Vote proposed to ease office conversions
Mayor London Breed is proposing a ballot measure that would waive the city’s transfer tax on buildings that have been converted from office to residential, a move that she hopes will help revitalize downtown San Francisco by incentivizing the adaptive reuse of vacant commercial properties.
The measure, which will be placed on the March 2024 ballot, would mean that landlords who convert their buildings to housing could sell the property without paying the transfer 6% tax rate, which currently applies to real estate transactions over $25 million. The waiver would apply to conversion projects that win approval by the end of 2029, and developers would have to line up building permits within three years of approval.
“By removing barriers to converting office to housing, we can take vacant space, turn them into homes, and bring more people into Downtown, which is good for our neighborhoods and our small businesses,” Breed said.
The tax waiver would be a onetime break — it would not be available if a property is traded a second time — and would be available to the first 5 million square feet of conversions, an amount of space that could accommodate about 5,000 units of housing. It would mean that an investor who buys a recently converted apartment building for $100 million would save $6 million in taxes. If not all of a building is converted, the transaction would be prorated by converted square footage. Transfer tax would still be due on non-converted space.
Breed placed the measure onto the March 2024 ballot, where it would need a simple majority to pass into law.
The city’s Office of Economic and Workforce Development recently put out a request for information for office building owners who are interested in converting. Eight property owners responded and were then interviewed about what the city could do to make residential conversions more feasible. Waiving the transfer tax stood out as “one of the biggest levers we have as a city” to make conversions more attractive for property owners, according to Anne Taupier, director of development for the city’s Office of Economic & Workforce Development.
“We heard them loud and clear,” said Taupier. “We are trying to clear the path to conversions as much as we can.”
The proposal comes as the city’s downtown neighborhoods experience a record-high office vacancy rate of 34%, with over 34 million square feet of vacant space.
Breed said the transfer tax waiver is part of her “Roadmap to San Francisco’s Future” nine-part plan, which includes “facilitating new uses and flexibility in buildings.” Other changes include introducing more flexible zoning downtown and streamlining the approval process of conversions.
Jack Sylvan, a veteran San Francisco developer who founded SDG Inc., recently worked with the urban think tank SPUR on a report looking at conversions. The SPUR report found that if all office buildings that are well-suited for conversion would be turned into housing it would add about 14,277 units to the city’s stock.
He said between 20% and 25% of older “Class B and C” buildings will be “functionally obsolete” in the coming years — potentially as much as 20 million square feet. While not all of those are likely to be converted, he said a significant number could be. He pointed to lower Manhattan where the 1990s brought about 13,000 units of conversions of office buildings. Those projects were made possible through tax abatements and other incentives.
There are a slew of economic factors that the city doesn’t control — construction costs and interest rates — but the city’s transfer tax is something that can be changed, he said.
“It functions as a major fee that most places in the country don’t have,” Sylvan said. “In the analysis we did with SPUR the transfer tax is one of the three or four big pieces that drive costs and make it not feasible.
That is an important piece in getting to a place where people would invest in conversions.”
Supervisor Dean Preston, who sponsored legislation that increased transfer taxes, declined to comment because he had not seen the proposal. John Avalos, executive director of the Council of Community Housing Organizations, said he is working with Preston’s office on reforming a different portion of the transfer tax — namely, exempting affordable housing organizations that go into limited liability partnership with other groups.
“The measure appears to only serve the wealthy commercial real estate owners, all when San Francisco property owners already can’t fill thousands of vacant market-rate units,” he said. “If the conversions resulted in affordable housing that would be a real trade-off to consider.”
Developer Oz Erickson, chairman of the Emerald Fund, said the “temporary suspension of transfer taxes to enable the conversion of antiquated office towers to vibrant residential buildings is an essential part of the drive to restore San Francisco’s downtown.”
But developer Cyrus Sanandaji of Presidio Bay Ventures said that a one-time tax waiver won’t help, as whoever buys the property from the second owner would have to pay the 6% when they sell the property.
“The next buyer of the stabilized asset is going to get hit with the 6% transfer tax,” he said. “Kicking the can down the road by exempting it once doesn’t change anything.”
Instead, he said, he supports “the wholesale reduction of transfer taxes on housing, full stop.”