The Facts

Mayor Lurie and Supervisor Bilal Mahmood paused the BUILD Act, and pivoted to taxing foreclosures.

Earlier this year, Mayor Lurie and Supervisor Bilal Mahmood proposed the BUILD Act, which would have cut San Francisco's transfer tax back to pre-COVID tax rates. The point of the BUILD Act was to help new apartments get built. Developers usually build and sell buildings to operators, so taxing the first sale is effectively a tax on housing production.

Since 1984 foreclosures have been exempt from paying the transfer tax. The new measure repeals that exemption for foreclosed commercial and multifamily properties, though not single-family homes or buildings with fewer than five units. It's projected to raise $200 million over three years, but if a competing transfer tax measure passes then that number may be cut in half. The bill already has six Supervisors in favor, so it is expected to qualify and appear on November's ballot.

The Context

San Francisco charges a 5.5% transfer tax on sales from $10 million to $25 million and 6% above that, which is higher than every other city in America except Los Angeles at 6.1%. NYC's transfer tax is 3.3%, Seattle's 3.5%, Philadelphia's ~4.3%, Chicago's ~1.2%, and most other big cities are under 2%.

The BUILD Act would have halved those rates, spurring more development. The problem is timing: San Francisco faces a projected $642 million deficit, and the long-term benefit of lower rates will take too long to materialize.

There is also a competing ballot proposal, a Dean Preston/DSA initiative, that would reserve half of the existing 6% transfer-tax to affordable housing and tenant programs while preserving the BUILD act's lower rate on the first sale (within five years of construction) of newly built multi-family housing.

If both measures pass, foreclosure transfers pay the full 5.5–6% — but half goes to the housing fund, cutting the foreclosure measure's revenue in half and siphoning off half of the existing transfer tax revenue away from the general fund. The competing measure also declares it prevails over any other competing measures "regardless of the number of votes cast," which is legally dubious. If both pass, expect litigation.

The GrowSF Take

We haven't taken a position yet, but there's a lot to dislike about this situation.

On the foreclosure tax:

• The case in favor: The foreclosure exemption was written for homeowners in distress, not institutional lenders moving nine-figure office buildings. If the exemption is being gamed in shrewd deals, removing the exemption would close a loophole and bolster city coffers.
• The case against: A foreclosure isn't a market sale, and the tax comes out of the lender's recovery on a loan already gone bad. At the margin it pushes lenders toward extending bad loans ("extend and pretend") rather than reselling buildings to owners who'll put them back to work. Downtown recovery depends on that reset happening fast. The foreclosure will also be taxed twice: once when the lender takes possession of the distressed property (taxed at the original value!) and again when the lender finds a new buyer. Double-taxing foreclosures won't speed up recovery; it'll slow it down.

On the competing transfer tax measure:

• The case in favor: Lowering the tax on new multifamily housing is great!
• The case against: Keeping the transfer tax at the second-highest in the nation in a city with a downtown still struggling to recover is a bad idea. And cordoning off a chunk of tax revenue while the city faces mounting budget deficits is just bad economics.

There's still plenty of time to do more research to inform our ultimate endorsement.