The stakes were high for real estate in this year's election. Rev Projects is here to summarize the most important results in the Bay Area.
CALIFORNIA PROPOSITION 21
Voters rejected expanded rent control policies with a resounding "NO" vote of nearly 3 to 2, a landslide failure that mirrored its performance in 2018 in the form of proposition 10. The proposition would have allowed a variant of rent control called "vacancy control" which would limit the price of a rental unit even after it has been vacated by the previous tenant. Voters recognized that the housing crisis cannot be solved through distortions of market pricing, but rather through practical solutions like loosening zoning restraints and construction of housing supply. Thank you for your support in defeating this measure!
CALIFORNIA PROPOSITION 15
The proposition to raise commercial property taxes was rejected by voters, though by a slim margin of 51.9% to 48.1%. It would have re-assessed properties starting in the 2022-2023 fiscal year, creating an overnight increase in property tax rates on commercial properties. In many cases, landlords would not afford the higher taxes, while other landlords would be forced to pass through the tax costs to their tenants, creating a significant burden on retail tenants who are struggling through the pandemic. California voter's rejected this proposition and prevented the abrupt and traumatic increase in costs that would have hurt an already sluggish economy.
SAN FRANCISCO PROPOSITION I
San Francisco voters approved Proposition I, which increases property transfer taxes on sales of commercial properties. It is an incredible overreach by the city treasury: on sales greater than $25 million, the rate doubles from 3% to 6% of the gross sale price. Commercial institutional landlords were not expecting this magnitude increase in their sales costs, and will shatter the financial performance of incumbent landlords that had plans to exit value-add properties. One of my investors, who works for an institutional real estate fund, noted that they would "buy a property for $40 equity plus $60 debt, and if you decide to sell it one year later for the same price, you get back 94%, or now only $34 equity, which is a 15% hit on your equity for nothing." The higher sales costs will be underwritten into the pro-forma cash flows of future acquisitions, but current landlords will take an overnight hit in their property values.