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CRE Players Push Back On Proposed Transfer Tax Change

Commercial property owners in San Francisco don't just have the state's high-profile split roll initiative to worry about come Nov. 3.

The city's largest landlords and other property owners are also pouring millions into a campaign to stop Proposition I, a doubling of the city's real estate transfer tax on deals $10M and higher. Sponsored by District 5 Supervisor Dean Preston, Prop. I 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.

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Proceeds are meant to go to renter relief and aid to smaller residential landlords, in what Preston and others say is a crucial response to the coronavirus pandemic. But opponents have spent almost $5M in opposition to the plan, which Emerald Fund CEO Oz Erickson said is a threat to new development and the city's economic recovery.

“I think there was a major miscalculation of the economic impact of Prop. I on the part of the supervisors," said Erickson, who leads one of the Bay Area's most prolific residential development companies. “It is going to have a devastating effect on future construction."

Neither Preston nor the Yes on I campaign responded to requests for comment. 

"Factor in months of lost wages for our lowest-income residents, and we've got an eviction and foreclosure crisis in the making," San Francisco District 9 Supervisor Hillary Ronen, one of five supervisors besides Preston supporting Prop. I, said in a statement.

"Prop. I will use a very reasonable one-time tax increase on the most expensive property transfers to provide relief to renters and small landlords, to keep people housed and to create new affordable housing opportunities throughout the city."

Erickson and other opponents aren't alone in their concern about the effect of Prop. I on the city's economy. San Francisco Chief Economist Ted Egan said in a recent report that the measure would have a "negative impact" on the city's economy. Arriving at a similar conclusion, Bay Area-based urban policy think tank SPUR recommends a no vote on Prop. I, citing its potential consequences for housing production.

"I think it is a mistake to raise this type of tax during a recession," said Ken Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at UC Berkeley. "[Prop. I] will discourage investment dollars flowing into the city."

Erickson and others say the tax hike will have a practically immediate impact on real estate values, making equity more difficult to find for multifamily projects already challenged by construction costs and rising development fees

“It’ll make it harder to get capital deployed to build more housing, so for that reason, I’m against it," said L37 Partners Managing Partner Eric Tao, who also pointed to the city having raised transfer tax rates only four years ago. "Secondly, it stings a little. We just raised the transfer tax and we didn’t fight it that much.”

This time, L37 and Emerald Fund have contributed $100K and $50K, respectively, in opposition to Prop. I, according to campaign finance records, while Brookfield Properties and Boston Properties have each contributed $250K.

Neither Brookfield Properties nor Boston Properties responded to a request for comment.

The measure has the support of community organizations like Mission Economic Development Agency, a Mission District-based nonprofit focused on preserving affordability for low- and moderate-income Latino families.

"We believe the measure is an equitable way to help fund essential COVID recovery in an area of great urgency: retaining and creating affordable housing opportunities for San Franciscans," MEDA Policy and Advocacy Director Norma P. Garcia said.

Bloomberg Intelligence Senior REIT Analyst Jeffrey Langbaum, whose research includes Boston Properties, said the involvement of the city's biggest landlords makes sense.

"I'm sure if you got all of them in a room, they would tell you they understand why the municipality needs to raise incremental dollars to fill budget shortfalls," he said.

"And they would probably acknowledge that commercial real estate is one place to do it, especially in a market like San Francisco where values are up so much," he said. "But at the same time, they're going to probably want to find some other way to fill those budget gaps rather than having it come out of their pockets."