Stiff “Anti-Speculation” Tax Headed To The Ballot Box In SFJune 17, 2014
A proposed measure which would establish a stiff tax to penalize real estate speculators in San Francisco appears to be headed for the November ballot.
Designed by the San Francisco Anti-Displacement Coalition and sponsored by Supervisor Mar with the support of Supervisors Avalos, Campos and Kim (the four votes needed to place the measure on the ballot without gathering signatures), the measure would establish an “anti-speculation” tax of up to 24 percent on the sale of multi-unit buildings in San Francisco which have been held for less than six years.
The tax would be based on the resale price of the property with the graduated tax rate determined by the length of the hold. The proposed tax rates for buildings sold within five years of being purchased:
- Sale within one year: 24 percent
- Two years: 22 percent
- Three years: 20 percent
- Four years: 18 percent
- Five years: 14 percent
The tax would not apply to “single-family homes, condos, owner-occupied tenancies in common, properties not being sold at a profit, new construction, properties being turned into affordable housing, and buildings with more than 30 units.”
Comments from Plugged-In Readers
Yes! The more taxes we add into the cost of housing, the cheaper it will be for everyone!
Wow, just wow! These guys are trying to utterly kill the RE market. The tipping point has been reached. When will we see the push back based on fundamental property rights provided by the founders of this nation.
yes, I think Jane Kim very much want to kill the market. She wants no ownership change, no tenancy change and no rent change. That solve the housing problem forever.
Why are they exempting owner-occupied tenancies in common? What about owner-occupied not tenancies in common?
Those are condos, right? They’re in the same category.
Just have to ask. Which benefactor to Mar, Avalos, Campos, or Kim arranged for the exemption from this tax for buildings with more than 30 units?
The logic could be:
A. Don’t harm the small building owner – there are likely a lot of them and they vote; and
B. Don’t harm the big time rental owner of big building- they make significant political contributions.
Yeah, that caught my eye too. My first thought was that this might be a kiss of death for the measure, as opponents can use a campaign slogan like “Don’t vote for this giveaway to large Corporate landlords!!!”
The Clown Show continues.
I think an interesting counter-tactic to the pro-rent control crowd would be a campaign (by an owners’ org – small prop of SF? SFAA?) to send a mailer to every tenant who has rented in the last couple of years, saying “You’re overpaying for your rent!! Neighbors who have comparable units as yours are paying as little as 20% in rent, even if they earn more than you! 10,000-15,000 units are being kept off the market – owners are unwilling to rent them because overly strict rent control and eviction laws make renting them too risky. ELIMINATE RENT CONTROL AND ALL OF THOSE UNITS, PLUS MANY, MANY MORE UNITS VACATED BY PEOPLE HOARDING FAR BELOW MARKET UNITS WILL COME ONTO THE MARKET AND DROP YOUR RENT BY ABOUT 20%!!!”
As it is now, most renters, even new ones, reflexively think “Oh, rent control is good – I’m a renter”. Educate them to realize that the market distortions are biting them in the butt – and only benefitting long-term renters who pay FAR less then recent renters. Might shift the equation of self-interest that has kept rent control getting more and more ridiculous.
You are so smart seeing thru rent control is actually harming renters more than the landlords in the long run!
What a dumb-ass idea
So if someone buys a building and realizes they can’t afford it – or things change…as they often do in life
they have to keep it for 6 years and drown in the debt rather than be able to sell….
so the supe’s will just pile on the pain
Asinine proposal and par for the course for Eric Mar. I also question how much tax revenue this even represents. I would love to see the math behind this idiotic idea.
Dude , i rent in a building with 8 units , 4 of which have been occupied for some years but the rents are still generous to pay the Taxes and a good chunk of the Mortgage , as for the other 4 units the turn over ever few years bringing them to market rate.
Also with Water, Bonds and Capital Improvements able to be passed through there is is little issue with the tenants covering the buildings costs.
So if there are 10,000 – 15,000 units not rented its probably more about the owners wanting to use them for personal use at some time, and not wanting to be locked into an agreement with a Tenant ,
I know a lot of people who are withholding units from the market. Of course, their reluctance isn’t the locked-in rent – they’d get more by renting a locked-in rent than they’re getting by having the units vacant. BUT, they’ve all had bad experience with tenants who they had to get rid of (usually because other tenants complained about them) – and had to pay big $$$ and go through hell to get the bad tenants out. So it’s the strict eviction controls that make them think “it’s just not worth it”
That, and they’re sick of the ever-increasing laws that make landlording a nightmare for them (they’re mom-and-pop types who actually know their tenants, not faceless Corporations who don’t – so they have to deal with their tenants personally.) So they intend to eventually sell, and know that when they do, their property will be worth more if vacant – so….save headaches, lose a lot of rent, but get some of that lost rent back when they sell. For them, the equation equals – don’t’ rent it. Let it sit vacant.
The above post about sums it up. Our building made meagre profits if any most years because we had ZERO turnover in the four units over a twenty year period. Bad tenant experiences made it clear that Ellis Acting the building and living there ourselves was the most economical and pleasant way to go. Even Ellis Acting by the books got our insurance sued and settled without a single question about the validity of the lawsuit. The lawyers for the tenants claimed every single person in the building was disabled for various reasons with notes from a paid for Dr. Then they refused to leave when their time was up. We negotiated free rent for a period of time to avoid having to go to court and pay those fees. Even trying to just remove the tenants and live there ourselves takes 1-3 years and about $100K in lawyer and Ellis Act payments. That represents about ten years of after tax gross profit from the building . Is barely $10K a year in profit worth the liability? The obvious answer was no.
The lease for life is ridiculous. Where else can the government tell you any contract you sign is one way permanent?
That’s fine and I can see keeping units off the market due to disclosure laws, access laws, etc. But to blame it on rent control alone is silly and disingenuous.
But rent control is the key element; It is only because tenants are paying way below market rate that they work so vigorously to avoid eviction. If landlord’s could charge market rate for all their units, there would be little incentive to evict tenants and little incentive to fight an eviction. Evictions would still happen for various reasons, but they would matter much less.
So, they don’t want to be landlords, and they don’t want to sell and make a giant profit. It’s just hell for them.
“Still enough to pay…”
How kind to tell people what they can do with their property.
Let me spell 2 words for you:
Dirty words for you. Founding blocks of the country you happen to live in.
might want to recheck your USA history and look for the even dirty words mercantilism, protective tariffs, and slavery.
Also, there really little reason to believe that Joseph A has the slightest clue about the real costs involved in operating and maintaining a rental building.
Rent control and lifetime leases go hand in hand. I have an in-law unit that I have kept vacant for 3 years because I don’t want a lifetime tenant. If there was no rent control and no lifetime lease rules, I’d happily rent it to someone for a reasonable price knowing that at the end of the 1 year (or what ever term we agree to in a contract), I could take possession if I needed to use the space as a home office, let a relative move in, help out a friend, etc. Regulation always has unintended consequences.
Greg- Both the SFAA and the small property owners want to talk to people like you. Call them
Hitman – it might be a good idea to explain to Greg why he should call them. I’m guessing SFAA and small prop want to gather as many legitimate anecdotes as possible, for use in campaigns against this measure and similar ones. If that’s the case, yes, Greg, call them – and I’ll have my friends who are withholding units from the market call them as well.
so if someone moves in there is really no way to kick them out? even if you don’t want to rent anymore? can’t you just NOT renew an annual lease or is there some city stipulation that makes you continue to rent to someone after the initial lease ends? serious question.
Serious answer – SF rent control law invalidates ANY clause in a rental agreement that requires a tenant to move out at any point. It even invalidates the usual “either party can terminate this agreement with 30 days written notice”. Actually it says that TENANTS can terminate the agreement, but landlords cannot.
so if i had a year lease in a property built before 1970 i could move out before the year end without punishment?
@seriously — I believe you would only be liable for rent until the landlord could fill the apartment, which in the current market is immediately. So yes.
Rent control is a virtual life estate
Thank you, I hate the “we don’t rent because of rent control” argument – so an owner would rather carry an empty building than rent for less than FMV? That’s like the silly statement “I don’t want a raise because it would put me in a higher tax bracket”. Even if true, you still net more than without it – just as a landlord of rent control units still nets more if they’re rented than if they’re empty.
You hate it because you’re either not reading the reasons why it makes sense, or you’re just not understanding it. It’s not just the RENT that is an issue – it’s possession. Once a unit is rented in SF, it’s a lifetime estate given to the tenant, at a rent that decreases every year when adjusted for inflation. And if you have a problem tenant who you are REQUIRED to evict to protect your other tenants, it’s a monster headache and a huge loss of $$$$$
Also, if you plan on selling within 3 years or so, it makes economic sense to lose that 3 years of rent in order to have a vacant unit in SF – because if you have a tenant, your buyer is buying a problem.
Let’s get real here, nobody owns any empty “apartment buildings” in San Francisco. Not when they could sell out at peak market value and invest that money anywhere else. This has to be the biggest old wives tale in town, there’s supposedly some big empty moroccan apartment building somewhere with the stubborn rent control-hating owner, but nobody can ever say where.
If that “10,000-15,000 units” figure has any validity it’s likely mostly mother-in-laws or “illegal” units. One can completely understand why a small-time owner doesn’t want to be in the landlord business, because it might seem like a free income stream, but it is actually a BUSINESS. Businesses require work and capital investment. Not everyone is up for that.
And outside of San Francisco, there’s millions of people not renting their in-law apartments and backyard cottages because it’s just not worth the hassle for them, even without rent control. It’s only the lure of ridiculous rents which puts these units into discussion in the first place.
On my block alone (half block actually) at least half of the non-owner units are vacant. And this is a block of duplex buildings common on the west side of SF. Of course, the vacant unit buildings are also the residence of the property owner and these owners have little interest in adopting a tenant for life.
My family owns six (or eight, depending on who you ask) units. We stopped renting two years ago after Ellis Acting. The building next to us has four. The building next door has been empty longer than I have lived here – ten years.
So – we have anywhere from 10-12 non rented apartments in just two buildings in the Mission.
These are fully legal apartment buildings. We are not alone. I’ve spoken at length with Tony Kelly (a very progressive guy running for Supervisor in Potrero Hill) and he was the first one that told me about the 10-15K units off the market.
Joseph- why is it that enough to pay the mortgage is acceptable. Would it be acceptable to pay you a wage that is “just enough” to pay your rent and 2500 calories per day. Why is mediocrity ok for another simply because it benefits you? You are a prime example of this notion of entitlement that is prevalent among renters. Why don’t you save for years like those of us who have ambition to make something of ourselves instead of depending on handouts. Loser!
Jesus, just repeal Prop 13 and repeal rent control and let the markets have at it.
If 49 other states can operate without Prop 13 property tax protections so can CA.
If NYC and Boston can phase out rent control so can SF.
Interesting concept. You greedy capitalist!
I don’t support this measure at all, but am just noting that CA isn’t the only state with a tax scheme like Prop 13… and the *entire state* of Vermont has a “Land Gains Tax” similar to this proposal – it’s graduated over 5 years, not 6. It’s been in place for decades; was enacted in the 1980s (IIRC) to combat development and speculation (i.e., prevent flatlanders from NYC and Boston from buying farmland and carving it up). For the most part it’s worked – but it’s also an administrative nightmare, and of course has become an entrenched source of revenue that’s now depended on and will therefore likely never go away.
I just spoke with a legislative aide in Mar’s office. He told me that this proposed surtax would only apply if the seller would not realize a loss after the surtax.
For example, a seller within one year that would realize a 22% gain before the surtax would not be subject to the surtax, but the same sale with a 25% gain before the surtax would be subject to a 24% tax. That is for sales that meet all the other conditions.
So, for a one-year resale that would qualify otherwise there would be no reason to have a resale with a profit of 24 to 48%. Less than 24% and no surtax, greater than 48% and the seller still makes greater than 24% profit after the surtax.
Seems like a clumsy way to go about this both for the market and to explain to the public.
Would be interested if anyone knows how many sales over the past few years would have been subject to this tax.
Don’t bother with trying to understand a law designed by fools. They create a new one every week without any clue on what the long-term consequences will be.
I don’t think that I understand this.
If I buy a property and it increases in value by 5% per year, then there is no tax implications for the first three years. However, if I have to sell in year 4, I will have a tax rate of 90% on my 20% gain. Can this really be right? How does this related to speculators?
AFAIK, you are correct. But notice that if you were to sell after 4 years at 17.9% gain, then you wouldn’t have any surtax.
So, you can choose to sell at either
20% gain and then suffer an 18% surtax for a 2% net gain
17.99% gain and pay no surtax, but effectively suffer about a 2% pseudo-tax
We should have the water supply at City Hall checked for neurotoxins.
I haven’t been able to find the actual wording of the proposal, but from what I’ve read the aide is incorrect. It says that the tax doesn’t apply if the sale doesn’t result in a profit. That is before tax, not after. In other words, if you have a 10% profit, you still might be subject to a 25% tax. Although a reasonable seller would simply lower the price 10% to avoid the tax. I don’t see anywhere that says the tax only applies if it is less than the gain. In any event, it is a monumentally dumb idea. Anyone that understands economics knows that by reducing the profit potential, they will decrease the supply, which will increase the cost. If their goal truly is “affordable” housing, they should be reducing barriers to entry not erecting them. Only then will investors be interested in buying, building and fixing up properties and making them available for rent.
Here is the document:
Surtax on Transfers of Residential Real Property Within Five Years of a Prior Transfer Ordinance
I did not find any part of the document that suggested that there was a breakeven-profit requirement for the tax to kick in. But I also could never be a successful lawyer because I don’t have the patience to parse these sorts of things. Please help.
Also, from a supervisor’s re-election standpoint it is much more important to ‘look like’ you are helping the housing market (entrenched voters) than to actually help the housing market.
A new rule every week. These clueless idiots are throwing their feces at the wall and see what sticks.
This is America, a nation where capitalism builds housing. All they can do with these rules is replicate Moscow ca. 1977, with 5 people in a bedroom and a coal stove for heating and cooking.
These fools do not belong in America.
“These fools do not belong in America.”
Oh dear… did you really say that? Dude, people who say crap like that do not belong in America.
Maybe a bit excessive but proportional to the idiocy of the confiscation.
Agree – they belong in a country where prices are fixed by beloved leader.
suddenly chris daly looks like a reasonable person.
He wouldn’t in this environment. Put enough fools in the same room and they’ll up themselves with crazy propositions.
Pure socialism. We all must vote next November to oust all these socialist lunatics. We need to elect
reasonable people into office. VOTE!!!!! We just can’t talk about it.
Agree – we moved to the Richmond in January – love it, but embarassed by Mar and hope someone halfway reasonable runs against him.
Mar ran in the last cycle and is not up for election. Unfortunately, his close ties with the SEIU enabled him to bring in 100’s of organizers in the last election to help “bring out the vote”. It made a huge difference.
I am embarrassed to say he is my Supervisor as well.
Communists! Comrade Kim once told me that nobody should be allowed to profit from real estate in SF. All of this was said while she glared at me through her $300 Gucci sunglasses.
I wonder what the law says about somebody that inherits a building in their family for 70 years and they need to sell to pay an estate tax.
One way to simultaneously fix the situation where hapless tenants get evicted by greedy landlords and mom&pop landlords get terrorized by over-priviledged tenants is to simply extend rent control so that even when a unit becomes vacant, its rent cannot go up more than a nominal amount set by the rent board. By removing the incentive to evict tenants to get more money, the city could then also remove eviction control, freeing the mom and pops from their bully tenants. Since rent control applies only to older housing stock, developers would still be building new units as fast as they can.
A few laws might need to be changed, possibly a constitution or two, but this seems like an appealing way to go. The only real losers are the landlords who won’t collect a windfall anymore when a long-time tenant leaves but they are all complaining about being ‘stuck’ with ‘bad’ tenants anyways, not the amount of rent they’re getting…
Ok. Let’s apply your policy to YOU and see how you like it.
Landlords are basically employees of their tenants – their tenants hire them to provide and maintain housing. By your policy, landlords can never receive more for their employment than what they did when first hired (except for a tiny amount that doesn’t even keep up with inflation) – even if they change jobs.
Let’s apply this to ALL employees everywhere. Whatever your first job was, that’s your pay – for life.
Oh, and you can’t quit any job unless you pay your employer a huge amount of $$$ and go through a long legal battle to do so. Your only right is to quit a job if you have an abusive employer – but for all your life, no matter what you do, you’ll always get the same pay as your first job (plus an annual raise of 60% of CPI).
Now that the shoe is on YOUR foot, how’s that feel?
Ecce – You can’t reason with these [people] because they are unreasonable. They think every landlord stole his property and instead of working to achieve their own home, they want the government to steal it back!
Sorry, the landlord/employee cannot quit either because of our dearest SF Mayor supporting Mark Leno’s SB1439, Ellis Act Reform.
It is simply supply and demand theory. The city needs to create more housing but not in the property owners’s expenses; the more oppressive the government is, more the property owners are forced to leave their properties vacant so to drive up the rent even more.
Actually, Landlords don’t collect a windfall when a tenant leaves; rather they are no longer a required to subsidize that tenant. Quite a difference.
It is time to challenge the constitutionality of the rent control ordinance again. For all the wannabee lawyers that say, “It is not a taking” – eff you because that was a previous ruling and times have changed. Personally, I am not in the happen of being a loser.
The rent control rules AND the other ordinances in SF, as applied in SF, deprive an owner of equal protection and due process. I know that others have lost but that does not mean that we cannot win. I have given up on the SFAA – they have turned into a weak trade group that caters to SF’s cottage industry of ret control lawyers.
It is time for someone else to stand-up and I hope the Small Property Owners Association takes that role. I will join them and lend my expertise.
Maybe the answer to this is obvious, but what is to prevent someone from forming an LLC with the building as its asset and simply selling the LLC?
If more than 50% of the LLC changes hands then the building is considered to change ownership. A bunch of property ownership corporations in San Francisco have tried to use the loophole you are describing, but SF is trying to crack down on these straw man purchases.
This is misguided.
The problem with speculation in recent times was of the “privatize the gains, socialize the losses” variety. Just today there was a post on a house that was in default since 2009 and just now hit the courthouse steps. With the 2006 refi, it could have been as many as eight years this person was in a property they could not afford. This foreclosure time scale is not nearly as uncommon as you might think. Of course, there have also been many institutional bailouts on a much larger scale.
The problem isn’t when speculators make money, it’s when they lose money and are allowed to dump the losses onto the public.
Nope, onto the banks. Now the banks are not taking their Responsibilities but that’s another story.
Onto the banks, which then needed to be bailout out by the public.
Hard to call what happened to the property market in the last decade free market capitalism and it’s tone deaf to not understand why people are angry.
It’s just that going after people who happen to make money rather than fixing the actual problems is misguided.
From the ideology that brought you the consequences of rent control on rents, this proposal will do the same for multifamily building prices. By forcing sellers onto the sidelines for five years, there will be fewer buildings available for sale, thus raising the prices of the ones that are for sale. Ironically, when they sell at the higher price, the new owner will probably be entitled to an even larger operating cost pass through to the tenants.
Other than “get the man”, what good is Supervisor Happy Meal hoping to achieve with this proposal?
“Get the votes”. Google “Tyranny of the Majority”.
I have a better idea, modeled around Denmark’s you can’t buy if you aren’t a citizen: 100% capital gains tax on non primary residences inside of SF. That’ll show them.
Even if you have owned a building for more than 5 years – what does this now do to the pool of prospective buyers? If this is anti-speculation that why are TIC’s OK? This just says you have to buy, evict and TIC if you want to avoid the tax. In essence, this is ANTI-SMALL LANDLORD not anti-speculator.
I assume the TIC exception has something to do with condo conversion. Just a guess.
This is f-ing insane. So because my home has an in-law unit, I would forfeit any gains to the city (including those resulting from the cost of the improvements I have made to it)?
This is just stunning. The fact that a proposal like this would seee the light of day is amazing. There are so many reasons a person might want/need to sell a property in under 5 years.
This insanity has to end!
Thank you supervisors Mar, Kim, Alvos, and [Campos]. I thank you for your gifts. I love how you make me rich beyond my wildest dreams. Every time you pass one of these dumb ass ideas you increase the value of my property. Thank you……Thank you…… Thank you…… Thank you……
Well as long as there’s money for a bike lane and bulb out at the 101/80 interchange so I can take my kids to school efficiently on my Lynskey Cooper Ultegra 6800… I’m down.
As I see it these supervisors are taking food out of my kids mouths. What do you do when someone takes food out of your kids mouth?
What needs to be done is to float a ballot initiative that includes 30+ buildings AND post 1979 buildings within this tax and extends rent control to the same. This will encourage the big money to properly fight this battle.
Otherwise, it’s just the common theme of blaming small property owners in SF for the cost of housing. Perhaps if the city believed that one’s profit from owning rental units should at least increase at the same rate as city pension COLI’s then we might have some common ground to begin discussions.
I agree with all of the above. I am disgusted by the tenants’ lawyers teaching their clients how to milk the system and their clients having an entitlement attitude.
As I have said before on socketsite, the only property a small holder should buy in San Francisco is one where you intend to occupy the whole as a residence. Anything else subjects you to this and many past and future laws designed to reduce the investment value of the property.
Anyone who wants to own small rental properties should buy in San Mateo County or other nearby jurisdictions without rent and other controls.
This is insane! Are we in communist country?? What they have been doing in SF are totally unconstitutional!! These oppressive politicians just want to get votes from tenant (65% in San Francisco) and acting like they were the heros before the tenants; creating enemy between the tenants and landlords; and ignoring the suffering middle class who believing in working hard owning their American Dream. The politicians did not study finance in college? Any investment should have a return. should we continue to support democratic party? What really needs to be done in San Francisco to stop these madness is to non-stop suing the city.
Judging by your handle, I assume the answer is “get violent”?
answering hitman above.
Look everyone, relax. There is zero chance that this will stand up in court. It may get thrown out pretty quickly too. To arbitrarily tax anyone who buys/sells 2-30 units is the definition of a government taking. This is not predicated on evicting tenants, or anything to do with tenant protections. What if I buy an empty building (not ellised), renovate the units, rent them out, then sell at 25% profit in 6 months? I just created housing, and did not evict anyone (and the former owner did no evictions, just natural attrition.) This is clearly a taking. Zero chance it will be sustained. This is politicians blatantly pandering to their perceived base.
You should ask for a refund on your law degree, since you apparently don’t know anything about it.
1- you did a *great* job of refuting my points.
2- I’m beyond needing a law degree; (market rate) SF rental income is all I need 🙂
two beers – Please don’t put words in my mouth… I asked what you would do?
Judging by your handle, I assume you would challenge them to a game of beer pong.
It’s our district supervisor form of government that’s the problem. The city needs to return to at large candidacy so that big boy and big girl talk carries the day. Enough of this ridiculous pandering.
If you think the supervisors are bad you should see their constituents.
yup. and kooks don’t vote. Bring back at large.
Never gonna happen. I remember when Willie packed the board with his cronies. The neighborhoods will never give up their power and cede it to big money downtown interests.
The perceived problem is that speculators can make a profit by buying a building and selling it quickly thereafter. So to discourage that practice, our esteemed supervisors propose that the government be given a cut of the profits on each flip. What could possibly go wrong with that approach?
Of course I’m against this but how is it very different from the government charging higher cap gains rate on equities held less than 12 months? One difference is the graded, extended penalty period of up to several years.
This would be similar to charging higher capital gains rates solely for smaller stocks and not for S&P 500 companies. The fact that “speculators” are so narrowly defined in this proposal is evidence that the supervisors are unwilling to take on the more powerful entrenched interests. In fact, if this proposal advances into law it serves to decrease the value of smaller rental buildings while inflating the value of larger buildings.
So what if I have held for 30 years, all of it in rent control. I have been subsidizing my tenants and raised my rents a paltry 1.6% this year. Now that I want to retire and sell to someone for the highest price, the speculators that would have bought for the highest price are now going to discount based on this tax. So in reality, speculators can just price in the tax. It is the owner who has suffered on the income side that also suffers in the sale of their remainder interest. This really affects the owners – not speculators.
You allow Supervisor Happy Meal to legislate diets and now he thinks he is god.
Cry me a river. Roll up your sleeves and get to work:
1. Apply for TIC developer loan
2. Ellis the building (or play the tenant attrition game)
3. Sell Forever TICs
4. Pass a couple of the TICs on to your kids (along with Prop 13 tax basis).
Congratulations, you just made more money than you could have by selling to speculators.
* IANAL, or an estate planner for that matter. YMMV.
FWIW, yesterday the aide in Mar’s office told me TIC developers were an example of what they were targeting with this ballot initiative.
Wait, you have 30 years of appreciation on a San Francisco home and you are asking us to feel sorry for you? Sorry bud, not going to do that. And reducing the rate of home price appreciation is exactly the whole point of this exercise right?
If reducing the rate of home appreciation is the goal, then apply this to ALL SF housing units. I might even get behind such a bill (probably not, but I could see the fairness inherent in the policy.) Of course, that would never fly so they are targeting a class of property owners that has little power in this city. The exemptions for large property owners is clear evidence of the cynical nature of SF politics.
@parklife nailed it.
Speaking of cynical: as a seller of a property you have a unique set of information about your building and how to market it. Suppose you enter into a ‘marketing agreement’ with your real estate broker wherein you provide information about the property and the neighborhood. The ‘real estate commission’ you pay your realtor is the difference between the sales price and your cost basis, and your real estate agent in turn pays you the seller for your ‘specialized marketing knowledge’ the difference between the ‘real estate commission’ as calculated and oh, let’s say about 5%.
Given the high ‘real estate commission’, the seller realizes no profit on the sale of the building (and admittedly face current income taxes on her marketing fee) but skates greatly on the ridicutax.
This is just a first pass. There have to be other work arounds. Who has an angle to preserve capital gains treatment?
Unfortunately a buyer will pay less for your 2-30 unit building. This is effectively a tax on the seller, irregardless of how long they’ve held the property.
This scheme would subject much of the gain to ordinary income taxation and would likely be a violation of RESPA.
“This scheme would subject much of the gain to ordinary income taxation” Assuming it was a <1 year hold, that would be the case anyway. It would eliminate a 1031 exchange.
Re: RESPA, I am not familiar directly, though it seems like one could structure a pre-escrow fee-for-service with a 3rd party that would raise the seller's basis similarly. Soccermom's Strategic Building Planning Service. Etc..
Sure I agree it should apply to all properties. No idea why they exempt 30+ unit properties. I am voting yes in November unless someone gives me a real reason to vote against it.
Seriously, you have no idea why they are exempting 30+ buildings?
And be prepared to see multi family housing continue to deteriorate with this tax. There will be no incentive whatsoever to rehabilitate our 100+ year old housing stock.
Constructing units for sale is time consuming and the significant lag between price signals and supply creation causes prices to overshoot on the way up and undershoot on the way down.
Speculators help reduce this by speculating on future demand and trying to have units ready when future demand arrives.
It would be silly to have builders start planning a project only when folks with money were literally knocking at their doors. Better for someone to start the process early and have units ready in the future.
Speculators dumping their losses on the public is a problem. Speculators helping the market work and reaping profit for that is not.
You could make a good case that some of our current low supply/high price problems are due to the *lack* of speculation during the bust times.
“TIC developer loan” ? do tell.
From Sirkins website (click on name for link).
As this article is written, both Sterling and Bank of Marin offer financing to TIC developers for acquisition and renovation of buildings that will then be converted and sold as tenancy in common. These loan products include a partial release feature that allows them to be repaid gradually as TIC interests are sold, and ensure that the sold TIC units are not encumbered by a blanket encumbrance.
Call Sterling Bank, for example, not the mega-banks.
Has anybody been keeping track of just how many measures are going to be on the November Ballot? Sheesh, the voters are going to go cross-eyed.
Do any of you seriously think this has a prayer of surviving a lawsuit? How is this not an obvious “taking.”
I hope/expect this won’t pass because it is bad law and hard to explain/justify.
I don’t think windfall profit taxes are “takings”. It is trivial to avoid this tax and still make a decent ROI.
Until this proposal is fleshed out, I would be hesitant to call it a “windfall profits tax”. Does it consider the cost of rehabbing a building? As I understand transfer taxes, they are based upon the value of a property at sale. So if someone buys a 4 plex for $1.5m and then invests $500k in bringing the building into a safe, habitable condition, then the tax would applied on the sale price even if the sale was for $2m (ie no profit).
If Mar wants to keep derelict rentals in SF as our “affordable housing supply”, then this is the perfect solution. I hope he is okay with the collateral damage when the earthquake hits.
It is absolutely a taking. If I own the bldg, I own whatever profit (or loss) the asset produces. Throwing an arbitrary tax on that is a taking. If the measure attempted to target sales of Ellis Act based bldgs, where tenants were evicted wholesale so the bldg can be flipped, that would at least be trying to counteract the power of the Ellis act. But blanket taxing any one who purchases a bldg, and profits from it is arbitrary and way over stepping the bounds of city government. This measure is absurd.
Nonsense. As foolish as this tax appears to be, it is certainly not arbitrary. It is targeted, even narrowly targeted, and not random or capricious.
Plenty of sales and transfer taxes/fees apply to purchases of property, goods, etc.
And there are plenty of targeted inclusions/exclusions, like the $250/500k tax-free exclusion of capital gains on home sales.
Also, it’s easily avoided by simply holding the building for 5+ years. Which is the entire intent of the proposed law. So it probably isn’t a taking.
The real issue is why people think discouraging short holds of a certain class of buildings is a good idea.
You tame price appreciation by adding supply, not by discouraging sub six year holds.
This was legal, how is this any different than a Windfall Profits tax on oil?
There is a HUGE difference. The windfall profit tax: taxes PROFIT not sale price.
I read the text of the measure. It is not a tax on profit – it is a tax on revenue. It is similar to the documentary transfer tax.
These people are capitalizing on their roles to make names for themselves in progressive circles. They have done more harm than good to SF.
This ridiculous bill would cripple even the seller who took a derelict, prop 13 causality, trust or probate sale building that was vacant and red tagged by the city, rehabbed it, monetized it by inserting market rents, and then sold it in three or four years to a longterm hold buyer/ new landlord. So a landlord who actually added to the housing pool would utterly victimized. WHAT A JOKE.
Probably can also get around this via the following:
Seller forms an LLC and transfers title in the building to the LLC.
Buyer/speculator buys all the shares of the LLC – no transfer of title
Buyer/speculator “sells” again by transferring all the shares of the LLC to the new buyer- no transfer of title and no “sale” and thus no tax. LLC’s are pass-through entities, so regular income taxes still apply, of course.
They can try to close off this avenue through wordsmithing of the ordinance, but I guarantee that some variation of this process will permit one to avoid this stupid tax. This can all be done for a pittance through any hack lawyer. I don’t think this will pass in any event as the realtors are against it, and they are a powerful lobby.
That appears to be covered by the proposed law.
This beast of ballot initiative would create about 7 pages of new law. Most of it is devoted to delineating what transactions are in and out of the scope of the law.
There are about a thousand ways to structure a transfer of ownership, and particularly the timing of the “sale” (which is the important point here), using partnerships, options, warrants, buy-back agreements, voting trusts, special purpose entities, lease-backs, etc. Any good tax lawyer or accountant knows them all. If they try to list the “forbidden” transactions in this ordinance, they will certainly leave out scores of options to get around it. It isn’t like you’re going to have trained corporate lawyers and tax specialists drafting it. And it’ll take a decent lawyer about 5 minutes to spot the slack.
This is a stupid idea. But don’t worry. Any idiot will be able to get around it and not pay a penny of this silly “speculator tax.”
I like your thinking Bob.
It sounds like you’ve bought a boat or a plane this way before…
Every year it is the same argument like Pachelbel’s Canon in D. Each side whips themselves into a frenzy for show. The world is a stage. The bottom line is that these are all red herrings designed to shift attention away from important problems like drug addicts, crime, homelessness, graffiti, bloated city budget, and pension costs your current elected officials lack the strength and will to fix. I really hate seeing my tax dollars wasted on these issues. If I wanted a show, I pay a $800 per hour call girl for one.
What if a property has ground up renovation? For instance a multi unit building, that was vacant got added to and completely upgraded — seismic, mechanical and so on. Does that qualify as New Construction as one of their exemptions?
Nope – [they] went to law school but can’t draft worth crap.
This law does not take into consideration Renovation. Here is an example of how bad this law is
1/1/14 Purchase 2 unit building for $1,500,000 with one vacancy
2/1/14 Renovate vacant unit for the owner to move in $250,000
3/1/14 Earthquake retrofit $100,000 (I know not mandated)
8/1/14 Owner gets a new job out of area and Sells for $2,000,000 and no tenant has been displaced
The Owner then gets taxed 24% plus transactional cost (6%), and renovation costs. He could stand to loose close to $450K versus make $30K if there were no tax.
But people will vote for it because real estate owners are “evil!”
Math isn’t your strong point, is it?
$2M – $1.5M = $500k “taxable gain”
$500k * .24 = $120,000
$2M * .06 (really .05 but I will use your numbers) = $120,000
$240,000 total costs
Gain = $2M – ( 1.5M + .25M + .1M) = $150,000
$240,000 – 150,000 = $90,000 total loss.
Where do you get $600k?
@NVJ – I am sure many people will believe that the tax is on the profit on the sale. The tax is actually on the gross sale amount – it works like a transfer tax, here is the document:
You are wrong he is right.
Transaction cost is agents + transfer tax.
This is not a tax on gain but an extra (huge) transfer tax.
That is what it is so lousy.
Ugh you are right, what a crazy tax. I am voting against it.
Avalos caught with his pants down. I do not think this has any influence on his incompetence though.
Democrats to endorse anti-speculation tax? (namelink)
Seems like the natural answer is yes, they will endorse it.
But in San Francisco, there is always a chance for some Slick Willie Brown moves to swing the pendulum behind the scenes.
We find out Thursday?…
the natural answer for democrats on this ludicrous, populist taking is a resounding hell no
While I would agree with you, in terms of handicapping the outcome it is the ‘San Francisco Democratic Party’ voting, which is hardly blue dog.
you would agree with me? Because you initially said the opposite and the point was “natural.”
I think it is natural for far left leaning San Francisco Democrats to vote for policies that favor renters for fear of being cast as evil right-wingers.
I’m making an observation about a probable outcome, not advocating that outcome. Like how I think hundreds if not thousands more people will die from Ebola. I don’t want it to happen, but I think it is a likely outcome.
Does that make sense?
I would say that you’re modifying San Francisco Democrats and basically lumping them in with progressives as a whole. The rank and file SF Dem is actually a lot more centrist than far left.
Sup Chiu is apparently an influential vote on their board. Let’s see if he’s serious about moving up to a state seat, or if he’ll just be another nutter from SF. Cause this measure is beyond stupidity, and sure to get reversed in court as over reaching and a taking.
So, the San Francisco Democratic Party did in fact, narrowly endorse Proposition G. I am sure our editor can find a link if he wishes, and normally frowns on linking to other “web logs’, so I will avoid that.
Noteworthy story yesterday in the gate (namelink) about various supervisors trying to shroud themselves in the afterglow of St. Harvey Milk. It turns out Milk’s idea for an ‘anti-speculation’ tax would have applied only to profits on sale of a multi-unit, not to the gross price. Such a distinction in the context of current debate would almost seem like ‘reasonable’ legislation.
they could have overturned it if they voted like real Dems. but three or four of them cowardly abstained.
Yes, property owners in SF are supposed to pay tens of thousands per year in property taxes, they are supposed to pay all costs, assume all risks, pay for maintenance/upkeep/repairs, insurance, they can never raise the rent more than 10 bucks no matter how much their costs go up, they can never evict even when they want to retire and get out of the dreadful business of being a landlord, and if they sell their property they must pay any profits to the City.
What the BoS is doing is making the dam against money higher and stronger. But the river just becomes bigger and stronger, and in the end more destructive. Money always finds a way (use your best Jeff Goldblum Jurassic Park impression), despite the short-sighted delusional actions of the populists.
First off, I hope this proposition fails but I suspect the average SF voter will vote yes just to stick it to the “greedy speculators”. However, if it does pass I would suggest that the first purchaser of a multi-unit building challenge his/her property tax assessment claiming that the true value of the property is 24% less than the purchase price.
RE: asking for a property tax cut due to 24% taking
I like the idea, but prop 13 ensures that the assessed value be stuck to what you originally paid + a token annual increase. With these numbers in mind, having a 24%+ property tax increase means you are way past the 5-year window of this proposition. Your property tax is already discounted of market appreciation.
Supervisor Chiu is a Harvard graduate (both undergrad and law school) so one would assume he has more sense than some of the other supes. Then again, Supervisor Kim is a Stanford grad so make no assumptions. Proof is in the pudding, so to speak.
“Supervisor Chiu is a Harvard graduate (both undergrad and law school) so one would assume he has more sense than some of the other supes.” I find the suggestion of forming expectations about adult behavior based on college attendance to be a perilous exercise.
Yes, the illustrious Ted Kaczynski graduated from Harvard. Now there was a man with some “sense”.
Chiu is a disgrace. He is obviously acting in his best interest so as not to give the opposition any ammunition in his attempt better his political career. He is gutless. There are no true leaders in SF – just politicians. Although I think he is the better option, I have to vote my self interest too. Therefore, I will now vote for Campos. Although he is a bigger nutcase, he can do less damage to me in Sacramento.
Huh? Campos sponsored this POS.
Campos did and he is the biggest communist on the board but in Sacramento he will be useless. In Sacramento, he won’t be able to pass any of his crazy anti-property rights ideas.
G doesn’t make sense. I think everyone is missing the real point here, 2,500 2-30 unit buildings (or 15,000 apartments) have sold since Jan 2010, every one of those investors will be subject to this tax (it’s retroactive) if they want or need to sell within five years of their purchase.
There were 300 TIC sales per year over the past 5 years, of those more than half were resales so no one was evicted to create those sales (there were most likely evictions/buyouts when they originally sold but not at resale so you can’t count them twice), so that leaves maybe 100-150 apartments per year (out of 200,000 rent controlled apartments) that were vacated through eviction or buyout (compared to 3000 apartments sold as buildings) to create TIC units to sell (at a price that is 10-25% below Condo/Co-op prices in most cases) and those units are still under rent and eviction control.
This tax might slow down some developers who plan to evict tenants but it will really hurt all other investors who buy expecting to have appreciation and the flexibility to sell when they want or need to.
The net effect will be that “Evicting Developers” will have an advantage over “Buy and Hold” investors. They will evict tenants and not offer huge buyouts. Investors will back away since no one wants to be locked in for five years, the developers will absorb the hit but they have more room since the building market will cool off.
“This tax might slow down some developers who plan to evict tenants . . .”
You can stop writing there. That is the whole purpose of Prop G. It will pass, and this is the reason why it will pass. Because tenants want to slow evictions, and they do not care about all of the other effects or considerations. A dumb law, to be sure, but dumb laws that are “pro-tenant” are almost certain winners in SF.
Predictions anyone? My bet is that this passes 55-45. I hope that I’m pleasantly surprised Wednesday morning.
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