We have a major election coming up in November, with the presidential seat up in the air between incumbent President Donald Trump and former Vice President Joe Biden. The outcome of this race will have some implications for real estate owners and investors, but that's not the focus of this article.
In this article, we're going to examine a couple of ballot items specific to California – propositions 15 and 21 – that, if passed, would have MAJOR impacts on the real estate industry in California. This brief article is intended to explain both propositions simply, and show what effect they would have on the California real estate market and California economy. Let's go in numerical order and start with Prop 15.
Proposition 15
To understand Prop 15, let's briefly discuss the passage of 1978's Prop 13 first. In 1978, Californian voters passed into law Proposition 13, which would change the taxation of all real property in CA. Previously, taxation was based on market value of the property each year. So, if your house or shop that you owned went up in value 10% over the last year, your property tax went up in direct proportion to that. Prop 13 stopped this type of taxation - it created a new system where property value was only assessed when a property was sold or transferred. The tax is a maximum of 1% of that assessed value (plus any new voter-approved taxes, which vary by county - the average property tax is around 1.15% in CA). Each subsequent year, a maximum of 2% increases are allowed in the tax... And that's Prop 13. It has been great for property owners, as it significantly caps the amount of property taxes owed. On average, property values in California go up more than 2% per year, so the longer you hold onto a property, the cheaper your tax bill will be in comparison to your property's market value. Now onto Prop 15.
Proposition 15, on the ballot for this coming 2020 election, would introduce a split-roll tax, which simply means it would treat commercial property differently from residential property. While it will not affect the way residential, agricultural, and some small businesses are taxed, it will revert taxation of all commercial property to be based on market value again. Essentially, it is a partial repeal of Proposition 13, for commercial properties only. The exemption for small business owners applies to businesses who own less than $3 million worth of real estate across the entire state. The new tax revenue will be used mainly on public schools and community colleges. Proponents say it will help schools, and opponents say it will hurt businesses and de-incentivize entrepreneurs from starting businesses in California, as it is already ranked as one of the least business-friendly states in the country. Some proponents within the real estate industry say it will force long-time owners to improve or sell their properties, which will allow for a more competitive commercial real estate environment, spurring good buying opportunities. Opponents say the majority of those tax increases will be passed on to tenants in the form of higher rents.
Proposition 21
Proposition 21 would alter the law relating to rent control on multifamily housing. Currently, rent control is dictated by the Costa-Hawkins Act of 1995. This act allows local governments to enact rent control laws on any residential property, except those that were A) first occupied after February 1st, 1995, and B) have distinct title, such as single family homes, condominiums, and townhomes. Currently, under Costa-Hawkins, there is vacancy de-control, which means that when a unit becomes vacant, a landlord can set the rent to market levels.
If passed, Prop 21 would allow local governments to adopt rent control laws on any housing except A) those first occupied in the last 15 years, and B) those owned by natural humans who own no more than 2 housing units with distinct titles, such as houses, condominiums, or townhomes. Prop 21 would also limit rent increases in the first 3 years of a new tenancy to 15% (plus any increase allowed by local ordinance). This would effectively remove vacancy de-control.
A very similar proposition was put on the ballot in 2018 called Proposition 10. It lost, with 59% of the vote going against it. Here it is again, sponsored by the same people. Proponents say it will stop excessive rent increases from making living in California too expensive. Opponents say it will de-incentivize builders and property owners from building and improving property, thereby hurting tenants in the long run.
I hope this was an informative and quick overview of these 2 important California propositions that would impact the real estate industry. For more information, visit Ballotpedia.
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