California Rent Control Measure Fails, Landmark Prop. 15 CRE Tax Reform Remains Too Close To Call

California voters have rejected Proposition 21, the second attempt in three years to relax statewide restrictions on rent control, while Proposition 15, which would raise property taxes on thousands of commercial properties in the state, remains too close to call.

At the municipal level, San Francisco voters have come out in favor of the city’s controversial Proposition I measure, which raises the city’s transfer tax rate from 2.75% to 5.5% on property deals between $10M and $24.99M, and from 3% to 6% on properties selling for $25M or more. With 607 of 609 S.F. precincts reporting Tuesday evening, Prop. I had 58% support, needing only a simple majority to pass.

As of 8 a.m. PT Wednesday, 59.8% of ballots had rejected Prop. 21, while 51.7% had been cast to reject Prop. 15, with 99% of state precincts partially reporting. Both measures need only a simple majority to pass. Prop. 15, colloquially known as the split roll, will likely not be called for a day or two at the earliest, poll watchers said.

“We’re not going to know the results of this election tonight, or maybe even tomorrow or the following day,” Alex Stack, communications director of Prop. 15 campaign Schools and Communities First, said in a press conference late Tuesday evening. 

Proposition 21 was the latest attempt by sponsor AIDS Healthcare Foundation to allow cities across the state to enact certain rent control measures. It would have reformed the state’s 1995 Costa-Hawkins Rental Housing Act, allowing cities to impose rent control on units at least 15 years old.

Prop. I’s sponsor, District 5 Supervisor Dean Preston, had called raising the city’s transfer tax rate a necessary measure in the face of a projected two-year budget deficit of as much as $1.7B. Proceeds are slated to go toward renter relief, permanent affordable housing and as aid for smaller residential landlords impacted by the coronavirus pandemic.

The transfer tax hike had drawn strong opposition from many of the city’s biggest property owners. Boston Properties, Brookfield Properties and others have contributed hundreds of thousands of dollars in opposition, with critics calling it an impediment to new construction and a threat to the city’s economy.

“I would be very disappointed if Prop. I did win," Emerald Fund CEO Oz Erickson said late Tuesday. "I think it was incorrectly marketed as a tax on the rich, and it dramatically affects the construction workers and the pension fund holders and will make it exceedingly difficult to build new construction in San Francisco.”

Prop. 15 would be a sweeping change to the state’s landmark Prop. 13 ballot measure, which since 1978 has afforded residential and commercial properties alike tax protections against the state’s rising property values. The measure applies only to owners with over $3M in holdings in California.

While both types of owners have enjoyed an annual cap limited to 2% on increases to assessed value, Prop. 15 will repeal the nonresidential part of Prop. 13, triggering a reassessment of commercial and industrial properties starting in 2022 and sending many property tax bills soaring. In Los Angeles County alone, for instance, the effect is an increase of $3.4B in tax revenue, according to a University of Southern California study.

Examples of how tax revenues will rise can come in the form of partial sales, which don't trigger reassessments. When Blackstone Group bought a 49% interest in San Francisco's 45 Fremont St. in 2017, it valued the property at about $415M, yet the tower is still assessed at about $236M, resulting in a property tax difference of close to $2M.

The upshot is an estimated $6.5B to $11.5B in additional annual tax revenue for public schools, community colleges and local government services, according to California’s nonpartisan Legislative Analyst’s Office. Proponents, led by the Schools and Communities First organization, say such a change to Prop. 13 is a long overdue and increasingly necessary measure.

Like the Schools and Communities First campaign, the No on Prop. 15 campaign said Tuesday it anticipates a delayed outcome in its favor. 

“Thanks to what is expected to be near-historic turnout, we anticipated that we would not know the outcome of Prop. 15 on election night," No on Prop. 15 spokesperson Michael Bustamante said.

"No on Prop. 15 has held a slight lead all night, and we continue to be optimistic that growing opposition to Prop. 15 seen in recent polls will ultimately drive us to victory when all of the votes are counted.” 

Proponents have stressed throughout the campaign that Prop. 15 would create a necessary windfall for local governments and schools around California.

"California has been falling behind on how we fund schools and local governments for a long time," Stack told Bisnow in the past.

Opponents included some of the state’s largest commercial real estate companies and property owners and have been led by groups like the California Business Roundtable and the California Business Properties Association, which argued that the hike hurts those beyond property owners and will hinder the state’s economic recovery efforts. Under triple-net leases common throughout the state, tenants are also directly exposed to property tax increases, opponents point out.

“This is still a tax increase on small business, and I know that we want to say it's not that and that it's all big corporations and big business, but a lot of them lease to small-business owners and they have triple-net leases,” California Retailers Association President and CEO Rachel Michelin said last month.

Another property tax measure too close to call on Election Day, Proposition 19 had 51.5% support as of 8 a.m. PT Wednesday morning. Among several changes resulting in a net increase in tax revenues, Prop. 19 would give eligible homeowners the ability to transfer their tax assessments elsewhere in the state. It has had the support of the California Association of Realtors and opposition of the Howard Jarvis Taxpayers Association.

“We are optimistic that when all the votes are counted, California seniors, disabled homeowners, and wildfire victims will get much-needed housing and tax relief, while delivering constitutionally protected funding for firefighters, local schools, cities, and counties," Yes on 19 spokesperson Becky Warren said in a statement.

UPDATE, NOV. 4, 8:38 A.M. PT: The ballot count has been updated. 

CORRECTION, NOV. 4, 1:55 P.M. PT: A previous version of this story misstated the market value of 45 Fremont in 2017. It was about $415M. The story has been corrected and updated.