Selected Media

Dell Avoids Property Tax ReassessmentJune 5, 2014

In 2006, just as kids were returning to school for a new year, an investor group led by Michael Dell closed on the acquisition of the entity that owns the Fairmont Miramar Hotel in Santa Monica. Although Dell claimed that the structure of the acquisition avoided a reassessment of the hotel for property tax purposes, the Los Angeles County assessor’s office and local residents cried foul. Residents complained that Dell was not paying his fair share for local services and those schools funded by the property taxes. The dispute ended up in court, where a California Court of Appeal this week sided with Dell, holding that the property could retain its 1999 base year value for property tax purposes.


With the passage of Proposition 13, the value of California property for property taxes purposes was generally limited to the value of the property at the time of a change in ownership (or certain other events) of the property with adjustments for inflation. The name of the game has been to avoid a change in ownership of the property after it has increased in value. 

It has always been clear that a simple sale of the entire fee interest in property to an unrelated person would trigger such a reassessment of the base year value of the property. Similarly, where the property is owned by a corporation, limited liability company, or other entity, the purchase of all of the equity of that entity by an unrelated person would constitute a change in ownership. But, the state statute has had what many have called a loophole: The transfer of interests in an entity is not a change in ownership unless a single person obtains a majority interest in that entity. 

Fairmont Miramar Hotel Transaction

A consortium led by Dell tried to take advantage of this rule when it acquired the Miramar Hotel. At the time, the hotel was entirely owned by a limited liability company, Ocean Avenue LLC. And, the property had a property tax assessed value that had been set in 1999, which was much lower than its value at the time of the 2006 transaction. The consortium structured the acquisition so that no single person would have a beneficial interest of more than 50% of the LLC. Dell acquired just under a 49% interest, Dell’s wife acquired another 49%, and the balance was acquired by third-party investors.

Using a variety of theories, the assessor’s office asserted that this was effectively a change in ownership of the hotel that would allow it to be reassessed to its current value. The court rejected this. It concluded that even though the assessor felt that it might be “too good to be true,” the statute was clear that this kind of transaction would not trigger a reassessment of the hotel property (Ocean Avenue, LLC v. County of Los Angeles, 173 Cal.Rptr.3d 445 (2014)).


This case shows that California courts will apply the state property tax statutes strictly according to their terms. That means that creative taxpayers, like Dell, have the opportunity to structure acquisitions of properties in ways that may avoid property tax reassessments. For example, when there are multiple parties in the buying consortium and the property has historically been held in an LLC, they can use Dell’s strategy to avoid the reassessment if none of the parties takes more than a 50% interest in the LLC.

But, taxpayers should be careful about trying to engineer this structure if the property has not historically been held by an entity. With the Miramont Hotel, the property had been held by the LLC for over 6 years at the time of the transaction. If a seller transfers real property into an LLC before selling it, a different set of rules would usually trigger a reassessment with the Dell structure.  So, it is important to consider these issues when the property is acquired and before any restructuring.

Proposed Legislation

Although this opinion was only recently released, there has for some time been an effort to pass a legislative fix to close this “loophole.” Just last week, the state Assembly passed AB 2372, which would expand the universe of events that would result in a reassessment. If the bill becomes law, a structure like Dell’s would no longer avoid a reassessment. However, taxpayers may still find opportunities under the new law to avoid a reassessment if they plan carefully.