Office-to-residential conversions have been positioned as a way to kill two birds with one stone, repurposing the millions of square feet of currently vacant office spaces in San Francisco into much-needed homes.
The problem? Very few building owners are raising their hands to initiate the process, typically citing cost challenges.
In an effort to help encourage these transformations, Mayor London Breed is putting a measure to voters on the March 2024 ballot that would waive the city’s transfer tax on buildings that have been converted from office to residential use. The measure would need approval by a simple majority of voters to go into effect.
The city’s transfer tax is paid when a building trades hands. Currently, the transfer tax rate for properties over $10 million is 5.5%-6%, higher than the top rate of any other major city in California.
Developers argue that the tax burden makes it more difficult to garner interest in projects from investors because of the hit to potential returns when the building is sold off.
There is a fair bit of fine print when it comes to actually receiving the tax break. Under the ballot measure, the tax waiver would be limited to 5 million square feet of converted office space, roughly 5.7% of the city’s entire office stock. In order to receive the tax waiver, the conversion would be required to be approved by the Planning Department by the end of 2029.
Projects would also need to receive construction approval within three years of their entitlement. If only a portion of the building is converted, the transfer tax bill would be proportional based on what is turned into residential use.
The ballot measure builds on legislation from the mayor and Board President Aaron Peskin that passed earlier this year, which created a slew of planning changes meant to relax building standard requirements for conversion projects.
A recent report from the think tank San Francisco Bay Area Planning and Urban Research Association, better known as SPUR, found that 40% of buildings in San Francisco’s Downtown would be suitable candidates for conversion due to factors such as building size, configuration and transit proximity. Converting those buildings could yield more than 14,000 housing units.
However, the report noted that economic conditions like rising construction costs, high fees and taxes and falling apartment rents have made these conversions difficult to pencil. SPUR recommended a number of policy changes to help encourage projects including transfer tax reductions, property tax incentives and the creation of tax increment financing districts.
“Transforming obsolete offices into housing is one essential strategy to diversify and revitalize San Francisco's downtown, making it a more dynamic district while supporting struggling small businesses,” said Sujata Srivastava, SPUR’s planning and housing director, said in a statement. “This brings us one step closer to creating thousands of new homes and adding vibrancy downtown.”
Conversions are a part of the city’s overarching strategy for transforming Downtown into more of a 24-hour neighborhood, but there’s a recognition that the tactic is not a panacea. Only one major project in San Francisco has officially been pitched since the pandemic.
A call out for developers interested in conversions made earlier this year yielded eight responses.
On the other hand, the city’s overall transfer tax revenue—which is directly tied to the sale of buildings—has fallen off a cliff due to far fewer properties trading hands. In the last fiscal year, San Francisco pulled in $186 million in transfer tax revenue—the lowest number in more than a decade.
The temporary freeze on transfer taxes for conversions appears to be a bet from the city that a short-term hit to revenues is worth kick-starting the next era for Downtown San Francisco.