May 9, 2013 -- The Santa Monica City Council will weigh-in Tuesday on whether the State should close a tax loophole that is saving the Fairmont Miramar $1 million a year in property taxes.

The move comes as the Miramar, partly owned by computer mogul Michael Dell, prepares to embark on a $255 million redevelopment project that would replace two buildings on the site with three new buildings and as many as 120 condos.

"At a time when schools are hurting, and cities like ours have lost redevelopment revenue, economic fairness in the application of Prop. 13 becomes increasingly urgent,” said Council member Kevin McKeown, one of the three council members who placed the item on Tuesday's agenda.

When it was passed in 1978, Proposition 13 limited the amount that property taxes could be assessed to a two percent annual increase, unless the property changed hands.

However, written into Proposition 13 is a loophole for commercial properties: as long as less than 50 percent of the entity that owns the property is being transferred to any one individual or interest, “a transfer has not taken place,” according to County Assessor officials.

When Dell and his wife bought Ocean Avenue LLC, the company that owns the Miramar for $204 million in 2006, they split the purchase with a third party. As a result, no single investor owned a majority of the company.

As a result, the property itself did not undergo a change of ownership, keeping it exempt from being reassessed under Proposition 13. Therefore, Dell and his partners were paying property taxes on the five-acre parcel based on the $86 million value assessed in 1999.

The LA County Assessor’s Office, however, does not agree that the property is exempt under Proposition 13. It contends that the investors are “still controlled by Mr. Dell,” said Jeff Prang, a public affairs officials with the L.A. County Assessor.

Last December, a California Superior Court judge ruled that Dell and his partners were operating within the law and that the taxable property value couldn't be legally reassessed under Proposition 13.

The L.A. County Assessor plans to appeal the decision, Prang said.

Prang noted that if the City approves a Development Agreement (DA) for the Miramar that includes new buildings on the site, it could lead to reassessments of at least part of the property.

“The difference between new construction and replacement is that replacement is not a re-assessable event,” said Prang.

The current plans include a 21-story tower on the site of the current 10-story tower and two new smaller buildings. Prang said he could not speculate on exactly how that would impact property value assessments.

Santa Monica receives 15 percent of the revenue from assessed property taxes.

Miramar representatives note that Santa Monica currently receives $4.7 million a year in taxes and fees from the hotel, an amount that could reach nearly $10 million a year after the redevelopment.

Since news about the Miramar property broke Sunday, Jon Coupal of the Howard Jarvis Taxpayers Association - - the organization that was the driving force behind Proposition 13 -- has acknowledged that some change to the law should be made.

State Assembly Member Richard Bloom, whose assembly district includes Santa Monica, agrees.

“It's not surprising that some very creative folks have found ways to save a lot of money by not triggering a reassessment situation,” said Bloom, who served on the Santa Monica City Council for 13 years. “It's a situation that cries out to be fixed.”

Bloom was mayor when the Council voted 6-to-1 to negotiate a DA with Ocean Avenue LLC to redevelop the Miramar.

Change won't come easy, Bloom said. Since Proposition 13 was a State constitutional amendment put on the ballot and passed by voters, “the ability of the legislature to affect change could be very, very limited.”

Currently, the Assembly is looking at AB 188, a bill which would get more taxes from commercial property transfers by getting rid of the 50 percent threshold.

Some Monica Council members want their legislators to push for more dramatic change.

Tuesday’s item calls for legislators to go further than AB 188 and push for “commercial properties to be reassessed regularly” while maintaining the protections from tax hikes Proposition 13 affords residential owners.

“I'm asking that Santa Monica support action in Sacramento to make business properties pay their equitable share of property taxes, while continuing to protect homeowners who have otherwise had to pick up the tab for unfair business exemptions," McKeown said.

McKeown's sentiments closely echoes an official resolution adopted by the State's Democratic Party at its April convention.

“Regularly reassessing non-residential property would, according to an analysis of data provided by the California Board of Equalization, generate at least $6 billion in additional revenue for California,” the resolution reads.

It also would “shift the tax burden from homeowners, renters, and working families to corporations and commercial landholders.”

While opponents of closing the loophole agree it could generate $6 billion in taxes a year, they point to a report released by Californians Against Higher Property Taxes that claims limiting the business exemptions would slash the state’s economic output by $71.8 billion over five years.

Authors of the study said it would place the greatest burden on small businesses, not large corporations.

Council member Bob Holbrook notes that the problem is with the law and not with the business people who use the loophole to their advantage.

“If I were a businessman, I would do the same thing,” he said. “If I could do a deal and save money on taxes, I would.”

But Holbrook says it is time to make some changes. “Given the times we live in, we need the finances,” he said.

Said Bloom, “If we can fix it, we should.”