San Francisco developers are divided on Proposition C, Mayor London Breed’s measure on the March ballot that would eliminate the transfer tax on up to 5 million square feet of office-to-residential conversions Downtown.
Some say it’s a step in the right direction while others call it a “performative” measure that could do more harm than good.
That difference of opinion may explain why the initiative has taken in far less money than any other on the March ballot, according to the city’s political contribution records. That includes the other housing-related measure, Prop. A, which would authorize a $300 million bond for affordable housing production, rehabilitation and purchases.
Prop. A has brought in $440,000 in campaign contributions, including $55,000 from Cahill Contractors, $50,000 from Strada Investments and $40,000 from Tishman Speyer, even with no substantial funds donated to the No on A campaign.
Meanwhile, Yes on C has raised just under $175,000, including $75,000 from Yelp CEO Jeremy Stoppelman, $25,000 from Prado Group CEO Dan Safier and just under $25,000 from Emerald Fund CEO Oz Erickson, while $30,000 has come in for the No on C campaign.
San Francisco Supervisor Dean Preston has donated $25,000 to No on C. It’s not surprising, given that he led the effort for a 2020 ballot proposition that doubled the city’s transfer tax to 6 percent for buildings valued at $10 million or more. Preston representative Kyle Smeallie said that more No on C funds would soon be coming from labor groups opposed to the measure, “who understand the importance of continuing to make the wealthiest real estate investors pay their fair share.”
Preston doesn’t object to legislation easing conversions per se, Smeallie said. He and others fighting the measure — including Board of Supervisors President Aaron Peskin, Supervisor Hillary Ronen, Supervisor Shamann Walton, the San Francisco Democratic Party, the Affordable Housing Alliance, California Nurses Association, United Educators of San Francisco and Service Employees International Union 1021 — are opposed to another part of the measure that would bring future transfer tax reductions and eliminations to the Board of Supervisors, not voters.
“Hidden provisions of the measure pave the way to complete elimination of the transfer tax,” according to the Preston spokesperson. “If Prop. C passes this March, politicians, not the voters, will have the power to gut and even eliminate the transfer tax in the future without voter approval, putting hundreds of millions of dollars of revenue for essential services at risk.”
The end to all transfer taxes makes a lot of sense to Presidio Ventures Managing Director Cyrus Sanandaji, who is also against Proposition C, but for the opposite reasons. He feels it doesn’t go far enough and won’t meaningfully reduce barriers to office-to-residential conversions.
“We need to stop taxing housing, full stop,” he said, if we want to see residential development return to Downtown.
Sanandaji called Prop. C “performative,” and possibly detrimental to further attempts to repeal housing-related taxes if it does not create the new units that voters are hoping to see built. If we only have one shot at convincing voters that taxing housing is bad, and then no housing is created, he said, it erodes the trust and faith amongst the electorate.
“Now you’ve undermined your entire argument to the detriment of broader housing production in the city,” he said.
Sanandaji is right that the measure could have been better written, according to Emerald Fund CEO Oz Erickson, but he’s wrong that it will cause more harm than good.
“Is it the best designed measure ever? Of course not,” Erickson said, adding that a provision requiring union workers on conversions might have gotten opponents in labor on board. “But nevertheless, it’s a valuable, good start and should be supported.”
SPUR, formally named the the San Francisco Bay Area Planning and Urban Research Association, co-wrote a study on the barriers to office-to-resi conversions. The organization’s Planning and Housing Director Sujata Srivastava calls Prop. C an “important first step to closing the feasibility gap for office-to-residential conversions.”
Waiving the fee would amount to a savings of $45,000 per unit, she said, but the feasibility gap for most buildings is about $250,000 a unit. Therefore, the city and state should also examine other incentives and subsidies to turn “obsolete and vacant” Class B and C offices into higher-value residential buildings that would generate more tax revenues in the future, and create more housing opportunities for low- and moderate-income residents.
She said that while the measure would give the Board of Supervisors the right to make exemptions or reductions in the transfer tax, voters would still get a say on instituting future tax increases. She added that as the transfer tax is a “highly volatile source of revenues” that is expected to decrease as values decline in the city, it should not be counted on to fund necessary city programs.
“SF has the highest transfer tax of any city in the state and, at the same time, is issuing a shockingly low number of building permits,” she said. “It is wise to give elected city leaders the ability to make changes to respond to SF’s tough economic conditions and spur more housing construction and investment, especially downtown.”
Prop. C is just part of the mayor’s “all hands on deck approach to the office vacancy issue,” according to Joe Arellano, her spokesperson for the measure.
“There is much more to do, but Mayor Breed is working to implement all measures that are currently feasible as part of her commitment to reduce office vacancies, support small business, and bring new activity to Downtown,” he said via email.
Those in favor of C argue that that new economic growth would more than counter the loss in funding that would result from the measure — an estimated $34 million to $150 million over 30 years, according to the city controller.
It could take 30 years to refill the city’s 30-million-plus square feet of empty office space with workers, Erickson said, whereas residential conversions would more quickly fill the streets, restaurants and retail businesses Downtown, much as it has in other places that have offered tax breaks and other incentives on office-to-resi conversions in the past, like New York City.
“In 1970, New York had 700 people living in the Financial District. Now there’s over 80,000 people,” he said. “That worked. Now we have to do the same thing.”
While Erickson has not yet found an office-to-resi conversion opportunity Downtown, Richard Hannum of Forge Development Partners has. Forge plans to invest $70 million in the purchase and renovation of a “grande dame” of a downtown building and is aggressively pursuing other opportunities to convert historic but underutilized office towers, he said.
He supports Proposition C even though he acknowledges it only solves one of many problems for developers interested in conversions, which he compared to constructing a zipper.
“Each of the teeth in and of themselves doesn’t create a closure,” he said. “It requires touching all of these things and, collectively, you end up with enough movement.”