How will Tomorrow’s Historic Tax Vote Affect San Francisco’s CRE?

By Dennis Kaiser

San Francisco voters will head to the ballot box on June 5 to decide the fate of rental rates for commercial properties. Historically, San Francisco has some of the highest rental rates in the country, and the two opposing ballot measures threaten to increase average annual rates for office space. San Francisco property owners are poised to push back hard against the measure, arguing that an increase to already existing gross receipts taxes will add yet another hurdle to compete for tenants considering a move to more affordable markets.

Transwestern’s Jamie Mahoney has been actively monitoring the situation ahead of the vote, and provides insights on potential impacts to the market in Connect Media’s latest 3 CRE Q&A.

Q: What are the opposing measures that San Francisco voters will decide on June 5?
A: Currently, there is a 0.3% tax generally based on gross revenues from renting commercial property, excluding protected uses such as nonprofits, residential, retail, and certain light industrial. There are two proposed additions to the 0.3% tax that would provide funds for two of San Francisco’s most significant needs: housing for low- to middle-income families, and early childcare and education. The former, called Housing for All, would add a 1.7% tax on gross receipts and would be expected to collect $65 million annually. Universal Childcare for San Francisco Families, estimated to collect $150 million annually, would add a 1% tax on leased warehouse space, as well as a 3.5% tax on leasing commercial space.

Q: How will the proposed tax measures impact commercial landlords/tenants?
A: Because the exclusions for both proposals are mostly the same as the current law, they would continue to target office users and, therefore, affect companies in San Francisco’s booming tech industry. Since landlords typically pass through the property tax to commercial tenants as part of rent, tenants can expect a $1.25 to $2.50 increase in average per-square-foot rates for office space at the beginning of 2019 when the measures would take effect.

Q: Which of the measures has a better chance of passing, and will the benefits outweigh the cost to office users?
A: The Universal Childcare for San Francisco Families only needs to carry a simple majority to pass because the measure met signature requirements for placement on the ballot; whereas the Housing for All measure would need a two-thirds majority approval. If both are approved, the measure with the most votes will be adopted. On the surface, the benefits of either measure would positively impact the city by providing funding to much-needed causes. However, both proposals allow for some funds collected to go into the city’s General Fund, allowing taxes collected to be used for purposes outside of the original mission. For office users, rents in San Francisco are consistently some of the highest in the country. Despite the slower increase of rates, the market has experienced in the last two quarters, office tenants should be prepared to allocate more funds toward overall occupancy costs should either measure pass.

For comments, questions or concerns, please contact Dennis Kaiser