Looking to November: A Summary of Upcoming Real Estate–Related Ballot Measures

At this November’s general election, San Francisco voters will weigh in on a number of ballot measures that could have long-lasting impacts on real estate development and land use in the City if passed.  Coming on the heels of the 8 Washington vote in November of 2013 and the Prop. B vote in June, some of these initiatives would continue to stifle responsible growth, while others are designed to push back against these recent development-unfriendly measures.

A summary of these initiatives:

Competing Housing Metering Ordinances.  Two competing initiatives will affect the production of new housing in the City.  An initiative proposed by Supervisors Avalos, Campos, Kim, Mar and Yee would impose additional conditional use criteria on housing projects if the City’s ratio of affordable to market-rate housing falls below 30%.  Mayor Lee introduced his own counter-initiative that would prohibit additional red tape designed to prohibit, condition, or otherwise restrict new housing based on an affordability ratio.  Mayor Lee’s ordinance would apply to projects in area or redevelopment plans, such as the Transit Center District or in the Eastern Neighborhoods.

Importantly, projects that submit environmental applications before January 1, 2015 will not be subject to the Supervisors’ initiative.  For most projects, a prerequisite to filing an environmental evaluation application is receiving a Preliminary Project Assessment (“PPA”) letter from the Planning Department, which takes 60 days from submittal of a PPA application.  We recommend project sponsors submit PPA applications no later than the start of October in order to ensure they can receive a PPA letter and can submit an adequate environmental application prior to January 1, 2015.

There is still a possibility that the Mayor’s Office and the Supervisors will reach a compromise and pull the dueling initiatives from the ballot, but the time to reach a solution is fast approaching:  if at least two of the Supervisors sponsoring the initiative withdraw their support by Tuesday, July 29, the housing metering initiative will not appear on the ballot.  If all five Supervisors withdraw support, or if the Mayor wishes to remove his initiative, August 1 is the deadline.

“Surtax” on Sale of Residential Property within Five Years of Purchase.  Sponsored by Supervisors Avalos, Campos, Kim, and Mar—four of the five sponsors of the housing metering initiative—the so-called “anti-speculation” initiative would add a surtax to the sale of most residential buildings between 2 and 29 units in size, if the building owner buys and sells the building within a five-year period.  The surtax could be as high as 24% of the sale price if sold within one year of purchase, and declines to 14% if sold within five years.  After five years, there is no surtax.  A number of sales are exempt from the surtax, including owner-occupied housing, buildings sold at a loss, buildings sold as a result of the owner’s death, and new housing.  

Starting January 1, 2015, the surtax would apply to all sales made within five years of purchase, even those buildings first bought prior to January 1, 2015.  The City Attorney’s office has confirmed that there would be no “grandfathering” for properties purchased before January 1, 2015.  That means, for example, a family that put its life savings into a three-unit building in 2011 will be subject to the surtax.

Another obviously troubling issue is the staggeringly high amount of the surtax, which applies to the sale price itself, not just the difference between the purchase and sale prices.  If our family referenced above purchased the building for $2 million in 2011 and sells it for $2.5 million in four years, it will pay a surtax of $350,000.  If our family purchased the $2 million building in 2014 and sells it for $2.5 million within one year, it will pay a surtax of $600,000, meaning the family will actually lose money on the sale.

Speaking at a recent public hearing, Supervisor David Campos acknowledged that if the initiative passes, the City expects it to be challenged in court.  The sponsors have until July 29th, or August 1st in the case of unanimous agreement, to withdraw the initiative.

Pier 70 Re-Zoning.  One of the projects hit hardest by June’s Prop. B requiring voter approval to increase height limits along the City’s waterfront was Forest City’s Project at Pier 70.  Its 28-acre mixed-use development—which will create nine acres of waterfront parks and add between 300 to 600 new affordable and middle-class homes on a dilapidated pier—is dependent on a site-specific height limit re-zoning from 40 feet to 90 feet.  

With Prop. B currently the law of the land in San Francisco, Forest City has to submit its rezoning request to the San Francisco voters, essentially creating a referendum on the project similar to 8 Washington.  Committed to working under Prop. B, Forest City gathered enough signatures to qualify an initiative onto the November ballot raising the height limit and paving the way for the project to move forward.  Supporters of increased low and middle-income housing and smart growth will be following this ballot measure closely.

Another twist in the Pier 70 project came earlier this month when the State of California’s Lands Commission filed a lawsuit against San Francisco challenging the legality of Prop. B altogether, on the ground that the City’s obligation to manage Port property in public trust cannot be overridden by the local initiative process.  It did not go unnoticed among political insiders that former Mayor Gavin Newsom sits on the State Lands Commission.  The lawsuit’s effect on the Pier 70 re-zoning is uncertain at this point, but Forest City is moving forward with the ballot initiative.

We will continue to monitor the progress of these initiatives.

The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient.  Readers should consult with legal counsel before relying on any of the information contained herein.  Reuben, Junius & Rose LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.