The federal elections have far-reaching implications for the mortgage industry this year, but some state election issues also are concerning for lenders.
Examples singled out by industry groups include two California ballot initiatives, one of which could change how commercial property is taxed, the other of which would change rent control policies.
Both the Mortgage Bankers Association and the California MBA worry these ballot measures could complicate property ownership in ways that could have a negative impact on loan performance and access to credit.
While California policies can be idiosyncratic, such issues take on national importance because the state is influential within the mortgage industry as a policymaking trendsetter.
"Think of a major lender in this country, and I imagine nearly every single one of them has a presence in California," said Mike Flood, a senior vice president in the MBA’s commercial and multifamily division. "Also, what happens in California can happen in other states."
This election season, Californians will vote on Prop. 21, which would roll back a 1995 law that put rent control in the state's hands, thereby allowing it to revert to municipal oversight. Proponents such as Sen. Bernie Sanders, I-Vt., and the California Democratic Party argue that this measure would increase the availability of rent-controlled units, while opponents, including the CMBA, MBA, the state's Democratic Gov. Gavin Newsom, the Republican Party of California and several real estate companies argue that it will likely make property ownership more expensive and discourage construction in a state that has a chronic housing shortage. The MBAs also say the passage of Prop. 21 could result in complexity that could discourage lending.
"We have 482 cities in our state, so lenders looking at financing rental properties here would certainly have a lot to consider when they were making decisions," said Susan Milazzo, CEO of the California MBA.
Prop. 15, which would subject commercial property owners to regular tax assessments rather than assessments based on purchase price, could strain struggling businesses and hurt loan performance, Milazzo said.
"Especially if you are talking about a business that has owned its property for 30 years, that business is going to see a significant increase in taxes," said Milazzo. "In an environment where we are not even starting a recovery from a global pandemic, this would be devastating to our state."
Of the two ballot measures, Prop. 15 is likely the more difficult of the two to defeat, especially given that in 2018, a similar measure to Prop 21, Prop. 10, which also aimed to return power to local municipalities regarding rent control measures, was rejected by 59% of California voters.
Almost $3.7 million has been raised in support of Prop. 21 by advocates of locally determined rent-control policies, whereas opponents have donated nearly $12.5 million, according to the nonpartisan National Institute on Money and Politics.
By contrast, Prop. 15 opponents were being outspent by proponents, who are billing the proposal primarily as a means to fund education in the state.
Nearly $11.5 million in political donations support it, compared to almost $3.4 million donated by those opposed, according to the National Institute on Money and Politics’ analysis of more than 73% of available records.
Proponents of the both ballot measures have alleged in a lawsuit that there have been improprieties in political fundraising and statements made by opponents. Opponents have refuted these claims.
The preponderance of Democrats support Prop. 15, including Gov. Newsom. Former Los Angeles Mayor Antonio Villaraigosa, a Democrat, and the Republican Party of California oppose it.
Another factor that may play a role in whether or not Prop. 15 passes is the fact that it splits the tax rolls, leaving residential properties exempt from the reform. That means it could have a mixed impact on real estate overall, according to
Higher commercial tax bills are a concern for commercial lenders in Prop. 15, but there also could be a "very, very marginal" positive impact on housing supply, said Laurie Goodman, vice president of housing policy at the institute and one of the authors of the report.
Prop. 15 could create tax revenue incentives to rezone residential areas as commercial but it also could encourage conversions to residential use to lower tax burdens. The study finds the former will likely carry more weight because the apportionment to schools limits other tax revenue opportunities.
"It's more likely to increase housing supply than to hurt housing supply. It also pretty clearly shows that it's not going to make a significant dent in the housing shortage in California," said Patrick Spauster, a research assistant at the institute, who also contributed to the report.
If Prop. 15 does pass, the one silver lining that commercial lenders may want to look for is the opportunity to finance conversions, said Goodman.
"In this whole debate, the role of developers who hold commercial properties that could convert to residential has been largely overlooked," she said. "I think that could be an opportunity."
