The implications of San Francisco’s Proposition C

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July 16, 2018

By: Wes Powell, International Director & Tom Poser, Executive Vice President

The expected passage of Proposition C will impact building owners, investors and tenants. The tax will increase the gross receipts tax paid by the landlord, directly increasing their operating expenses. Real estate owners already fund a significant portion of the city’s tax revenue. On average, San Francisco generates $300-$400 million from transfer tax and nearly $2 billion in property taxes annually.

The increase in building operating expenses places upward pressure on already high rents. Real estate professionals and city officials have cited concerns that the city will become more reliant on the tech industry and push out other industries that cannot afford the increasing costs.

In context

Any tenant under a full service gross lease that has already established its base year under its current lease will bear the full burden of the tax. The tax will be added as an overage to the tenant’s operating expenses and 100% will be passed through. On the contrary, if the tenant is in its base year, the tax will be included in the base year operating expense and will fall 100% on the landlord. Average annual full service rental rates in San Francisco for Q1 2018 were approx. $75 psf. The increased gross receipts tax will translate to an annual tax obligation of $2.25 psf per year or $22,500 per 10,000 sf each year. For NNN tenants, the tax is a direct pass through to the tenant given the structure of a NNN lease.

“The structure of San Francisco office leases is such that I would expect the vast majority of this tax to be legally passed through to the tenants of the office buildings, with only a small piece of the cost ending up as the responsibility of the landlord. This is an occupier tax, not an investor tax.” – Tom Poser, EVP

General Overview

Proposition C is a San Francisco June 2018 ballot measure formally known at the “Universal Childcare for San Francisco Families Initiative”. Under Proposition C, gross receipt taxes for commercial properties would increase to 3.5%. Commercial real estate and specifically large commercial assets are the sole target of the tax. The tax revenue from Proposition C is estimated around $150 million. Despite the measure’s title, 15% or approx. $20 million would directly go to the city’s general fund and can be used for nearly any purpose.

About us

Wes Powell

With 26 years of experience representing Landlords (16 at JLL), I co-lead the Agency Leasing practice and am responsible for a 20 building 7 million sf agency leasing portfolio in downtown San Francisco. I have closed over 14 million square feet of lease transactions and assisted with strategy and underwriting assumptions on over $8 billion of downtown acquisitions since 2000.

Contact me directly by email at wesley.powell@am.jll.com.

Tom Poser

I represent tenants in the San Francisco and Marin office markets, helping you find office space, buy buildings, and negotiate leases. Partial client list includes Bank of America, RocketSpace, Marin General Hospital, GoPro, Globant, Regus, Kiva, Indiegogo and more. I have helped secure over a million square feet of office space for my clients in the past 3 years.

Contact me directly by email at tom.poser@am.jll.com.

 

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