Proposition 13: Buying Property Without Reassessment of Property Taxes

Recently, Michael Dell has been in the news quite a bit as the result of his purchase of the Fairmont Miramar Hotel for $200 million.  In fact, the LA Times  reported to its chagrin that while Michael Dell had bought the hotel, he was able to exploit a "loophole" in Proposition 13 that allowed him to keep the property tax base as if the property was only worth $86 million.  By doing this, he was able to save over a million dollars a year in property taxes.  When the LA County Assessor's Office read the Times article they conducted a review of their own.  While LA County attorneys informed the assessor's office that Mr. Dell's transaction was not a change of ownership, the Assessor's Office challenged the transaction anyways.  Recently, an LA Superior Court judge ruled in Mr. Dell's favor, holding that under plain language of the law, there was no "change of ownership" and could be no reassessment.  
The Times, article, however, doesn't go into the details of how this was orchestrated and the law that applies.  Generally, when there is a change of ownership, property is reassessed for property taxes.  Now, when the property is owned by a legal entity, there are additional rules and complexities.  Under the law, the general rule is that the mere transfer of an ownership interest in a legal entity does not constitute a change of ownership of the property in the entity.  However, there are two main exceptions to this rule.  The first is the "change in control" exception which provides that if a single person (or entity) acquires more than 50% of the entity, then there will be a reassessment.  The second exception is called the "original co-owner" exception and provides that if the original owners of the entity cumulatively transfer more than 50% of their ownership interests in the entity to others, there will be a reassessment.  However, this second exception only applies if the entity acquired the property after March 1, 1975 in a transaction that was not considered a change of ownership because the property was used to capitalize an entity.  It was this curious requirement that worked in Dell's favor.
In particular, Dell's attorney's advised him that instead of buying the real property outright, he should instead by the LLC that owned the hotel.  In particular, they had Michael Dell form a limited partnership that bought 42% of the LLC, they had Michael's wife set up a trust for her to buy 49% of the LLC and then the remaining 8.5% was bought by an investment entity owned by Dell's investment managers.  Ordinarily, this transaction would easily fall under the "original co-owner" exception because you had the original owners of the LLC transfer 100% of there interests away.  However, because the hotel had been purchased by the LLC (or potentially was capitalized before 1975), this exception could not apply and so there could be no reassessment.  That left the Assessor's office relying on the first exception and so they argued that even though no single person owned more than 50% of the LLC, that there had been a change of ownership because Dell's interest and his wife's interest should be viewed as a single unit.  Dell's attorney's countered that this would violate the plain language of the law and that husband-wife transfers have never constituted a change of ownership.  The court ended up ruling in favor of Dell, which the Assessor's Office is expected to appeal.
The take-away is that if a buyer is interested in acquiring a property that has been owned by an entity since before 1975 (or purchased by the entitty thereafter), there are ways to structure the transaction so as to keep the low assessed value for property tax purposes.