Preliminary Election Results: Correction on Measures L & M

| Kaitlin Sheber

Measure L: Additional Business Tax on Transportation Network Companies and Autonomous Vehicle Businesses to Fund Public Transportation – Failed*

With preliminary election results showing 56.88% voter approval, it would seem voters passed Measure L, but the Measure has failed due to a provision in Measure M discussed below. Measure L would have placed a permanent additional tax on transportation network companies and autonomous vehicle businesses to support Muni transportation services and fare discount programs, titled the “Ride-Hail Platform Gross Receipts Tax.” The Measure would impose the tax specifically on businesses that provide passenger service for compensation and receive more than $500,000 in gross receipts. The tax rates range between 1% and 4.5% of gross receipts. The Controller estimates annual revenue from the measure at approximately $25 million.

Measure M: Changes to Business Taxes – Passed

Measure M proposed to modify several existing taxes in the City, including the Gross Receipts Tax, Homelessness Gross Receipts Tax, Overpaid Executive Gross Receipts Tax, Business Registration Fee, and the Administrative Office Tax on Payroll Expenses. In general, the Measure is expected to cut taxes for many small businesses and shift more tax burden onto medium, large, and wealthier businesses through a variety of changes. Preliminary election results show that Measure M was approved by 69.73% of voters so far. As discussed above, Measure M contained a provision to render Measure L null and void in the event it obtained more votes. With preliminary results showing Measure L with 201,074 votes in favor and Measure M with 228,038 votes in favor, Measure L is expected to fail.

*Corrected from original publication on November 13, 2024.

 

Authored by Reuben, Junius & Rose, LLP Attorney, Kaitlin Sheber.

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.

Preliminary Election Results Show New Rules Coming to SF

| Kaitlin Sheber

On November 5th of last week, voters took to the polls to cast their ballots in an election with several measures that will affect businesses and City Commissions. With preliminary election results available, below is an overview of some of the key results.

Proposition 33: Local Government Residential Rent Control – Failed

Prop 33 sought the statewide repeal of the Costa-Hawkins Rental Housing Act of 1995 (“Costa-Hawkins”), which restricts the ability for local jurisdictions to impose rent control. Proponents for the proposition argued that repeal of Costa-Hawkins would allow jurisdictions to expand rent control, while opponents argued it would freeze construction of new housing and effectively reverse dozens of new state housing laws. Preliminary election results show 60.8% of voters voted no on Prop 33, keeping Costa-Hawkins in place and delivering a resounding rejection of stricter rent control.

Measure D: City Commissions and Mayoral Authority – Failed

Measure D proposed to limit the total number of commissions in the City of San Francisco to 65, while also giving the Mayor sole authority to appoint and remove City department heads. The Measure would also have given the police chief the sole authority to adopt rules governing the conduct of police officers. Preliminary election results show that 56.39% of voters voted no on Measure D, maintaining the current number of commissions in the City.

Measure E: Creating a Task Force to Recommend Changing, Eliminating, or Combining City Commissions – Passed

Also aimed at commission reform within the City, it appears that Measure E won out over Measure D, with preliminary election results showing 52.05% voter approval. Measure E asked voters to decide whether the City should create a task force to make recommendations by February 1, 2026 on ways the City could change, eliminate, or consolidate commissions to improve the administration of City government.

Measure L: Additional Business Tax on Transportation Network Companies and Autonomous Vehicle Businesses to Fund Public Transportation – Passed

With preliminary election results showing 56.88% voter approval, it looks like voters have passed Measure L, which places a permanent additional tax on transportation network companies and autonomous vehicle businesses to support Muni transportation services and fare discount programs, titled the “Ride-Hail Platform Gross Receipts Tax.” The Measure will impose the tax specifically on businesses that provide passenger service for compensation and receive more than $500,000 in gross receipts. The tax rates range between 1% and 4.5% of gross receipts. The Controller estimates annual revenue from the measure at approximately $25 million.

Measure M: Changes to Business Taxes – Passed

Measure M proposed to modify several existing taxes in the City, including the Gross Receipts Tax, Homelessness Gross Receipts Tax, Overpaid Executive Gross Receipts Tax, Business Registration Fee, and the Administrative Office Tax on Payroll Expenses. In general, the Measure is expected to cut taxes for many small businesses and shift more tax burden onto medium, large, and wealthier businesses through a variety of changes. Preliminary election results show that Measure M was approved by 69.73% of voters so far.

 

Authored by Reuben, Junius & Rose, LLP Attorney, Kaitlin Sheber.

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.

San Francisco Empty Homes Tax Struck Down at Trial Court

| Alex Klein

Last week, the San Francisco Superior Court struck down the City’s “Empty Homes Tax” which was set to be collected for the first time starting in April 2025 for the 2024 tax year. As stated in a message on the San Francisco Treasurer and Tax Collector’s website, the agency is evaluating the court’s decision and its effect on the upcoming collections and will “expect to have more information in the coming weeks.”

Adopted by San Francisco voters with the passage of Measure M, during the November 2022 general election the Empty Homes Tax aimed to add residential housing stock back into the local rental market by imposing a tax on owners of certain multifamily buildings for keeping rental units vacant for 182 or more days each tax year. The Empty Homes Tax would have applied broadly to most multifamily property owners in the City whose properties had vacant units with limited exemptions for 501(c)(3) tax exempt nonprofits, governmental entities, and the owners of residential buildings with two or fewer units.

The tax would have been calculated based on the vacant units’ square footage. For the 2024 tax year, a minimum tax of $2,500 would have been assessed for vacant units with less than 1,000 square feet and up to $5,000 would have been assessed for vacant units with greater than 2,000 square feet. Tax rates imposed under the Empty Homes Tax were set to increase annually over the next few years.

The present litigation was brought in February of 2023, shortly after the passage of Measure M, by a handful of property owners in the City affected by the Empty Homes Tax, in addition to the various interested real estate organizations including the San Francisco Apartment Association and the San Francisco Association of Realtors.

In their complaint challenging the Empty Homes Tax, Plaintiffs argued that the Empty Homes Tax violated the Takings Clause of the US Constitution. Specifically, Plaintiffs argued that the tax amounted to the City compelling property owners to rent their property, an action the United States Supreme Court and California’s First Appellate District have held is a Taking. Yee v. City of Escondido (1992) 503 U.S. 519; Cwynar v. City & Cty. Of S.F. (2001) 90 Cal.App.4th 637, 658. The tax, plaintiffs argued, sought to “achieve indirectly the very result that the Constitution and state law prohibit…” by “coerc[ing] owners to rent their units by severely penalizing those who exercise their rights to keep units vacant…” (Complaint pg.5.)

Plaintiffs also argued that Prop M was preempted by the Ellis Act which prohibits public entities from compelling owners of residential real property to offer their accommodations for rent or lease. Cal. Gov. Code § 7060(a). As Plaintiffs highlighted in their motion for summary judgment, the “compulsion” prohibited by the Ellis Act extends to the imposition of financial or other penalties for declining to rent residential units. See Bullock v. San Francisco (1990) 221 Cal.App.3d 1072.

In addition to arguing that Plaintiffs did not have standing to challenge the tax before paying it under protest, the City argued in its motion for summary judgement that Plaintiffs had mischaracterized Prop M as requiring property owners to rent their units or pay the Empty Homes Tax. Rather, the City argued, property owners merely needed to ensure that their rental units were “occupied, inhabited, or used,” or that they fell within one of Prop M’s vacancy exclusion periods. Defendant’s Motion for Summary Judgement, Pg. 16.

The Court has yet to publish its decision granting summary judgment for Plaintiffs. It is certainly possible that the City will appeal the decision, which will create uncertainty over the future of the Empty Homes Tax.

 

Authored by Reuben, Junius & Rose, LLP Attorney, Alex Klein.

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.

Key Tax Appeal and Exclusion Request Deadlines

| Kaitlin Sheber
Appeal

Property owners in San Francisco have a right to appeal the assessed value of their properties within a certain window of time and may request tax exclusions when performing certain work.  Typically, the Assessor determines the increased base year value for the portion of any taxable real property that is newly constructed.  The value of the land would remain unchanged when there is new construction.  However, the cost of some types of improvements, including seismic safety improvements and accessibility improvements, may be excluded from reassessment if a timely request is submitted.

Below is an overview of key deadlines and time frames to keep in mind, especially as the Regular Assessment Appeal Period is open now through September 16, 2024.

Key Appeal Deadlines for San Francisco:

Regular Assessment Appeal Period Opened July 2

The open filing period for appealing 2024/2025 assessed property values began on July 2, 2024 and expires on September 16, 2024.  No appeals may be filed after September 16, 2024.  Note that the Assessment Appeals Board has 2 years from the date of a timely filed application to schedule, hear, and render a decision.

Supplemental and Escape Assessment Roll

Supplemental and Roll Correction assessment appeals are only accepted within 60 days after the date of the supplemental notice issued by the Assessor, and Escape assessment appeals are only accepted within 60 days of the issuance of the tax bill.

Exclusion Deadlines:

Seismic Safety Improvements

Under the Revenue and Taxation Code Section 74.5, a new construction exclusion may be requested for (1) seismic retrofitting improvements and (2) improvements utilizing earthquake mitigation technologies that are constructed or installed in existing buildings.  To obtain the exclusion, the property owner must submit a completed BOE-64 form to the Assessor before or within 30 days after completion of the project.

Additionally, all documents necessary to support the exclusion must be filed by the property owner within 6 months after completion of the project.  Failure to timely file the form and all necessary documents constitutes a waiver of the exclusion for that year.  The exclusion expires upon a change in ownership of the property.

Accessibility Improvements

Section 74.6 of the Revenue and Taxation Code generally allows an exclusion for construction, installation, removal, or modification of a portion or structural component of an existing building or structure to the extent that it is done for the purpose of making the building more accessible to, or more usable by, a disabled person.  To receive the exclusion, the property owner must notify the Assessor of its intent to use the exclusion before or within 30 days after completion of the project.  All documents necessary to support the exclusion must be filed with the Assessor within 6 months after completion of the project.

 

Authored by Reuben, Junius & Rose, LLP Attorney, Kaitlin Sheber.

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.

Proposition C Upheld by Court of Appeal

| Kaitlin Sheber
Proposition C

California’s First District Court of Appeal (“Court of Appeal”) has rejected arguments from business and tax groups challenging the validity of San Francisco’s Proposition C, the Early Care and Education initiative.  The Court of Appeal held that citizen initiatives to enact a special tax only require a simple majority vote to pass, even if an elected official is involved in the citizen initiative process. This decision could be a game-changer in how tax measures are processed in the future, causing legislators to convert proposed tax measures into citizen-initiated measures, i.e. allowing politicians in California to use the citizen initiative’s simple majority vote requirement to avoid the more strenuous two-thirds supermajority vote local governments must obtain to increase taxes. San Francisco City Attorney Dennis Herrera described the ruling as “a victory for voters and a victory for democracy.”

Background

Proposition C, a citizen initiative, was approved by City of San Francisco voters on the June 5, 2018 ballot. This commercial rent tax was expected to raise up to $145 million annually for childcare and early education services by taxing business revenues from commercial space rentals by 3.5% and warehouse space rentals by 1% where receipts are over $1 million. Norman Yee, at the time a member of the City’s Board of Supervisors, was the driving force behind citizen initiative Proposition C. He completed the key steps required to put a citizen initiative on the ballot— he both turned in the signed initiative petition pages and signed the ballot arguments in support of Proposition C.

In San Francisco, there are two different ways special taxes are imposed: (1) local governments may present a special tax to the voters, but voters must approve the special tax by a super majority two-thirds vote, or (2) local citizen initiatives may present special taxes to the voters after receiving a threshold number of signatures. Citizen initiatives only require a simple majority vote to pass.

After Proposition C was approved by a 51% majority of voters, the Howard Jarvis Taxpayers Association quickly joined forces with other business-related groups (“Plaintiffs”) to challenge the initiative, arguing the measure needed a two-thirds supermajority vote to pass because an elected district supervisor put forward the measure. Though the City has collected tax funds from businesses since the passage of the proposition, the money was not spent during the legal challenge. A San Francisco Superior Court judge rejected Plaintiffs’ arguments in July 2019. The decision was affirmed by the Court of Appeal on January 27, 2021. Now, Plaintiffs are planning to appeal the most recent decision to the California Supreme Court as the Court has not previously ruled on this issue.

Legal Reasoning

The Court of Appeal adopted the reasoning of a recent case in another division of the same court, City and County of San Francisco v. All Persons Interested in the Matter of Proposition C (2020) 51 Cal.App.5th 701 (“All Persons”), to reject Plaintiffs’ appeal arguments. First, All Persons noted the initiative power is “one of the most precious rights” of the democratic process, so courts must both guard and liberally construe the exercise of the power. Accordingly, the court held Proposition 13 only requires governmental entities to gain two-thirds supermajority voter approval before imposing a special tax. Next, the court held Proposition 218, which requires a two-thirds supermajority when local government imposes a special tax, did not apply because the electorate is not “local government.” Finally, the court held that the City Charter did not require a two-thirds supermajority to pass a special tax because the Charter only creates substantive limits on the initiative power, not procedural limitations.

Plaintiffs argued their action challenging Proposition C was distinguishable from All Persons because Norman Yee was an elected official serving on the Board of Supervisors. The court rejected this argument, holding that Propositions 13 and 218 did not require a two-thirds vote to pass special taxes where an elected official was involved in the citizen initiative process. Plaintiffs will appeal to the California Supreme Court, noting this decision allows politicians in California to circumvent the two-thirds voter approval requirement for special taxes by turning special tax proposals into citizen initiative petitions.

 

Authored by Reuben, Junius & Rose, LLP Attorney Kaitlin Sheber.

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.

Real Estate Tax Update

| Kevin H. Rose
Tax

Deadline to File Real Estate Tax Appeals for the 2020/2021 Tax Year

For property owners that disagree with their property valuation for the 2020/2021 tax year, the deadline to file an appeal is Tuesday, September 15, 2020. For property located in other counties, owners should check with the local Assessment Appeals Board. Unfortunately, these appeals would relate to the property value as of January 1, 2020, so the economic impact of Covid-19 is not likely to be considered. If you have questions about this, please contact Kevin Rose at krose@reubenlaw.com.

Commercial Properties May Lose Proposition 13 Protection

After many years of planning and political maneuvering, the opponents of Proposition 13 have settled on a ballot initiative, Proposition 15 (also known as the “Split Tax Roll”), to drastically overhaul California’s property tax structure. Proposition 13 is California’s landmark law, embedded in the Constitution that protects owners from increases in real estate taxes in excess of two percent per year. As a compromise to help ensure passage, residential property would be exempt from the tax increase.

The Basics

If passed in this November’s general election, Proposition 15 would require commercial and industrial properties to be reassessed every three years at the full fair market value of the property, as determined by County Assessors. This new assessment would be used to calculate property taxes based on the statutory tax rate, which is also limited to 1% by Proposition 13 and would remain unchanged. There would be no limit on reassessment, so many property owners could experience significant increases in real property taxes. This would wipe out the ability of property owners to plan for stable property tax increases of no more than 2% per year, and authorize County Assessors to exercise their discretion in determining the “fair market value” of real estate. Residential property, including multi-family structures (apartments), is specifically excluded from reassessment, as is commercial agricultural property.

Why Increase Taxes?

The proponents of Proposition 15 argue that commercial and industrial properties are underassessed and avoid over $11 Billion in local property taxes, which should be used to support schools, local governments and affordable housing. Advocates cite an unnamed University of California study claiming that such reassessment of commercial property will have a “net positive benefit” on jobs and the California economy. There was little discussion in the findings about the potential impact on tenants of commercial properties due to higher rents and expense pass throughs, other than the deferment for properties with at least 50% small business occupancy, discussed below. The opposition argues that this is the first step in completely dismantling Proposition 13.

The Process and Procedures for Reassessment

Starting with the 2022-2023 tax year, each County Assessor would be tasked with reassessing commercial and industrial properties to determine the value for property tax purposes. This process would be phased in over two years. Proposition 15 requires the creation of a task force comprised of different interests to recommend the statutory and regulatory details for implementation. Taxpayers would be given a “reasonable” timeframe during which to pay any tax increases. Such time frame is not defined and would have to be determined by the Legislature.

Proposition 15 imposes the burden of proof on the taxpayer with regard to any valuation disputes. Under current law, escape assessments (assessments for tax years later than the tax year the reassessment event occurred) or increased assessments due to change of ownership that are different than the purchase price require the Assessor to prove that the reassessment is justified. Property owners will likely be concerned that, due to political pressure to increase revenues, the Assessor will favor increases in value when there is any conflicting or disputed information. Local assessment appeal boards will almost certainly see a major increase in real estate tax appeals.

Some Properties Worth $3M or Less May Be Excluded

Small property owners are exempt from future reassessments if their property is worth $3 Million or less, but only after one reassessment under Proposition 15. This $3 Million threshold would be adjusted every two years for inflation, starting in 2025. This exception excludes “wealthy” property owners. This means if any owners of such low value property also own other property worth more than $3 Million, then the exception would not apply. The taxpayer has the burden of making this claim with the applicable County Assessor. The decision of County Assessors with regard to these exceptions are deemed to be final, and not subject to appeal to the local assessment appeals board, and judicial review of this exception is limited to “abuse of discretion.”

Small Business Temporary Exception

Properties that are used primarily (50% or more) for a small business, are exempt from reassessment, but only until 2025-2026. Small businesses are simply defined as businesses with less than 50 full time employees, provided that such business owns real property in California (not necessarily the same property) and is independently owned and operated. It is unclear if franchises are excluded, but it seems that the intent is to exclude franchise businesses from the exception.

The Personal Property Tax Exemption

As an incentive to the business community for support (apparently focusing on technology companies), up to $500,000 of tangible personal property and fixtures are exempt from taxation. This excludes airlines and boats. Also, small businesses (as defined above) would be fully exempt from taxation of personal property.

Use of Funds and Administration

Proposition 15 requires that all funds generated by these tax increases be distributed to community colleges (11%) and to school districts, charter schools and county offices of education (89%). There are complicated formulas and reporting requirements included as part of the administrative provisions. Each county and city is required to be compensated for additional costs incurred due to implementation of the reassessment requirements. Apparently, the payments are from the general fund, not the new tax revenues. The spending limitations in the California Constitution would not include any revenue generated by Proposition 15.

The Fight

While normally any proposed change to Proposition 13 would be highly contested, Covid-19, social unrest and the divisive presidential election may limit the publicity and focus on Proposition 15. The California Democratic Party, Bernie Sanders, and the San Francisco Board of Supervisors support Proposition 15. Opponents include the Howard Jarvis Taxpayers Association, The California Business Roundtable, the NAACP, and the California Business Properties Association. According to Ballotpedia, Proposition 15 had a 6% lead in the polls as of April 2020, with a 3% margin of error. Typically, new taxes need a large lead prior to the election as many voters become skittish when actually voting. It will be interesting to see how the voters feel about increasing taxes during recessionary times.

 

Authored by Reuben, Junius & Rose, LLP Attorney Kevin H. Rose.

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.

San Francisco Tax Update

| Kevin H. Rose
Tax

Homelessness Gross Receipts Tax Upheld

On June 30, 2020, the First District of the California Court of Appeal upheld the legality of the City and County of San Francisco’s “Homelessness Gross Receipts Tax.” This tax ranges from 0.175% – 0.690% of taxable gross receipts (depending on the industry), and is 1.5% for administrative offices. This tax is imposed on companies that earn more than $50M per year in the City and County of San Francisco. In upholding the tax, the Court of Appeal found that the Constitutional right of California voters to pass laws by initiative and a majority vote, is superior to the limitations on new taxes or special taxes which require a supermajority, 2/3 vote. The Court agreed with the City that because the tax was initiated by the people, and not the government, then only a majority vote was required. The Howard Jarvis Taxpayers Association has filed a notice of appeal to the California Supreme Court, so this may not be the last word on the issue.

A copy of the court’s decision may be found here. Prop C Appellate Opinion

Commercial Rent Tax Appeal Remains in Process

The challenge to the San Francisco Commercial Rent Tax (funds for early childhood education) remains active in the First District of the California Court of Appeal. The Commercial Rent Tax is 3.5% for offices and 1.5% for Industrial space. Retail is generally excluded.

Appellants’ arguments include (1) that politicians cannot use the citizens’ initiative process as a loophole to avoid the 2/3 vote requirement, (2) voters cannot exercise power that the Board of Supervisors does not have (i.e., a majority vote standard), and (3) that the requirements of Propositions 13 and 218 should apply because the decision in the Cannabis case cited by the City related to a procedural requirement, not the actual approval of the tax at issue. The appellants’ reply brief is due July 23, 2020. Given the decision on the Homelessness Gross Receipts Tax, it seems likely that the Commercial Rent Tax will also be upheld, and there will be a showdown in the State Supreme Court. Stay tuned.

A copy of appellant’s brief may be found here. Appellant’s Opening Brief

Protective Refund Claims

In order to protect their rights to refunds, San Francisco taxpayers that are subject to the Homeless Gross Receipts Tax or the Commercial Rents Tax and wish to preserve their rights should file a protective request for refund with the San Francisco Tax Collector. Once the request is rejected, a Claim for Refund should be filed with the San Francisco Controller. Otherwise, refund claims may not be honored if the Supreme Court strikes down the tax.

The following is a link to the request for refund form and filing information. Refund Form

There may be other basis for challenging the taxes, including potential equitable arguments, that should be referenced when filing these requests/claims. You should consult with legal counsel or a tax representative to verify the process.

 

 

Authored by Reuben, Junius & Rose, LLP Attorney Kevin Rose.

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.