Change in the Control or Ownership of an Entity

Effective as of 2010, whenever there is a change in the control or ownership of a legal entity, which owns or leases real property in California, the acquirer of such an entity must file a notice (see reference below) of said change with the Board of Equalization’s (BOE) office in Sacramento within 45 days of the change. [Revenue & Taxation Code §§ 480.1 and 480.2]

The measure of a “change in control” is reached when more than 50% of the ownership of a legal entity is transferred to a buyer. A legal entity can take the form of a corporation, a limited liability company, a general partnership, a limited partnership, a land trust, a title holding trust or a living trust, etc.

An ownership interest can be the shares of a corporation’s voting stock, or the beneficial interest/power of direction in a trust, or one’s interest in a partnership’s or an LLC’s capital and profits, etc.

The ultimate purpose of these changes to the R&T Code is to alert the county tax assessors in California of instances where a non-recorded shift in the control or ownership of a legal entity that owns real property, has occurred. These new laws should uncover a large number of heretofore, unrealized changes in the control of the ownership of real property and result in a subsequent rise in the reassessment of the underlying land.

A common example of what was happening is where a business that owns land, equipment, tools, etc. is sold in its entirety–by the simple expediency of transferring all the shares of their voting stock in the entity, to a buyer. Since shares of stock are personal property, not real property, the sale of such stock isn’t recorded in the county recorder’s office. As a consequence, the sale of the company’s stock wouldn’t trigger a reassessment of their real property holdings.

A similar example, on a smaller scale, is where a property owner creates a title holding trust and transfers the title of her house into it, and then sells all of her interest in the trust to someone else, without the necessity of recording any evidence of the property transfer in the public record. The purpose of such a transaction would be to avoid the due-on-sale clauses in the existing financing, and avoid a reassessment of the real property’s tax base as well.

While the advent of these new codes won’t impact the skirting of due-on-sale clauses in trust deeds, they should have a measurable impact on plugging a lot of unseen reassessment loopholes and thus generate a lot more property tax revenue in the state.

The penalty for failure to inform the BOE of a change in the control or ownership of a legal entity that owns real property is stiff. It amounts to 10 percent of the property taxes applicable to the new base year value.