SF launches office-to-housing tax district

While the headlines in post-Super Bowl San Francisco were taken up by an extended teachers’ strike that kept children out of school all week, Mayor Daniel Lurie — whose own frustrations with the strike fed the news cycle — quietly signed what could end up as one of the most impactful pieces of housing legislation in his tenure.

On Thursday, Lurie formally established a new public financing program he hopes will incentivize the conversion of the old office buildings of San Francisco’s urban core into housing. The so-called Downtown Revitalization Financing District will direct increases in property tax revenue toward annual incentive payments for eligible conversion projects. The district’s boundaries include the Financial District, Union Square, and parts of the Market Corridor and SOMA.

San Francisco rose as the poster child for the pandemic’s decimation of America’s traditional central business districts. Cities across the country concluded that a resilient downtown meant a transition from a strictly commercial center into a more mixed-use neighborhood. Thus, converting office towers into apartments was viewed as a key strategy. However, these projects proved expensive and logistically complex. Like some other cities, San Francisco has seen zero conversions, despite the hyped up potential.

The tax increment financing district set up by Lurie and the San Francisco Board of Supervisors could put more than $1.2 billion of redirected property tax increases into these projects over the next 30 years, according to city documents. The city estimates that about 50 buildings within the district could make for a good conversion, with the potential to add up to 7,000 new homes. One source inside the city’s Office of Economic and Workforce Development told the San Francisco Chronicle that the typical project could receive about $100,000 per unit in incentives.

Yet, conversions are most feasible when the commercial real estate market has hit the floor, and investors can purchase old towers for steep discounts. Over the last year, the city’s commercial real estate market has bounced back profoundly. However, much of that activity has been confined to Class A and trophy buildings, which has left mid-to-low tier office towers, such as the one at 260 California Street, with big question marks looming overhead.

New life for capped taxes

Since it went into effect nearly three years ago, Measure United to House L.A. has drawn the attention of housing developers up and down California. Approved by voters in Los Angeles, ULA, which implements a 4-to-5.5 percent real estate transfer tax on home sales of greater than $5 million, has been criticized for stalling new housing construction in the city. Late last month, the Los Angeles City Council rejected proposed amendments to the legislation — which would have to be approved by voters — that would have carved out exemptions to the tax for multifamily properties.

Thwarted development in Los Angeles has seemed to fuel interest in a statewide limit on local real estate transfer taxes. A petition is now circling the state that asks whether they want to vote capping real estate transfer taxes throughout California. If it qualifies, which the president of the sponsoring Howard Jarvis Taxpayers Association told CalMatters he is “cautiously optimistic” about, Californians would vote on the tax cap in November. The League of California Cities estimates the measure, if approved, could trim tax revenue up to $3 billion per year, with the shortfall spread over municipalities big and small.

Yet, it may not be the only citizen-initiated tax limit on the ballot in November. Earlier this week, a petition began making its way through California that would exempt homeowners 60 and older from paying property taxes on their primary residence. According to the Secretary of State’s office, the initiative could cost local governments and school districts up to $20 billion per year.

California homeowners already enjoy the benefits of Prop 13. Passed in 1978 after a tax revolt, Prop 13 changed the landscape of homeownership in California, as it tightly limited how much a home’s assessed value could increase. It is essentially rent control for owners. The legislation has resulted in fewer houses hitting the market, and has been cited as exacerbating the state’s housing crisis.