California extended a property tax exemption for solar projects placed in service by the end of 2026.

The projects remain exempted until there is a change in control.

The exemption had been scheduled to expire at the end of 2024. It has been extended multiple times since the 1980s. California Governor Gavin Newsom signed a bill, S.B. 1340, on September 18 extending the exemption, but urged legislators to consider the effect on local tax collections before extending it again after Kern County objected that the exemption shifts the cost of public services used by increasingly well-established solar companies to other property owners.

The California constitution limits property taxes on real property to 1% of the 1975 value or the value upon more recent construction, plus an adjustment for inflation that is limited to 2% a year.

A change in ownership triggers a reassessment to the current value.

Section 73 of the California property tax statute effectively exempts active solar systems from assessment until there is a change in control after the initial construction.

Avoiding a change in control is a significant issue in any M&A transaction where California solar projects are involved.

A change of control is considered to occur when more than 50% of both the profits and capital interests in a partnership are transferred. The state focuses on whether someone is gaining control in a transaction rather than someone is losing it.

California clarified in late 2021 that partnership flip transactions, which are the most common way to raise tax equity to finance solar projects, do not trigger property tax reassessments, but left some potential gaps that require attention to detail. (For more information, see “Partnership Flips and California Property Taxes” in the December 2021 NewsWire and “California Split-Roll Initiative Upsets Solar Developers” in the June 2020 NewsWire.)