San Francisco’s budget just suffered another blow.
As office buildings languish downtown, the city’s transfer tax revenue — that is, the money it collects on real estate transactions — waned in the most recent fiscal year to its lowest point in more than a decade, according to a report from the city controller’s office. San Francisco Business Times first reported the report’s findings.
The city’s meager $177.7 million in collections during the fiscal year that ended in June was nearly $45 million less than budgeted, reflecting the fact that “few large office buildings traded hands, and those that did, traded at reduced prices,” the report stated. The number of taxable transfers stayed relatively flat from the last fiscal year.
“Some of that could be that people are unsure of whether they want to invest in commercial real estate in San Francisco, and some of it has to do with the availability of capital — with really high interest rates, it’s just harder for anyone to buy anything,” said Michelle Allersma, budget and analysis director for the controller’s office. “It’s a tough sales environment.”
While transfer tax is notoriously volatile, the controller had predicted that revenue would grow in 2024 and 2025 and return to its prior long-term average by 2026. The city this year expected $95.4 million in transfer tax revenue from transactions valued at $10 million or more but reeled in only $44.9 million. That shortfall, and the risk of a similar one next year, suggests that new budget cuts will be needed, the report warned.
It’s a story of bad news getting worse. San Francisco officials recently warned that the budget deficit could swell to $1 billion if President-elect Donald Trump withholds federal funds from sanctuary cities, as predicted. In short, it’s a massive headache for Mayor-elect Daniel Lurie.
“I’m building a team rooted in accountability, service, and change to tackle the city’s historic challenges,” Lurie said in a statement, “including any expenditure reductions that may be required in light of the budget shortfall.”
The city’s transfer tax revenue has been on a downward spiral for several years. While transfer taxes reeled in more than $500 million annually in the 2010s, San Francisco has faced declines since the outbreak of the Covid pandemic. The exception was 2022, when the city saw several major sales and the implementation of higher tax rates on expensive properties.
Transfer tax revenue includes both commercial and residential sales, but because the city’s fee depends on the price of the transaction, commercial sales account for much more. At the top end, transfer taxes for sales valued at $25 million and more ring in at 6%. Some transfers are exempt, such as when a buyer pays less than the property’s outstanding loan.
The last time San Francisco’s annual transfer tax revenue was this low was in the wake of the Great Recession, when it was $135 million, the city’s chief economist, Ted Egan, previously told The Standard.
Meanwhile, some property owners are trying to decrease their assets’ valuations, which could lower the amount of property tax revenue SF brings in. There’s been an increase in property owners petitioning the city to reduce the value of their holdings in recent years. If the city is struggling, the property should be worth less than when it was thriving, the rationale goes. (For example, the owner of a building leased to offer controversial sleeping pods recently appealed for a decline in value.)
The city expects “increased risk to property tax revenue” because of anticipated reductions, the report said. “Remote work and high interest rates” will continue to adversely affect the city’s finances, it added.
According to Allersma, the city budgeted $219 million in transfer tax revenue for 2025. “If revenues don’t improve over last year, that will add to our budget deficit,” she said.