Proposition C would waive the transfer tax on San Francisco office buildings that are converted into housing. The transfer tax is a one-time fee imposed on real estate sales. According to existing law, office-to-residential conversion projects, which are likely to have a sales value of $25 million or more, would be required to pay a transfer tax of 6% of the value of the sale.

To obtain the transfer tax waiver, project sponsors would need to obtain planning approval by the end of 2029 and begin construction within three years of receiving that approval. The transfer tax exemption would be limited to a citywide cap of 5 million square feet of converted space.

The amount of square feet of converted office space would be restored to the annual allocations set by 1986’s Prop. M, a measure approved by voters that restricts the amount of office space that can be approved annually. Each year, newly proposed developments must apply to be a part of that year’s office space allocation. Under Prop. C, if office building owners want to demolish or redevelop their properties, they would be able to do so without applying for a Prop. M allocation of office space.

The ballot measure would enable the city to make future changes to the real estate transfer tax legislatively through the Board of Supervisors, rather than sending proposed amendments to voters.

The Backstory

The real estate transfer tax is charged on development after a property is sold. Because it fluctuates with market conditions, it is one of the city’s most volatile revenue sources.

In the last 15 years, voters have repeatedly approved increases to the real estate transfer tax rate through ballot measures. San Francisco’s transfer tax rate is the highest of any large city in the Bay Area, and it has been identified as an obstacle to attracting private investment and new housing development.^[1]

The revenues from the transfer tax are put into the general fund, meaning that these revenues cannot be designated for a specific purpose. However, the Board of Supervisors has passed nonbinding resolutions that have tied revenues from the transfer tax increases to specific city programs, including free college tuition and affordable housing.

Office-to-residential conversions are one way to accelerate downtown San Francisco’s recovery. The office vacancy rate is at a historic high and is likely to remain so for years due to the effects of hybrid work. According to real estate firm JLL, the office vacancy rate is 32%.^[2] About one-third of the vacancy is in Class B and Class C buildings that are less desirable to office tenants and that are at risk of becoming obsolete. Vacant office buildings produce no revenues for the city other than property taxes, which are based on the assessed value of the real estate.

The Office of the Controller expects that the value of office space will decrease in response to the drop in demand and that significantly fewer transactions will occur than in past years.^[3] Recently, some office buildings have sold for between 20% to 40% of their pre-pandemic prices.^[4] This market slowdown will substantially reduce transfer tax revenues compared to the last decade.

In 1986, San Francisco passed a voter measure, Prop. M, that caps the amount of office development that can be approved each year at 950,000 square feet. More recently, 2020’s Prop. E tied approval of office development to the amount of affordable housing built. As a result of these policies, San Francisco has occasionally been unable to approve office development projects to accommodate a growing number of companies and jobs. To avoid further constraining the office supply in downtown San Francisco in the long term, the measure allows for any office space that is removed in a conversion to be allocated back to the Prop. M “reserve.”

In February 2023, Mayor London Breed announced her Roadmap to Recovery strategy for San Francisco’s economic recovery, which included establishing a new commercial-to-residential adaptive reuse program. The Board of Supervisors subsequently passed legislation to waive certain Planning Code requirements that were barriers to conversions, but it included no financial incentives for conversions. Prop. C will advance the goals of the mayor’s roadmap by making it less costly to convert office buildings to housing.

Prop. C was placed on the ballot by the mayor. The measure requires a simple majority (50% plus one vote) to pass.

Equity Impacts

In the past, San Francisco’s real estate transfer tax has been viewed as a source of funding for City College of San Francisco, rent relief, and affordable housing programs, resources that disproportionately benefit low-income households and people of color. However, the transfer tax is highly volatile and likely to decrease, given expected declines in real estate values in San Francisco, and therefore it cannot be counted on as a major funding source for city programs to assist vulnerable, low-income people and people of color.

To the extent that the real estate transfer tax waiver results in the construction of housing downtown, it has the potential to create more housing opportunities for low- and moderate-income residents.

Pros

• Accelerating office-to-residential conversion projects would speed downtown recovery by reducing the cost of development.
• Transforming obsolete office buildings into housing would bring back foot traffic and economic activity in vacant spaces.
• Because any lost office space can be returned to the Prop. M allocation, there would be no negative consequences for the city in terms of office capacity in the long term.
• The measure would allow the Board of Supervisors to make future changes to the transfer tax legislatively, without having to run another ballot measure, making it easier for the city to adjust the real estate transfer tax based on economic conditions.

Cons

• The measure could reduce the city’s real estate transfer tax revenues by $34 million to $150 million over a 30-year period, according to the Office of the Controller. However, if the measure resulted in housing conversions of obsolete office buildings that would have remained vacant, the city would gain more property tax revenues.
• The reduction in the real estate transfer tax is not sufficient to close the feasibility gap for most office-to-residential conversion projects. In most cases, additional incentives are needed to make these projects financially viable.