Mayor Breed Places Measure to Create Tax Incentive for Office to Residential Conversion onto March Ballot

The measure would waive transfer tax on projects that convert from non-residential to residential uses to encourage more housing in Downtown as part of the Mayor’s Roadmap to San Francisco’s Future
October 17, 2023

San Francisco, CA – Today, Mayor London N. Breed proposed a ballot measure to encourage investment in Downtown by waiving the City’s transfer tax on buildings that have converted from non-residential to residential use. The goal of this ballot measure is to incentivize more underused office buildings to convert into housing, which would create a more sustainable, vibrant Downtown.    

The Mayor will sign this measure onto the March 2024 ballot where it would need a simple majority to pass into law.   

This proposal is part of Mayor Breed’s Roadmap to San Francisco’s Future, a nine-strategy plan to position Downtown San Francisco for its next chapter. One strategy is to facilitate new uses and flexibility in buildings. As part of this strategy, Mayor Breed authored legislation that became effective in August 2023 amending City codes to ensure flexible zoning to accommodate the widest possible range of activities and uses Downtown. That legislation established an Adaptive Reuse Program to simplify the approval process and streamline requirements for converting underutilized office buildings into housing.   

Over the summer, the City also issued a Request for Interest (RFI) to learn more about the financial and regulatory challenges faced by specific residential conversion projects. Eliminating the transfer tax is the next step in this work to create a more diverse, thriving Downtown.  

“We are working to do everything we can to support a more diverse and dynamic future for Downtown San Francisco,” said Mayor London Breed. “By removing barriers to converting office to housing, we can take vacant space, turn them into homes, and bring more people into Downtown, which is good for our neighborhoods and our small businesses.”   

“For Downtown to be a true, 24-hour neighborhood, it needs more than just office workers,” said Sarah Dennis Phillips, Executive Director of the Office of Economic and Workforce Development. “The measure will give us another tool to incentivize capital investments in our downtown and allow the City to diversify the local economy by increasing opportunities to create a 24-hour dynamic neighborhood where people can live, learn, work and play.”  

The City’s Transfer Tax -- which is up to a 6% tax rate on transactions over $25 million – would be waived after a qualifying non-residential to residential conversion. The tax waiver would be limited to five million square feet of space converted, and require that planning approval be complete by December 31, 2029. Projects would also have to get construction approval within three years of planning approval, to ensure conversions are moving forward. If not all of a building is converted, the transaction would be prorated by converted square footage.  Transfer tax would still be due on non-converted space.  

“The temporary suspension of transfer taxes to enable the conversion of antiquated office towers to vibrant residential buildings is an essential part of the drive to restore San Francisco’s downtown, filling it with new residents whose presence will help struggling restaurants and retailers”, said Emerald Fund’s Oz Erickson who successfully converted 100 Van Ness Avenue office tower to housing.   

“We definitely support any initiative that creates more traffic downtown.  We understand there’s a housing crisis here in the City and it makes sense that some of the vacant space downtown could be converted to increase foot traffic and create more places for people to live.  We are hopeful this initiative will be an important step toward revitalizing downtown”, said Andrew Chun, founder of Sidecar Hospitality group, and owner of historic downtown restaurant Schroeder’s.  

“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, Planning and Housing Director at SPUR. “However, the city's taxes and fees remain barriers to the feasibility of such projects. We applaud Mayor Breed for advancing this necessary legislation to reduce the real estate transfer tax. This brings us one step closer to creating thousands of new homes and adding vibrancy downtown.”

San Francisco is experiencing high office vacancy with over 30 million square feet (representing 34% of the office market) currently vacant. By allowing owners to creatively repurpose buildings into housing we can simultaneously reduce the office vacancy rate and spur significant new investment into Downtown, which will help stabilize and grow the local tax base.   

Currently, this necessary investment is being discouraged by the City’s high transfer tax, which is as high as 6% for transactions over $25 million. Conversions, like all development in San Francisco today, are already financially challenged due to stubbornly high interest rates and construction costs. For projects that are on the edge of financial feasibility, a 6% tax due on the sale of a converted and leased up building is simply too expensive for this market and is discouraging owners and developers from undertaking these conversions in the first place.   

Creating housing downtown will help diversify the local economy, making it less reliant on office workers and a more vibrant neighborhood 24 hours a day. Where conversions are feasible, they also represent a more sustainable and less disruptive construction process than ground up construction, due to the reuse of foundations, structures, and other buildings elements.   

This measure will update the City’s office allocation process to accommodate a new reality where underutilized and obsolete office properties can be rebuilt to current safety standards or converted to residential by making available the square footage of converted or demolished office buildings for new office projects in the future. This way, when there is demand for new office space, the City can quickly approve projects that will provide new, high quality, seismically safe office buildings.