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Affordable Housing Impact: Proposed Property Tax Struck Down

residential segregation in housingA referendum to change how California enacts property taxes, which some argued would address California's housing affordability issues, was defeated by the state’s voters. Proposition 15 was designed to create a split-roll property tax system in California, with commercial properties being reassessed to market price every three years while residential property would continue to be taxed under the rules of the 1978 Proposition 13, which restricts increases on assessments to no more than 2%. Owners with less than $3 million in total commercial property would be exempt from the initiative, which was scheduled to go into effect in 2020.

While a final tally has yet to be announced, Capital Public Radio in Sacramento is forecasting a voter rejection of Proposition 15 by a 52% to 48% margin.

Supporters of Proposition 15 argued that increasing property taxes on commercial real estate would encourage the conversion of these properties into residential developments, thus alleviating the state’s chronic housing affordability problems. Research by the Urban Institute determined that many commercial parcels in four major markets—Berkeley, Chula Vista, Fresno, and Los Angeles—were eligible to be converted from commercial or industrial use into homes.

The Urban Institute study, lead-authored by Sarah Strochak, a research analyst in the Urban Institute’s Housing Finance Policy Center, concluded that “long-term incentives for owners and developers to build/convert to residential uses are much stronger than for municipalities to rezone under medium and high price appreciation scenarios.”

Furthermore, supporters of Proposition 15 argued that higher commercial property taxes could be used to help fund public services, raising between $10.3 billion to $12.6 billion annually. The trade journal EdSource predicted that 40% of those funds would be used to finance operations at K-12 schools and California’s community colleges.

California Gov. Gavin Newsom and presumptive President-Elect Joe Biden supported Proposition 15 and the Chan Zuckerberg Initiative, the philanthropic organization funded by Facebook CEO Mark Zuckerberg and his wife, Dr. Priscilla Chan, donated $7.1 million to the campaign that promoted the referendum.

However, commercial property owners were opposed to Proposition 15, arguing that it would force businesses to leave California while companies that remained would be forced pay higher leases and other real estate-related costs including insurance and maintenance fees. The San Francisco Examiner reported opponents to the measure raised $30 million to sway voters.

“It would punish everybody that owns real estate and every tenant that has to occupy real estate,” said John Kilroy, CEO of Kilroy Realty Corp. in Los Angeles, at a trade conference in September. “It would be one of the most insidious taxes, particularly at a time of great economic uncertainty and recession.”

About Author: Phil Hall

Phil Hall is a former United Nations-based reporter for Fairchild Broadcast News, the author of nine books, the host of the award-winning SoundCloud podcast "The Online Movie Show," co-host of the award-winning WAPJ-FM talk show "Nutmeg Chatter" and a writer with credits in The New York Times, New York Daily News, Hartford Courant, Wired, The Hill's Congress Blog and Profit Confidential. His real estate finance writing has been published in the ABA Banking Journal, Secondary Marketing Executive, Servicing Management, MortgageOrb, Progress in Lending, National Mortgage Professional, Mortgage Professional America, Canadian Mortgage Professional, Mortgage Professional News, Mortgage Broker News and HousingWire.
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