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.