🔥 California's Real Estate Crisis & The Big Solution: Exclusive with Robert Lapsley!

THE SELF STORAGE REPORT — EPISODE TRANSCRIPT Episode: 🔥 California's Real Estate Crisis & The Big Solution: Exclusive with Robert Lapsley! Guest: Robert Lapsley — President, California Business Roundtable Host: Chris Berg — Abernathey Development Recorded: January 19, 2024 Video: https://www.youtube.com/watch?v=u6YiE12876w Key topics: Taxpayer Protection Act qualified for the November 2024 ballot with 1.43 million signatures; Measure ULA, the LA mansion tax, passed at 56% and faces invalidation; the Upland decision and Proposition 218 vote thresholds; the 2020 split-roll attack on Proposition 13; California Apartment Association and statewide rent control; governor and legislature's state supreme court suit to strip TPA from the ballot; $17 billion in state homeless spending; $1.20 per gallon in gasoline taxes; a proposed $250 billion single-payer system and 20% top income tax; CEQA reform, an 18-month litigation cap and deferred city impact fees; Westfield Mall keys handed back at Powell and Market; Arnel Development and George Argyros Note: Speaker attribution reconstructed from raw captions. Light cleanup of transcription errors only; wording preserved. Timestamps and YouTube chapter markers removed. Turns marked [attribution inferred] could not be attributed with certainty. ————————————————————————————— Chris Berg: Is California open for business, and what you must know about the Taxpayer Protection Act here in California. Welcome to the Commercial Real Estate Report. I'm your host Chris Berg, head of Business Development for Abernathey Holdings. We build Class A self-storage sites here in California and Arizona. Joining me today, a very special guest. He's the current president of the California Business Roundtable, and also, for our real estate friends out there, vice president of Arnel Development, one of the biggest private real estate companies here in Southern California, Robert Lapsley. So Robert, welcome to the show, it's great to have you. Robert Lapsley: Chris, thank you for the invitation, and thank you for what you do in addressing the issues facing California. Chris Berg: Thank you. I'm excited to see if we can't, you know, make some shifts here in what's happening. We'll talk more about that as we get into the conversation. And just for people to better understand and appreciate your real estate background, let's start with VP of Arnel Development. What was your role there, and then what were you doing? Robert Lapsley: So I was on the business development side. I had the great honor of working with the U.S. ambassador George Argyros. He was the founder and president, CEO of Arnel. Built an incredible company with a diverse portfolio between multifamily, commercial, retail, amazing holdings in Southern California. And so I had worked with him over the years, went into the company to work with them, has served as a consultant with them, and then has carried that work actually up here on the issues facing the real estate industry. It's been just a great opportunity for me to try and help pay back. Chris Berg: So now you're president of the California Business Roundtable, and I want to start here because I think it sort of lays the ground where we're going to go today. You recently were on the Real Talk podcast with my friend Andrew Kersch, and I'm not going to quote you exactly, but essentially you said, hey, from a public policy standpoint in California, real estate is under attack at every level. Why? Robert Lapsley: So when you look at the makeup of the California capital, when you look at where California's public policy is going with our legislature, they are continuing to try and implement a very progressive policy agenda. Progressive being defined as, you know, essentially shifting the costs of creating new programs and essentially balancing the whole income inequality issue in California. So the plans are to be able to look at how they provide cash grants to lower income people on top of all the services that we pay for through our taxes. You look at, number one, how do we create a single-payer health care system. Make no mistake, that is in the plans and there is huge efforts to try and do that. That's a $250 billion a year program to be able to shift it away from private and move it to a public health care system in California. There are committed advocates for all of these types of things. In addition, you have to pay for these programs. You have these same groups committed to believing that individuals who make over $1 million should pay a personal income tax in California of 20%, plus a wealth tax, plus all the other taxes. And it doesn't stop there, because the insatiable need for paying for new programs never stops, in addition to salaries and pensions for our current state workers. So we are in this loop right now of how to push these things back. But the target is real estate, because real estate can't move. Oil and gas has moved, tech is moving, financial services has moved to other states. Everyone is aware of our outward migration, for both being able to afford a home and for being able to work and have a job. Real estate that has holdings here can't do that. So that's where the bullseye is coming in, to figure out how to tax them more to be able to be a big part of paying for these programs. Chris Berg: And real estate is a supply and demand business like any business, right? I mean, I'm from North Dakota. You go to North Dakota, there's not as much demand there for land, obviously there's more supply, right, so the price is lower. And so people moving, you talk about the out-migration, they understand, maybe they don't, but the supply and demand piece, that hey, let's go for example right now to San Francisco, right? We see big developers handing the keys back to banks, right? So now all of a sudden you've got the value of this real estate way below what somebody else paid for it, which is going to have a dramatic impact, I'm assuming, on the tax revenues in San Francisco. Maybe they don't see it now, but they're going to see it someday. Can the state now sort of see that from a bigger picture and go, hey, we've got to do something to attract people back into our state? Robert Lapsley: Well, that is a fantastic point and it summarizes it very well. But what's interesting there, and San Francisco is a great example, Westfield Mall handed the keys back on the downtown mall, which was a beautiful mall. I used to live in San Francisco. Beautiful mall, a great redevelopment, they changed that whole neighborhood downtown, Powell and Market. And so they give it back, and now their tax revenue is basically dried up. But there's no real understanding or recognition from the city government or advocacy groups of what that means in just a couple years for funding city services. They essentially assume they will move on to tax it in a different way. So it makes no sense, there's no logic to any of this. Measure ULA in Los Angeles last November passed with 56% of the vote, the quote-unquote mansion tax, one of the most poorly drafted policies ever conceived, because what it has done is exactly what you just stated. It was estimated at $1 billion a year. It's frozen the market on all fronts and has now led people to say we're no longer investing. And so they're never going to get what they think they're going to get. And so, but it's not going to be changed. Chris Berg: Unless. Let's get into the Taxpayer Protection Act. If that were to pass, does ULA become retroactive? Let's just start, for people that maybe aren't familiar with TPA, Taxpayer Protection Act, what is that exactly, and is it 100% going to be on the ballot in November? Robert Lapsley: So the California Business Roundtable, my board, made up of senior executives across all sectors of California's economy, you know, has taken a position over these many years that where there are bad policies for California's economy and bad policies that will impact our job growth, we're going to stand up and fight. And that's exactly what we've been doing. And a large part of this is both in the legislature, in the courts, but also a large part of what we do now is in the initiative process, because that's where the public employee unions are trying to gain advantages, particularly around taxes. So case in point, in the middle of a pandemic, when we're facing a potential, you know, catastrophic recession, they put on the ballot in 2020 a $13 billion a year tax increase on commercial, retail, industrial property called a split roll property tax, that changes Proposition 13 at its most fundamental core, in order to, you know, gain that money, thinking they would have an opportunity to pass it. Fortunately we had business leaders around the state who coalesced. We ran the campaign from the Roundtable, we defeated it. But it doesn't stop. So coming off of those battles, we've defeated, in coordination with the California Apartment Association, a statewide rent control effort twice. It's on the ballot again in November, we'll defeat it again. But it keeps coming. So my members said, what can we do to get out in front of all this and actually create some good policy that will provide long-term checks and balances for California, for all Californians, most importantly, who have to live here with the highest cost of living in the country, but also be able to send a message for business that there is some certainty and some protections, so that we want you to come here, relocate here, invest here, grow here. So what we put together, and with their leadership, we qualified for the November 2024 ballot. We got 1.43 million signatures on the following initiative policy. Number one, if the California legislature passes a tax, that tax does not go into effect until it's been voted on in a statewide election by the people of California. All voters will have the right to vote on future taxes. And where that came into effect was under Jerry Brown. That was his policy in his third term. He would not sign a tax increase from the legislature unless it went to the ballot. And with that we got Prop 30, which was a tax on high income earners that passed, but it was on the ballot, people voted on it. Number two, the same thing applies at the local level. All special taxes are a two-thirds vote. That currently exists under Prop 13, except for one category, which is citizen-backed initiatives at the local level that are qualified through the ballot. That used to be a two-thirds vote under Proposition 218. In 2018 the courts arbitrarily changed that from a two-thirds vote to majority vote in what was called the Upland decision, around a cannabis tax. Since then we have had major efforts like Measure ULA in Los Angeles where they're using that majority vote to try and raise taxes all over the state. There was no reason why it should have been lowered to a majority vote. So what we're doing is we're changing it in our initiative from majority vote back to its original two-thirds vote. In addition, we have all new provisions on transparency and accountability language on the ballot, so when you actually get your ballot and you're voting on a tax, you see how much it is, how long you're going to pay it, how much it raises and where it's going. We have language in there that ensures that for all taxes the money has to go where it says it's being spent. We have new language defining what's a fee and what's a tax. And then we also finally have language in there that, for the first time ever, mandates that any ad valorem property taxes raised in a county must be spent on the essential services in that same county. There's no more taking the county money and moving it to Sacramento for their various schemes and progressive agenda and then doling it out however they want. So those are the major provisions, and that is what we received tremendous support on to qualify this initiative. Chris Berg: So, kind of saying this in jest, but I'm hoping you're going to give me the answer I want to hear. So in order for the TPA to pass, it's just going to be 50 plus 1, it's not two-thirds? Robert Lapsley: Correct. So again, a very astute question. So two things on the Taxpayer Protection Act. Fully qualified. Since we're fully qualified for November, the legislature, the progressives, the public employee unions, the League of Cities are the major opposition to this measure, because this threatens the very core of the progressive agenda that we spoke about earlier and how they fund it. If they believe, if you give people the right to vote on what they have to pay in taxes, that they are going to do something different from what those groups believe should be done for California. There's no way in the world that they believe people in this state should have the right to vote on these taxes. They want that vested with the legislature, who they try to control, get elected. So this is really striking at the very heart of where we're going as a state in the future. We believe that we trust the people of California to make the right decisions. We believe they have made the right decisions on most measures and that they should have that power. So what the legislature did is they have attacked us in two ways so far to stop this measure going forward before people even get a right to vote on it. So one is the governor and the legislature have filed a lawsuit with the state supreme court saying that we should be taken off the ballot in November, people shouldn't even be allowed to vote on it, because we are a major revision to the constitution that will disrupt current government services. So we have a large legal team that is fighting that effort. We are currently submitting the various briefs and now we are finishing that process in February. So then the state supreme court will make a decision about those arguments, probably in March, April. I can tell you unequivocally that if we come off the ballot, if the state supreme court takes us off the ballot, then there is a huge ongoing concern for the future of California, especially for business, that a one-party state will now go from the state supreme court all the way on down through local government, and we will have no opportunity to be able to make positive reforms or changes in this state that will help Californians and will help business. So you will see it play out. And then they also have passed a measure in the legislature. In the last two weeks they introduced a constitutional amendment that was passed by one vote that changes the California constitution, which has been in effect since 1879, that says any statewide initiative is a majority vote. They passed something to change that in two weeks that says if you raise a vote threshold on a tax, any tax, then you must also pass by that same vote threshold at a statewide level. So what that means in practical terms, very quickly, is because we're closing that Upland loophole, to say a previously special tax that was a two-thirds vote became a majority, we're raising it back from a majority to a two-thirds vote, we're increasing the vote threshold on a tax. Well, technically that's true, but we didn't do it. The people of California didn't do it, they didn't get to revote on it. The courts did it arbitrarily. Well now, under this provision that the legislature passed, we are supposed to get a two-thirds vote next November in order to pass this, for the first time ever. This doesn't stop us one bit. We actually believe it's going to fail on the ballot when people realize that it's a trick to make it easier to raise taxes. And so all of our research shows it can be defeated. So we actually are just not, you know, we'll run a campaign against it, but it doesn't faze us one bit in what we're doing. Chris Berg: So just for clarity, based on what you just said, that in November, if it's on the ballot, you're going to need a two-thirds vote for it to pass because of what the legislators did a couple weeks ago? Robert Lapsley: So, technically that's true. However, first it has to pass, otherwise it doesn't apply to us. If it fails, then all we need is a majority vote. Chris Berg: Got it, I think. Robert Lapsley: And there's some other provisions that guide that, but all of our research shows it's going to fail, so it won't even impact us. Chris Berg: Okay, great, thank you. The other thing that's really important that you mentioned, or at least hinted at, that I want to give people clarity on, is that if this were to pass in November, this becomes constitutional, within the California constitution, correct? Robert Lapsley: That is correct. Chris Berg: Very powerful. Explain why that's so powerful. Robert Lapsley: So, California has two types of initiatives. One's called a statutory initiative and one is called a constitutional initiative. A statutory initiative is essentially like passing a law by the people. It can be changed by a two-thirds vote of the legislature. They can change anything in it. So you're basically taking a risk that even though you do all of this and the people vote on it and they tell the legislators what they want, the legislators will go back in, and they have, and they'll change it. But it does take a two-thirds vote. A constitutional initiative actually goes into the California constitution, and what that means is that if there is going to be a change on it, the people of California have to revote on it. It can't be done by the legislature. That is a huge difference in providing certainty and long-term protections to keep these policies in place. Chris Berg: Thank you for making that point, very powerful. We all know that, you know, taxation without representation, there's been wars fought over that, and that's why I think TPA is so important, because it's the ultimate taxation with representation when it's a one-to-one vote with the people. So then let's move on to ULA. I'm hearing a couple different stories. Let's say TPA passes in November. Does it automatically nullify the ULA in LA, or does it go back to a second vote, but now it needs two-thirds? Robert Lapsley: So this is a very important part of something that we spent a lot of time analyzing and considering as this policy was drafted, before it went before the people to get signatures. When we proposed this policy, we drafted it in 2021 and worked on it, then ultimately went out for signature gathering in 2022. And we knew that the minute that this initiative went before the voters to get their signatures, again 1.43 million signed it, we knew that the public employee unions, the progressives, the local government would rush to the ballot in 2022 to pass taxes using that Upland loophole before this measure could take effect. There would be a rush to the ballot. And so we wanted to send a signal to say, look, if you're going to rush to the ballot, you need to be able to be in compliance with our measure or risk being invalidated if you don't get a two-thirds vote. So what we did was, we have a provision in the Taxpayer Protection Act that when we pass next November, it actually becomes effective on January 1st of 2022. So any taxes not in compliance with the Taxpayer Protection Act that have been passed since that time, 2022 to 2024, they risk being invalidated. Now, Measure ULA, the mansion tax, will be one of those measures that gets invalidated. They didn't get a two-thirds vote, they were not in compliance with our measure. And so what we provided for in our measure is to say, look, you will be invalidated, you didn't comply, however, we'll give you one year to go back out and get a two-thirds vote. So what we call a cure period, a two-thirds vote of the electorate, so you can continue that tax, but you have to get a two-thirds vote, and you have to comply with the accountability provisions, et cetera. And so that's where Measure ULA stands right now. We are the only measure, since the court cases have lost in challenging it, that is going to impact it. But we will impact it directly, we will invalidate it. It's frankly the only hope for the policy to try and fix it, change it, or get rid of it, unless they go out with a two-thirds vote. But I guarantee you, if they do, unless it's substantially changed, we'll run a campaign to defeat that too. Chris Berg: You're very politically astute, and so just to be fair, you've got to give the other side credit, right, for dubbing it a mansion tax. That was good political branding, right? Robert Lapsley [attribution inferred]: True. Absolutely true. Just like all these other taxes are basically being dubbed a homeless tax. Chris Berg: And I want to get to that. Before we do, I know ULA is being proposed in San Diego. What kind of rumblings are you hearing? Is it just the city of San Diego, the county of San Diego, and what are you hearing? Robert Lapsley: So we're tracking taxes all over the state, particularly at the local level, and obviously part of that is because we want to see what's in compliance with TPA and what's not. And I can tell you that in 2022 there were a multitude of taxes that passed at the local level that were in compliance. And we have given assurances from, you know, our team, that, you know, we've had questions raised to us, are we in compliance, you know, are we good? We're like, you're good. Right? We want to be helpful. If the local community wants to pass taxes, they should pass them so that the local community gets the services or the facilities and the infrastructure that they need. We're all in support of that. That makes a better California. Now in these other cases, what happens on these things is the money never goes where it says it is. Part of Californians' frustrations these days, right, are you pay the highest taxes in the country, but where does my money really go? Because, you know, you're paying $1.20 per gallon in gasoline taxes now, when we have the highest prices, right, gasoline per gallon. Everyone's like, why are we so expensive? Well, part of that is you pay a buck 20 a gallon in taxes. So, okay, you know, where is that money going? Well, you definitely see infrastructure projects out there. You know, people may not pay as much attention to them, but the money is going to projects, you're seeing improvements, there's road construction all over. Money is flowing right now. So we can argue the amount, but money is flowing. Now on the other side of that, you've got the homeless situation gets worse. What in the world? Where is all that money going? We've supported billions of dollars of one-time funding from the Roundtable for the governor's proposals to be able to help with homeless, but you never see that money get anywhere. Chris Berg: You don't see anything, right. I know that was the ULA, the principle of the ULA transfer tax was to affect the homeless situation in downtown. So I saw a stat, I think it was the last four years, and you may know this better than myself, but the last four years the state of California spent $17 billion, with a B, dollars on the homeless situation, and it actually got worse, correct? So that seems almost impossible. You could have paid rent for everybody for, you know, probably a year or two with the $17 billion, and problem solved. So where did that $17 billion go? Robert Lapsley: Well, that's the question everybody's asking. So there's going to be arguably some oversight hearings from the legislature to supposedly talk more about that, to look at that. There's some reports that are coming out. But again, here's the dirty little secret on cities and counties and local government. They get that money allocated, but do they have a legal, you know, mandate that that money has to go exactly where it says it's going? The answer is no. You're depending on them to do the right thing, you're depending on them to do what they're supposed to do. So you have money that goes into salaries and pensions for local government workers. When they get their raises, it's what we call the float. It provides the opportunity to take care of other needs and priorities. Now again, it's up to local government, maybe those are the right things to spend it on. But when you say it's going to homeless, from our perspective it darn well better go to the homeless, right? Because that's what people care about. From a humanistic standpoint they care about those people on the street, we all do. Well, why can't we make progress on that? Where's the money going, and then how much are we spending, right? So again, we're trying to provide checks and balances with our measure to say, if you raise taxes and the money's going to homeless, it's going to the homeless, or we can hold you accountable legally. Chris Berg: Again, I say this in jest. If you want to comment, great; if not, we can move on to my last question. But maybe if we all just pretended like we were foreign leaders, then it would all get cleaned up, like what happened in San Francisco. Let's move on. So I want to share something with you, and I know you guys do a lot of polling. Currently, at my church we're doing this 21 days of prayer in the morning, and so it hit me this morning where I was like, I've been back here now for probably 9, 10 months, and so many people I talk to, Robert, say, Chris, I feel like this state is literally pushing me out. Like, I love this state, it's got so many amazing resources, from ag to energy to the weather, and then I feel like the state that I love is pushing me out of it. Is that a fair assessment from these people based on some of the polling that you've seen, and if so, what's it showing you? Robert Lapsley: Yeah, so we are a very intensive research organization for the business community, but mainly for policy makers. We provide them with that information so they hopefully can make more informed decisions on the policies that they're, you know, voting on. It's a great question, because it really is the most important question today for where California is going. And number one, Californians have on a consistent basis the highest frustration with California as a whole and their policy makers because of the cost of living. The cost of living is driving everything. Behind that, the number two issue is homeless. Behind that is crime. We haven't even touched on retail theft and the problems there of kind of the fabric of our society. But it's the cost of living. Why? As we know, the highest housing cost practically in the nation. How do you provide, you move here, come here, grow up here, how do you get into a house these days? My heart breaks for, you know, the younger generation who have a job, who are doing all the right things in life, and yet we aren't providing them with housing opportunities that they deserve, to build wealth creation for their families in the future. It's insane. It's insane. But again, there's no effort, you know, there's efforts going on now, but there's not this kind of leadership you would expect to be able to drive. So people are moving. Well, Chris, we're glad you're back, so welcome back. Chris Berg: Thank you, thank you very much. It's great to be back here, because I drive around and I just go, gosh, the state is so incredible. If we, it's amazing, and I'm trying to say this as I dance between the raindrops, so I'll say it this way: if we had people that were more open to, I think, the business community, we'd be Florida times a million. I mean, people would be coming here in droves, there would be a ton of revenue coming in. So I had one last question for you and I think it may have just missed my mind because I'm thinking about, man, California, all these people, like it's the most incredible place on the planet. Robert Lapsley: Yes, and we have to keep it that way. But we have challenges, and so we have to ensure we have the policies to meet those challenges, and our problem is we're not seeing the policies we need. Chris Berg: You just reminded me of my question. You've been here now for a long, long time, so let's go hypothetical. You're king for a day of California. What do you do to change this housing situation? Robert Lapsley: So that's certainly a multi-layered question. But number one, we have the land available to create the housing that we need. It's a combination of infill, you know, in urban environments. It's a combination of suburban, because that's really where people want to live, a single family home with good schools and hopefully a job close by, not having to drive from Riverside to LA every day, to be able to do that. So number one is we have to reform the California Environmental Quality Act, CEQA, to provide certainty, so that when you propose a development for housing, that if there's going to be lawsuits against it or opposition, there's a certainty on how long that can go. Because we have huge projects now that have been proposed and they're on their seventh and eighth year of litigation with no end in sight. If we can say all challenges to a specific project have to be done by 18 months, expedite the courts, create a special court to hear these cases, you know, some of these things, that is key. Number two, the cities are charging huge impact fees, so that cost to be able to build these projects. One is, we should defer the impact fees from the cities to actually be paid until the project has been built. Then the city gets all its money and then, you know, the thing has been done. Here you're paying it, it's still being litigated, and you're having to comply with the city schedules, and so you're just bleeding money. That's unsustainable over this whole time frame. Or, you know, be able to provide the state to be able to backfill on some of these fees down to local government with a fund, and then set a more reasonable fee schedule. So there's all different ways that we can get at this. But because of some of the agendas up here, there have not been a willingness to be able to do that, and that is what has continued to hurt us, and now it's causing people to leave, to your point. I mean, the numbers are staggering, you know better than I do. Chris Berg: And let's have this conversation again, Robert. I know this isn't the last time we're going to do this, because there's so much happening in an election year and so much happening in this, like you said, it's just such a beautiful, great state. I think about the ag resources, the energy, and what could be if we were to unleash that, do as we've seen in other areas of the country. So thank you so much for the time, and we wish you the best of luck here on the TPA in 2024. Robert Lapsley: Well, we appreciate it, and look forward, anytime we can be of help please let us know, and we just look forward to making California better on all of these issues. Chris Berg: Thank you again. I hope you enjoyed the show. Share this with your colleagues and friends. Subscribe here to the Commercial Real Estate Report YouTube channel. We'll do this again very, very soon. — END OF TRANSCRIPT —