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Move To Double S.F. Transfer Tax Would Make It Nation's Most Expensive

San Francisco's real estate transfer tax is on November's ballot, as voters decide whether to double the levy, a possible change that has divided the city's small businesses and the commercial real estate industry.

Proposed as Prop I and needing a simple majority of S.F. voters to pass in November, the measure would double the city's transfer tax on commercial real estate deals of $10M or higher. The hike would raise the transfer tax rate from 2.75% to 5.5% on properties selling for between $10M and $24.99M, and from 3% to 6% on properties selling for $25M and over. 

San Francisco City Hall with downtown in the background.

Prop I has the support of District 5 Supervisor Dean Preston, who is the sponsor, as well as four of the city's 11 other supervisors. But it has concerned some members of the CRE industry, who complain the increase is much too large, a charge Preston rejects by pointing to San Francisco's projected budget deficit and the risk of an eviction wave.

"At a time when San Francisco faces a $1.7B project deficit over the next two years, this progressive tax measure will generate much-needed emergency funds," Preston wrote in an argument for the proposition. "It's time to ask those selling buildings worth more than $10M to pay a little more to help those in need."

Among the businesses and organizations supporting Prop I are City Lights Books, Sam's Grill, the Sierra Club and the San Francisco Democratic Party, while those in opposition include San Francisco Chamber of Commerce President and CEO Rodney Fong and Ace Mailing owner Gwen Kaplan.

CRE opponents have balked at the size of the hike. The transfer tax is payable by custom, Allen Matkins partner Bill Ahern said, meaning it can be worked out between buyer and seller. For some sellers, the new tax means must have appreciated by as much as the 6% upper rate before profit is possible, Ahern said.

“It’s already pretty hefty, and they’re proposing doubling it," Ahern said. "It’s certainly going to be taken into account in determining purchase price."

Preston said the tax increase would offer necessary help for the city's renters, citing a Board of Supervisors resolution passed earlier this month that makes rent relief and permanently affordable housing a top priority for new revenue. Part of the revenue would also aid smaller landlords impacted by the pandemic, and funds would eventually go toward permanently affordable housing, according to Preston. 

"One area that we can control policy in San Francisco is on the transfer tax," Preston said in an interview.

"We could have increased it a lot more than the roughly 3% that we are increasing it, but we wanted to increase it enough to generate sufficient revenue to tackle the problem, and also to provide incentives for sellers to consider sales" to the city or a nonprofit housing provider.

Prop I would also allow the Board of Supervisors to enact future ordinances "without future voter approval" that would "exempt rent-restricted affordable housing, as the Board may define that term," from the transfer tax increase, according to the legal text of the proposition

Marcus & Millichap First Vice President Ramon Kochavi said the assumption that many of the city's landlords can shoulder such an increase when they need to sell is unfair, and that the bigger investors will look outside of S.F., to the city's detriment.

"It assumes an appreciation that doesn't happen every day," Kochavi said. "They're going after a certain segment of the population in such an egregious manner. And [investors] do have options in a sense."

San Francisco's current transfer tax is already one of the highest in the country, and this would likely make it the highest in the country, according to Vanguard Properties Director of Investment Sales Alex Kolovyansky

"This would double the transfer tax of even Manhattan," Kolovyansky said. "We're literally going to double that and we don't have nearly as many sales as they do."

The tax would "generate significant but volatile additional revenues for government services," San Francisco City Controller Ben Rosenfield wrote in an analysis of the proposed ordinance.

"Applying these tax rates and current estimated property values to transactions that occurred during the most recent economic cycle (from 2008 to 2020), annual revenue resulting from this proposition would have ranged from a low of $13MM to a high of $346M, with an average of $196M," he wrote.

Kolovyanksy said he anticipates a 3% drop in property pricing, which he said is not enough to meaningfully slow transactions in the same way the city's permanent eviction ban for nonpayment of rent has been. 

The new expense of the transfer tax hike "would be underwritten in the deal, so effectively it would reduce the value of the property," Kolovynansky said.

"Eviction moratoriums in conjunction with dropping rents and soaring vacancy are doing more damage to market value of buildings than an additional 3% transfer tax," he said.