Proposed Legislation Could Slash Transfer Tax Rates – For Some

| Michael Corbett
rates

Looking to kick-start housing production in San Francisco, Supervisor Ahsha Safaí recently introduced legislation that would significantly reduce the city’s transfer tax rate – a fee imposed by the city on real estate transactions – for certain residential projects that satisfy a detailed set of preconditions.

Specifically, the proposed tax cuts would apply to rental residential projects (including those subject to a recorded condominium map) that meet the following criteria:

  • Include no less than 12% affordable on-site units, calculated by excluding any permitted density bonus units.
  • Receive a Certificate of Final Completion and Occupancy (“CFCO”) on or after June 3, 2014.
  • Used/Use 100% union labor.
  • At least one year before and through the date of the transfer, collectively have a minimum of $25 million in investment from union pension fund(s).

If passed, the legislation would lower transfer taxes from 5.5% to 3% for qualifying properties valued between $10 million and $25 million, and from 6% to 3% for properties worth more than $25 million. For qualifying properties that received a CFCO prior to the ordinance’s passage, the reduced transfer tax rate would expire on June 30, 2029. Applicable projects that are issued a CFCO after the passage of the ordinance would be able to capitalize on the reduced rate through December 31, 2033.

The value brackets that the ordinance targets likely mean the tax cuts will primarily apply to mid- to large-scale residential projects. Projects such as 100 Van Ness Avenue, 99 Ocean Avenue and 101 Polk Street would appear to be within the qualifying group of projects that could avail themselves of the tax benefit if the ordinance were to pass and those properties brought to market.

Notably, Supervisor Safaí’s proposed legislation is only made possible through the passage in March of Prop. C. In addition to allowing a one-time transfer tax exemption for owners of properties converted from commercial to residential use the first time they are sold following conversion, that tax measure also authorized the Board of Supervisors to amend, reduce, suspend or repeal (but not increase) the transfer tax without voter approval.

Supervisor Safaí, who is running for mayor, looks to capitalize on this authority, saying that reducing the tax rate could create an incentive for owners that have been on the sideline, waiting for a more favorable economic environment before bringing their properties to market.

San Francisco’s transfer tax rates shifted mightily at the turn of the decade and has since been a hot-button issue for owners and investors alike.  In 2020, San Francisco voters approved Prop. I, which doubled the transfer tax from 3% to 6% on the sale of properties over $25 million, and from 2.75% to 5.5% on deals worth between $10 million and $25 million. The city’s Controller’s Office at the time projected that the measure could increase city revenue by $196 million per year on average. While the tax generated $520 million in fiscal year 2021-22, transfer tax revenue plummeted in fiscal year 2022-23 to $186 million. With historically high vacancy rates for commercial properties, dramatically higher interest rates, and a general decline in deal volume and aggregate sales prices across all property types in the city since 2021, the gross revenue from transfer taxes for fiscal year 2023-24 may yet fall further.

It is unclear if the proposed legislation would materially swing the tide in increasing transfer tax revenues for the city. On balance, the ordinance would be a step in the right direction towards promoting new residential deals and investment to help generate much-needed housing production. It will certainly make it easier to finance qualifying projects. Yet, with tens of thousands of residential units currently approved but not financeable, it can be argued that the ordinance – with its narrow scope and 5- to 10-year sunset provisions – does not go far enough to provide the spark that will begin the thaw of an otherwise frozen housing pipeline.

If you have any questions or would like to discuss this proposed legislation or existing transfer tax rates, please contact Michael Corbett from Reuben, Junius & Rose, LLP, at (415) 567-9000 or mcorbett@reubenlaw.com.

 

Authored by Reuben, Junius & Rose, LLP Attorney, Michael Corbett.

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.

Transfer Tax Waiver Proposed by Mayor

| Kaitlin Sheber
exemption

Last week, Mayor London Breed proposed a ballot measure aimed at encouraging conversion of office to residential use in San Francisco’s Downtown by eliminating transfer tax for certain converted residential space. The measure would complement the Commercial to Residential Adaptive Reuse Program, effective as of August this year, which we previously provided an overview of on April 19, 2023.

Currently, the City’s Transfer Tax is as high as 6% for transactions over $25 million (Article 12-C, San Francisco Business and Tax Regulations Code (the “Transfer Tax”)). If approved by the voters, any deed, instrument, or writing that effects a first transfer of converted residential property, that would have been subject to the Transfer Tax, is exempt from the Transfer Tax. However, the exemption only applies up to the first 5,000,000 square feet of converted residential space. Above the 5,000,000 gross square feet limitation, the Transfer Tax would apply to the proportional value of or consideration for the property, based on the floor area over 5,000,000 square feet.

Under the ballot measure, converted residential property is the property or portion of property that received a first certificate of occupancy after conversion from nonresidential property to residential property (“Converted Residential Property”), and meets the following requirements:

  1. Either (1) the first development application for conversion is approved or (2) the first site or building permit is issued, before January 1, 2030. Note, in cases where there is an appeal, the approval/issuance must be upheld before January 1, 2030;
  2. A certificate is requested from the Planning Department, before January 1, 2030, showing the square footage of the proposed conversion, to be within the 5,000,000 square foot limitation (“Qualifying Certificate”);
  3. A first construction document is received within three years after final approval of the conversion; and
  4. At the time of the transfer, the gross floor area of the improvements divided by the lot area is at least one.

Those who seek to claim the proposed Transfer Tax exemption must take the following steps:

  • Request, after final approval of the property conversion, a Qualifying Certificate;
  • Request an exemption certificate from the Planning Department for each transfer for which an exemption will be claimed; and
  • For each exemption claimed for each transfer, submit the exemption certificate to the recorder at the time the Transfer Tax Affidavit is submitted.

According to the Mayor’s Office, 30 million square feet, or 34% of the office market, is currently vacant in the City. The proposed ballot measure aims to assist projects on the edge of financial feasibility through elimination of tax that would be due on the sale of a converted building. Voters will decide whether to approve this proposed ballot measure at the upcoming March 5, 2024 election.

 

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.