Property Owners Bombard San Francisco with Tax Appeals

Property owners in San Francisco—including some of the largest landlords in the city—have been bombarding the county with appeals of property tax assessments, seeking tax cuts reflecting the plunge in valuations of offices, shopping centers and hotels as well as homes.

The list of CRE players queueing up to request reductions includes Brookfield, Blackstone and Columbia Property Trust, according to a report in Bloomberg.

According to filings with the San Francisco Assessment Appeals Board, Brookfield requested a 75% reduction in the value of an office tower at 685 Market Street and a 68% assessment reduction for One Post Street.

Columbia Property Trust is asking for 50% reductions on three office buildings; Blackstone requested assessment reductions ranging from 20% to 25% on three office buildings near the San Francisco waterfront, the report said.

For the fiscal year ended June 30, San Francisco tax filers have asked for an average 48% reduction on property assessed at more the $60B. That total includes taxable business items including fixtures of vehicles, but the lion’s share of the amount being appealed is tied to land and building, the report said.

Assessments for this fiscal year were sent out in July; the deadline for appeals is September 15.

San Francisco is facing a $780M budget deficit through FY 2025, with the city’s latest budget factoring in an anticipated refund of $167M due to property tax appeals.

As an example of the appeals frenzy, Bloomberg cited Independent Tax Representatives, an accounting firm that said it has filed appeals on an estimated $11B worth of property in San Francisco during the last tax year.

Of the 2,420 appeals heard by the board in the 12 months through June 30, an estimated 55% received a reduction in taxes, the report said.

According to a report from Boston Consulting Group, valuations for San Francisco offices have dropped as much as 60%. Home prices in the city dropped 16% in June in a year-over-year comparison, the California Association of Realtors reported.

The wave of tax appeals is coming at a time when San Francisco city officials are finding themselves caught between a rock and a hard place as they race to create incentives to spur recovery at the same time they look for remedies for a yawning budget deficit.

San Francisco’s Controller’s Office issued a report earlier this summer indicating that the city’s most viable path to recovery—and drawing occupants to its hollowed out downtown—is meaningful tax reform that diversifies the tax base while paring stratospheric business taxes.

In recent years, San Francisco and its voters have piled on business taxes. According to the Controller’s report, a tech company with $30B in sales and 10,000 local employees pays 20 times more in local business taxes that it would if it were located in Mountain View, 200 times more than in San Jose and 1,300 times more than in Sunnydale.

San Francisco, which started the decade with the highest business tax burden of any city in California, has raised rates on existing taxes while continued to add on new business levies during the pandemic.

City voters have approved the creation of a Homelessness Gross Receipts Tax, a Commercial Rents Tax and something called an Overpaid Executive Tax which targets companies where there is a huge spread between what the top execs get paid and the average workers earn.

As a result, San Francisco is relying on an extremely volatile base—and handful of large tech companies who can quickly relocated or convert to remote work—for the lion’s share of taxes it desperately needs as businesses including offices and retail stores desert the city’s struggling downtown.

Mayor London Breed has proposed an overhaul of the city’s tax structure, to be developed into a tax reform ballot measure that will go to voters in November 2024. Breed has proposed to delay a Gross Tax Receipts tax increase for certain industries and to provide a temporary discount of the tax for new businesses locating to downtown.

The Gross Receipts Tax is the city’s primary business tax, generating about $800M annually for the city. Nearly 70% of that revenue comes from three tech-oriented sectors: Information (33%); Financial Services (19%) and Professional, Scientific and Technical Services (17%), according to the Controller’s Office.

According to JLL, those also are the three industries that were the quickest to embrace work-from-home policies during the pandemic—which the Controller’s report says cut Gross Receipts Tax revenue more than in half in 2021.

Any significant tax reform will need to be approved by the same voters who have been rubber-stamping increased business taxes