding any more costs just costs the operator money and won't change their behavior unless the costs are so high that the bank is forced to foreclose. Maybe on some that level that is a good thing and clears the market but in the current situation the banks just won't make loans unless this happens.

It makes me think of the "poker game" model of nuclear power plant construction where the vendor is quoting a price lower than they know it will cost because otherwise they wouldn't make the sale. If commercial buildings were properly priced at the outset, banks would be financing fewer of them.

[marcosdumay]

Yes, the idea of a land value tax is to make it high enough to for banks to foreclose. The entire thing is about making sure land is used on the most socially benefiting way possible.

[dragonwriter]

> The entire thing is about making sure land is used on the most socially benefiting way possible.

The idea of land value tax is to make the government effectively the universal landowner and everyone else renters, and renters paying a high enough rent that it is economically infeasible to use land for any but the most financially remunerative purpose.

Having it optimizing for social utility rather than maximizing negative externalities requires a finely optimized system of Pigovian taxes and subsidies, otherwise you are nailing the accelerator to the floor on the divergence between market incentives and social utility.

[epistasis]

It would make sense to have those Pigouvian taxes no matter what. But having an LVT is orthogonal, and it doesn't make the bad economic incentives that much worse. Especially since most economic activity subject to pigouvian taxes will not be much affected by land value taxation.

[dragonwriter]

> It would make sense to have those Pigouvian taxes no matter what. But having an LVT is orthogonal

It is absolutely not orthogonal; LVT by design makes doing things with property that are less financially remunerative unviable, it’s key selling point is eliminating “less productive” uses by that mechanism. This exacerbates any divergence between market incentives and social utility.

[marcosdumay]

Ok, good point.

If you optimize a lot, the social optimum is almost never the most profitable use for anything.

[estearum]

> The article points that adding any more costs just costs the operator money and won't change their behavior unless the costs are so high that the bank is forced to foreclose.

That is assuming operators are roughly zero-IQ automatons who can't factor future costs into present decisions?

[atoav]

And I don't even think it is controversial. People who squat on needed resources without using them are a drain on society, thus society should try to create an incentive structure for using spaces. A tax can be part of this.

[danjl]

What about incentivizing switching the building from commercial to residential? Given that commercial brick and mortar are generally on a downward trend, and the need for housing continues to increase, it would seem better to switch the property zoning in the long run. Since I'm clueless about the financial details of commercial real estate, I'm sure this proposal is full of holes, but, as a rule, I prefer incentives rather than penalties to motivate change.

[dec0dedab0de]

Don't underestimate how many businesses are supplementing their income with dirty money.

[coliveira]

Some businesses survive because they already own the property or have long time leases.

[kcplate]

Sometimes the last lessee is still on the hook for the remainder of the lease due to landlord improvements for the tenant. Had a friend lease a retail storefront, his business failed, but he still was coughing up rent to the landlord until the space was leased again. He was a sole proprietor and had to personally guarantee the lease. It was in his best interests to pay it rather than take the hit to his credit by defaulting on the lease.

My guess is a already wealthy landlord would probably be motivated to ride out the remainder of an existing lease and write off any unpaid amount as a loss before lowering the price to attract another business into the space.

[scifi]

True. What I don’t get, is how is vacancy a good move for the landlord? Wouldn’t it make more sense to have a tenant during that time?

[bobthepanda]

Commercial loans are not like residential mortgages and often the loan is based on a minimum rent. If you go below that then you are in default.

[triceratops]

How do they make mortgage payments without rent?

[bobthepanda]

* own a portfolio of real estate, so losses in one area can be offset

* own a mixed use building, so an empty ground floor retail space can be offset by multiple floors of apartments

also, if the rise in equity outpaces the losses in rents it can still be net positive

[duskwuff]

I don't like just saying "read the article", but this is precisely what the article explains. In short: the rental rates are a condition of the property owner's loan.

[seanmcdirmid]

Is it because of Prop 13 that commercial property owners aren't paying adequate property taxes that would act to encourage use?

[spwa4]

How does land value tax change the scenario in the article? It plays out exactly the same way with and without land value tax.

[spankalee]

Land value tax mainly helps with severely under-utilized properties like parking lots. Right now a parking lot is taxed far, far lower than a lot with a building, so the owner can keep it for parking when it would be better utilized as residential, commercial, or office space.

If it didn't pencil out to just site on empty land, we'd get better development.

[spwa4]

So it does not help with commercial property? How does that work? I don't understand the reasoning. Because this is of course not true unless it lowers the value of that land to below zero. And if it lowers the value of that land even just to zero, it'll just be undeveloped entirely ...

[ImPostingOnHN]

> So it does not help with commercial property?

The opposite: It does help with commercial property

> if it lowers the value of that land even just to zero, it'll just be undeveloped entirely

It's not that the value of the land is zero, but rather the price can drop to zero. The price is a factor of both the land value and the taxes on the land. For example, suppose you buy land for $50, and you wish to 10x your investment, and won't resell for less than $500 (which nobody will pay). Suppose further that the land value tax is $0/mo. You can sit on the land doing nothing, ruining the community, and it won't cost you much.

Now suppose the land value tax is raised/added to the tune of $1/mo. You would need to find some use for the land that raises more than $1/mo, or else you're losing money every month. Costing money every month means the land is now worth less, let's say $25. But what if you don't want to use the land, because you're a speculator, not a business owner? Well, you can choose to either keep losing money monthly, or sell the land for $25. Economically speaking, you might choose to sell the land if you would otherwise keep it empty for >25 months.

If you choose to sell the land, whether for $25 or $0, then I could buy it and run a business from there, and as long as the business makes more than $1, I stand a chance to profit. Thus, I win, and also the community wins, because the storefront that the original speculator kept empty gets filled with something useful.

In fact, in this scenario, everybody wins except the real estate speculator who was ruining the community by keeping storefronts empty, and that person deserves to lose and be punished. With any luck, the speculator realizes that what they're doing is both bad and unprofitable, and either finds a useful way to contribute to the community, or fucks off forever. Either way, the community wins!

[spwa4]

But ... none of this affects this problem in a good way. The problem here is that it's cheaper to leave financed buildings empty, rather than fill them up at cheaper rents, eating the bigger loss. If anything land value tax makes the problem worse, as it would immediately become part of the financing, driving up the price. (the price, obviously, is the price the buyer paid. That the seller doesn't receive the money for the land value tax just sucks for them, it makes no difference)

Land value tax, in a world where buildings are financialized (ie. have a mortgage) and used for speculation will make things worse by making everything more expensive, hence making the big losses on underwater mortgages ... bigger. Which, you have my personal guarantee, won't affect the community in a good way at all.

Empty lots aren't empty because their owners hate you, it's because the land value is too low for the mortgage and needs to drop, but can't, they're unwilling or unable to eat the loss. The problem is investors prefer small yearly loss over eating the big loss now. Land value tax supposedly solves that ... by making everything more expensive? Of course it will do the reverse.

[ImPostingOnHN]

> The problem here is that it's cheaper to leave financed buildings empty, rather than fill them up at cheaper rents

Exactly! So we make it more expensive to leave their building empty. Land value tax makes it more expensive to hold the land vacant, thus encouraging the speculator to either use the property (improving the community), or continue lowering rental/sale prices until it rents or sells, or pay higher taxes to the community they're ruining.

> Empty lots aren't empty because their owners hate you, it's because the land value is too low for the mortgage and needs to drop, but can't, they're unwilling or unable to eat the loss.

They're empty because the speculators are asking so much above market price for rent or sale that nobody can afford it. The solution is to institute forces which coerce them to either use it or sell it (potentially at a loss, but not as high a loss as holding it vacant).

> Land value tax supposedly solves that ... by making everything more expensive?

No, land value tax only makes it more expensive to leave the property empty. It doesn't make anything else more expensive. Indeed, it makes it cheaper for a business to buy up an unused property, because the seller would rather sell at a loss than incur a sufficiently larger loss (land value tax) over time.

[zem]

same thing happens in SF, often to businesses that have been a valued part of the local neighbourhood for years. it's infuriating.

[anigbrowl]

Yep, this has wiped out my favorite deli, local cinemas, and bookstores in the east bay. Basically non-capital-intensive businesses seem to pay the price for the market signal falsification engaged in by landlords and banks. But nobody wants to bite the bullet and risk setting off a repeat of the 2008 financial crisis, so we've ended up with some kind of hypernormalization-style fake economy which is being 'run' by a former reality TV star and a bunch of TV personalities and political entrepreneurs.