Proposition C—the Commercial Rent Tax for Childcare and Early Education—is set to take effect on January 1, 2019, and increase the Gross Receipts Tax (“GRT”) on commercial rents in San Francisco.  As discussed in our previous post, Proposition C competed with Proposition D—the Housing For All Commercial Rent Tax—and prevailed with San Francisco voters in June.

The City’s existing GRT regime already imposes a tax on the gross receipts of many businesses operating within San Francisco, with a current GRT rate of approximately 0.3% imposed on commercial rents.  Gross receipts tax refers to the tax on the total amount of money received or accrued by a person from doing business in San Francisco, less specific statutorily excluded items.  In addition to the existing GRT, the City’s new Commercial Rent Tax imposes a tax of 1% on amounts received for rentals of “warehouse space,” and a tax of 3.5% on amounts received from rentals of other “commercial space” in the City.

The Commercial Rent Tax will significantly increase the local tax burden on commercial property owners in San Francisco, and taxpayers’ advocacy groups have filed suit against the City and County of San Francisco seeking to invalidate it, claiming that Proposition C was passed in violation of the California Constitution.  At issue is whether the “special tax” imposed by San Francisco voters by initiative requires a two-thirds majority to pass.

Unless the challenge is successful, the Commercial Rent Tax will take effect on January 1, 2019.  Landlords may be able to pass some of the resulting expense on to their tenants with triple net leases, depending upon the expense pass through language in the leases.  Going forward, landlords will need to consider this tax when drafting such provisions, and tenants will want to pay close attention as well when negotiating their leases.

Commercial landlords in San Francisco who already pay tax on the lease of their space will find the process familiar, as returns for the new tax will be filed in the same manner and on the same schedule as the current gross receipts tax.  The rules for filing combined returns applicable to the current rent tax will apply: the taxpayer must file returns on a combined basis with all of that taxpayer’s related entities, i.e., those entities with which the taxpayer is permitted or required by the California Franchise Tax Board to reflect income on the same combined report.

For a more in-depth discussion of the GRT regime in San Francisco, including its history, the current applicability, and information about determining the tax, please refer to the recent Coblentz publication examining this topic.

This summer, the San Francisco Board of Supervisors approved legislation that increased the Transportation Sustainability Fee (TSF) for large non-residential projects, amended the HOME-SF (Housing Opportunities Mean Equity-San Francisco) Program to temporarily (through 2019) reduce Program requirements, and created a new administrative approval process for 100% Affordable Housing Bonus Program projects.

TSF Increase for Large Non-Residential Projects

In June 2018, the San Francisco Board of Supervisors approved a Transportation Sustainability Fee (TSF) increase for large non-residential projects (over 99,999 gross square feet (gsf)) citywide, with certain exceptions.  This increase follows a major overhaul of transportation fee requirements in 2015, which imposed higher transportation fees citywide for most projects.  The legislation characterizes the increase as $5.00 per gsf (based on the 2015 original TSF rate); however, according to the current Development Impact Fee Register, due to interim increases based on indexing, as of January 1, 2018, the TSF was $21.14, and the actual fee increase is $2.90 per gsf.

There are certain exemptions and exceptions to the fee increase.  For example, for most large non-residential projects in the Central SoMa Plan Area, the fee will be $21.04 upon the effective date of the Central SoMa Plan Area rezoning and associated Planning Code amendments under Board of Supervisors File No. 180184.  The fee increase also does not apply to projects with a Development Agreement approved prior to June 5, 2018.

The TSF for residential, hospital, health services, PDR, and other smaller non-residential projects (under 99,999 gsf) is not affected by the legislation and there are no changes to existing grandfathering clauses and exemptions.

Amendments to HOME-SF Density Bonus Program

In July 2018, the San Francisco Board of Supervisors approved legislation to temporarily reduce HOME-SF Program requirements.

As explained in more detail in our prior blog post, the HOME-SF Program seeks to increase affordable housing production, particularly housing affordable to middle income households, by encouraging project sponsors to provide additional on-site units as affordable.  Certain Planning Code modifications and density bonuses may be granted by the Planning Commission for qualifying projects, including up to 20 feet of additional building height without the need for a Height Map amendment. Previously, in order to qualify for the Program, at least 30% of on-site units were required to be designated as affordable, as compared to the lower percentages (18 to 20% for rental and ownership projects, respectively) otherwise required under the San Francisco Inclusionary Housing Ordinance.

The recent legislation reduces HOME-SF Program requirements for projects with a complete Environmental Evaluation (EE) application on file before January 1, 2020.  For qualifying projects with 25 or more total units, the 30% requirement is reduced to 23% or 25% for a height bonus of up to five and ten feet, respectively.  For projects seeking a height bonus between eleven and 20 feet, the 30% requirement still applies.  For smaller projects only seeking a height bonus of up to five feet, the 30% requirement is reduced to 20%, which, again, is the same as the current on-site Inclusionary Housing Ordinance requirement for ownership (i.e., condo) projects.

Although the required AMI spread for affordable ownership units (80%, 105% and 130% of AMI) and affordable rental units (55%, 80% and 110% of AMI) remains the same, changes were made to the percentage of affordable units required at those AMI levels.  For example, although a qualified HOME-SF Program project seeking 20 feet of additional building height would still be required to designate at least 30% of on-site units as affordable, more of those units could be rented at 80% and 110% of AMI. See Planning Code Section 206.3(f) for more information.

The recent amendments also require the Planning Commission to approve or deny a HOME-SF Program project within 180 days of submittal of a complete application, unless an EIR is required for the project. See Planning Code Section 328 for more information about the Planning Commission review process.

New Administrative Approval Process for 100% Affordable Housing Bonus Program Projects

The July 2018 legislation referenced above also created a new administrative review and approval process under Planning Code Section 315.1 for 100% Affordable Housing Bonus projects, as defined under Planning Code Section 206.4.

These projects will now be reviewed and approved administratively by the Planning Department, notwithstanding any otherwise applicable Conditional Use (CU) authorization requirement related to a specific land use or use size limit.  The Planning Director may also grant “minor exceptions” to Planning Code requirements (in addition to  Planning Code Section 206.4 modifications), including exceptions from residential usable open space, loading, rear yard, dwelling unit exposure and parking requirements, and modifications of other Planning Code requirements that could otherwise be modified through the Planned Unit Development (PUD) process, regardless of the zoning district. These exceptions are similar to what is currently available by Planning Commission authorization for downtown projects and projects in the Eastern Neighborhoods under Planning Code Sections 309 and 329, respectively.  Even though these modifications are substantially broader than those otherwise permitted under Section 206.4, they are available  in limited circumstances (i.e., to “appropriately shift” building mass to respond to the surrounding context and only if such modifications “do not substantially reduce or increase the overall building envelope permitted under Section 206.4.”).

The Planning Department’s determination will be appealable to the Board of Appeals through the  building permit process, but any requests for Discretionary Review (DR) by the Planning Commission will be denied if and when the Commission delegates its DR authority to the Department for 100% Affordable Housing Bonus projects, as contemplated by the legislation.  The CEQA determination for a project will be separately appealable to the Board of Supervisors, unless the project qualifies for ministerial approval under Senate Bill (SB) 35, as locally implemented pursuant to Planning Director Bulletin No. 5 (which should be amended to account for new Section 315.1). See our prior blog posts for more information about SB 35 and the local implementation of SB 35.

California voters will consider a November ballot initiative (Proposition 10) that would repeal the 1995 California Costa-Hawkins Rental Housing Act (“Costa-Hawkins”). Costa-Hawkins generally limits rent controls that may be imposed by local jurisdictions on housing units in buildings with a certificate of occupancy issued after February 1995, prohibits local jurisdictions from expanding rent control to include “vacancy control,” and exempts single-family homes and condominiums from rent controls, with limited exceptions.

In San Francisco and Los Angeles, Costa-Hawkins prohibits rent control for housing units in buildings with a certificate of occupancy issued after June 1979 and October 1978, respectively, because of the local rent control ordinances that were in effect in those cities when Costa-Hawkins was adopted. In other words, in San Francisco, rent control only applies to tenants in buildings built before June 1979, meaning that generally, owners of buildings built after that date can increase rental rates at any time (subject to required notice) to reflect market conditions.

Proposition 10 is not the only attempt to repeal Costa-Hawkins in the recent past. In 2017, Assembly Members Chiu, Bloom and Bonta introduced AB 1506 to repeal Costa-Hawkins, which was rejected by the Assembly Housing and Community Development Committee, in part because two Democrats abstained from voting.

If passed by California voters, the ballot initiative would allow—but not require—local jurisdictions to adopt rent control laws without any state-imposed limitations related to the type of housing or the date that a certificate of occupancy was issued for a building (see above). If Proposition 10 were to pass, the San Francisco Board of Supervisors could vote to impose rent control on units in buildings built after June 1979, including new construction. Earlier this month, the San Francisco Board of Supervisors voted on a resolution to support Proposition 10. That resolution failed, with “no” votes from Supervisors Cohen, Safaí, Stefani and Tang.

The Coalition for Affordable Housing is leading the campaign in support of the initiative and the California Apartment and Rental Housing Associations are leading the opposition, with major donations from the real estate investment and development communities. A myriad of elected officials, businesses, organizations, labor unions representing the construction trades, and some affordable housing developers and advocates are also in opposition. Opponents generally argue that Proposition 10 would worsen the existing housing crisis because it would discourage investment in housing. Supporters, including the California Democratic Party and the California ACLU, generally argue that Proposition 10 is necessary to protect residents from being displaced due to skyrocketing rent increases.

Earlier this summer, Bay Area voters passed Regional Measure 3 with 54% of the vote, authorizing $4.5 billion of transportation improvements throughout the region. Commuters will pay a $1 toll hike on seven Bay Area bridges, excluding only the Golden Gate Bridge, beginning on January 1, 2019. Our original article summarizing RM-3 lays out the planned improvements. 

San Francisco commuters may have already noticed new Muni railcars on the N-Judah line, added in late June 2018 with money from other sources. With RM-3 funding on its way, Muni officials estimate that 68 new cars – featuring automated stop announcements and new seating configurations – will go into service by the end of next year.

RM-3 requires the Bay Area Toll Authority (BATA), a joint-powers agency with the Metropolitan Transportation Commission (MTC), to establish an independent oversight committee to manage the allocation of funds throughout the nine Bay Area counties. The committee would submit an annual report to the State Legislature, detailing the status of the projects in the Measure’s operating and capital expenditure plans.

The construction schedule for RM-3 projects is not expected to be determined until next year, pending the resolution of a taxpayers’ lawsuit seeking to invalidate the Measure.  The lawsuit claims that the toll hikes are a tax requiring a two-thirds vote of the Legislature to qualify for the ballot.

We expect more information about the RM-3 improvements beginning in January of 2019, when the Measure is scheduled to take effect, and we will continue to provide updates.

 

Competing special purpose tax measures are on the San Francisco June ballot, both of which would raise the tax on gross receipts from the lease of commercial space in San Francisco.  The tax rates in the measures – generally, 1.7% and 3.5% – would be a steep increase over the current gross receipts tax rate applicable to commercial rents of around 0.3%.  Either proposed tax would be in addition to the gross receipts tax already in effect and would become operative on January 1, 2019.

Prop D: Housing For All Measure

Proposition D would impose a tax of 1.7% on gross receipts from the lease of commercial space in San Francisco to fund low- and middle-income housing and homelessness services.

Exemptions would apply to:

• A small business with gross receipts within San Francisco of $1,000,000 or less.
• Private foundations and non-profit organizations that are exempt from income taxation under California or federal law. Further, rents paid by such organizations are not considered gross receipts subject to the tax.
• Any structure or portion thereof being used for “production, distribution and repair”, “retail sales and services”, or “entertainment, arts and recreation” (as these categories of uses are defined in San Francisco’s Planning Code).

This measure is sponsored by San Francisco Supervisors Ahsha Safai, Jeff Sheehy, Katy Tang, Malia Cohen and Mark Farrell.  A two-thirds supermajority vote is required for the approval of this measure.

Prop C: Universal Childcare for San Francisco Families Measure

Proposition C would impose a tax of 1% on gross receipts from the lease of warehouses in San Francisco and 3.5% on gross receipts from the lease of all other commercial space to fund early care and education for children up to five years old.

Exemptions would apply to:

• A small business with gross receipts within San Francisco of $1,000,000 or less.
• Private foundations and non-profit organizations that are exempt from income taxation under California or federal law. Further, rents paid by such organizations are not considered gross receipts subject to the tax.
• Rents paid by federal, state or local governments.
• Any structure or portion thereof being used for “industrial uses”, “arts activities”, or “retail sales or service activities or establishments” other than “formula retail” uses (i.e., chain stores) (as these categories of uses are defined in the San Francisco Planning Code).

“Industrial uses” and “arts activities” are significantly narrower subsets of the uses that comprise “production, distribution and repair” and “entertainment, arts and recreation”, respectively, under the Planning Code.  For example, unlike under Proposition D, “business services” uses would not be exempt.  Another difference from the Proposition D exemptions, as noted above, is that “formula retail” uses would not be excluded under this measure (i.e., leases for chain stores such as Starbucks would be subject to the tax).

San Francisco Supervisors Jane Kim and Norman Yee led the citizen initiative campaign for this measure.

Proposition C requires a simple majority to pass, whereas Proposition D requires a two-thirds vote to pass.  However, only one of the two proposals can be adopted because each measure provides that if both are approved by San Francisco voters in June, then the measure with more affirmative votes will become operative.  The San Francisco Controller estimates that Proposition D would generate approximately $70 million in net annual revenue for San Francisco compared with approximately $146 million expected from Proposition C.

On the June 5, 2018 primary ballot, voters in the nine Bay Area counties will vote on Regional Measure 3 (RM-3).  The measure would authorize toll increases on seven Bay Area bridges – all but the Golden Gate Bridge – to fund large-scale improvements to the region’s transportation infrastructure.  If approved, tolls would increase by $1 in January 2019, with subsequent $1 increases in January 2022 and 2025.

The legislation aims to remedy the Bay Area’s “traffic epidemic” by funding approximately $4.5 billion of transportation improvements over the next 25 years.

Some of the major projects that would be funded by the toll increases are:

• Provision of 300 new BART cars to decrease overcrowding – $500 million
• Extension of BART through Santa Clara to Downtown San Jose – $375 million
• Extension of CalTrain Downtown to the new Transbay Transit Center – $325 million
• Bay Area Corridor HOV Express Lanes on the I-80 Bay Bridge, I-580, I-680 in Alameda and Contra Costa, I-880 in Alameda, I-280 in San Francisco, and Highway 101 in San Francisco and San Mateo – $300 million
• Implementation of the Ferry Enhancement Program, which would include new vessels, additional and more frequent routes, and a new terminal in Mission Bay – $300 million
• Improvements to the Contra Costa Interstate 680/State Route 4 Interchange, which would include widening of Highway 4 – $210 million

The ballot measure has the official endorsement of many prominent organizations, including the Bay Area Council, the League of California Cities, SPUR, the San Francisco and Oakland Chambers of Commerce, and the California Labor Federation.

On May 10, 2018, the San Francisco Planning Commission voted unanimously to adopt the Central SoMa Plan and its Implementation Program by certifying the EIR and recommending approval of implementing legislation, with modifications. It also recommended approval of the proposed Central SoMa Housing Sustainability District (HSD), which is separately sponsored by Mayor Mark Farrell and Supervisor Jane Kim. The Central SoMa legislation will next be considered by the Board of Supervisors.

Central SoMa Plan

The Planning Commission’s recommended modifications include a Central SoMa Mello Roos Community Financing District (CFD) participation requirement for projects that include new construction or the net addition of more than 40,000 gross square feet on a “Tier B” (residential only) or a “Tier C” property, as defined under proposed Planning Code Section 423.2.  An exception would apply if the project’s square footage would not exceed the total that could be approved under current law.

See the Central SoMa website for information about other recommended modifications. The recommended modifications to increase potential housing production, which are summarized in our prior blog post, were incorporated in the substituted legislation introduced by Mayor Farrell and Supervisor Kim last month.

Central SoMa Housing Sustainability District

The HSD would include all property within the Central SoMa Plan Area. Residential projects in the HSD meeting the following criteria would qualify for a 120-day streamlined ministerial (i.e., no CEQA) review and approval process, including design review by the Planning Department:

• Residential uses are principally permitted (i.e., do not require conditional use authorization) on the subject property;
• Residential density would be between 50 and 750 units per acre;
• The majority of the square footage would be for residential uses;
• No more than 24,999 gross square feet would be for office uses;
• The building height would not exceed 160 feet (unless the project is a 100% affordable housing project);
• At least 10% of units would be designated as permanently affordable to very low or low-income households, as defined under Planning Code Section 415;
• Prevailing wages would be paid and/or skilled labor would be used for construction, depending in part on the number of units proposed and project timing;
• There is no locally significant historic structure (i.e., designated landmark or contributory or significant structure under Articles 10 or 11 of the Planning Code) on the project site;
• There would be no demolition, removal or conversion of any existing dwelling unit(s) on the project site;
• If a density bonus is requested, there would be no significant shadow impact;
• All applicable mitigation measures in the Central SoMa FEIR would be implemented;
• All applicable adopted design review standards would be met; and
• All applicable zoning standards would be met.

The clock on the 120-day HSD review and approval process would not start until the Preliminary Project Assessment (PPA) process is completed, all required application materials and affidavits (e.g., to implement mitigation measures) are submitted, and any studies required pursuant to any applicable mitigation measures are completed to the satisfaction of the Planning Department’s Environmental Review Officer.

HSD project approval would follow a public hearing held by the Planning Department and would be appealable to the Board of Appeals.  A building or site permit for the project would generally need to be obtained within 36 months of project approval.

The proposed Central SoMa HSD legislation is authorized under AB 73, which was sponsored by Assemblymember David Chiu and signed into law in 2017.

We will continue to monitor the proposed legislation through the approval process.

[Originally posted on March 19, 2018, updated on April 11, 2018]

Building on the state’s major housing legislation from 2017, Senator Scott Wiener’s SB 827 proposes major increases in height and density for qualifying housing developments. A project would generally qualify if it is within either a 1/2 mile radius of a major transit stop or a 1/4 mile radius of a stop on a high-quality bus corridor, as defined in the bill. The legislation was introduced in January and was amended on March 1 and April 9, principally to address tenant relocation and inclusionary housing concerns and to extend the operative date of the bill to January 1, 2021 (with a potential one-time one-year extension) to address timing concerns raised by San Francisco and other local jurisdictions. For qualifying sites, permitted heights would be at least 45 to 55 feet (originally, 45 to 85 feet), regardless of local height limits, unless the height increase would result in a specific, adverse impact, as defined in the bill. Major areas of the state, including large portions of several of its largest cities, would be affected.

Battle lines have emerged, with supporters such as SPUR, SFHAC, Silicon Valley Leadership Group, the Bay Area Council, and California YIMBY claiming that the legislation is a bold, necessary solution to the housing affordability and climate change crises. Opponents such as the City of Palo Alto, League of California Cities, and the Sierra Club of California assert that it is a threat to neighborhood stability and an invitation to gentrification.

On March 15, the Planning Commission held an informational hearing on SB 827, and the Planning Department prepared a detailed analysis of how it would apply in San Francisco. The report concludes that SB 827 would apply throughout most of San Francisco and would significantly upzone most of the areas of the City where there has traditionally been resistance to increasing height and density limits. Among questions and concerns raised in the report:

• The height limits would be additive to state density bonus incentives and could result in heights greater than proposed in the legislation.
• The City could continue to enforce certain objective design standards (for example, to require building sculpting), as long as certain minimum floor area ratio (FAR) limits are preserved. However, the bill’s language creates some uncertainty about exactly what local discretion is retained.
• The legislation does not include funding or time for local jurisdictions to study and implement impact fees to mitigate effects of the upzoning. The April 9 amendments attempt to address this concern.

At the Planning Commission hearing, there was support for some of the objectives of the legislation, but Commissioners generally expressed concern about the “one-size-fits-all” approach and potential negative consequences for San Francisco if the bill passes in its current form.

On April 3, the San Francisco Board of Supervisors took a formal position in opposition to the legislation.  Previously, following vigorous public debate, the Land Use and Transportation Committee approved amendments to a resolution in opposition to SB 827. The resolution was reframed to urge amendments that would preserve certain local control and allow the economic benefit of height and density increases to be recaptured for affordable housing and other public benefits.  The full Board rejected the Committee’s recommendation and instead approved a resolution introduced by Supervisor Peskin opposing the bill.  The vote was 8-3, with Supervisors Breed, Safai and Sheehy opposed. Opposition was generally focused on the legislation’s impact on local control, lack of public benefits and mitigation, and tenant displacement.  Proponents emphasized the magnitude of the state-wide housing crisis and advocated for amendments to address displacement and other issues.

Assemblyman David Chiu has unveiled his long-promised legislation to establish a modified version of the state’s former redevelopment program, aimed at creating major state funding for affordable housing, transit, and other infrastructure. Chiu introduced AB 3037 as placeholder legislation on February 16 and amended it on March 19. Committee hearings began on April 11.

When redevelopment agencies were eliminated in 2011, cities and counties lost approximately $1 billion in annual funding for affordable housing. Following on the heels of major state housing legislation passed in 2017, AB 3037 would allow cities and counties to establish new agencies (each, a “redevelopment housing and infrastructure agency”) to capture tax increment within designated geographic areas for affordable housing, transit priority projects and other specified infrastructure and community facilities. The legislation attempts to address critiques of former redevelopment agency spending abuses by adding auditing and other accountability measures. The state would also agree to repay any property tax losses to local school districts.

Key features of the legislation include:

• A requirement for state (Strategic Growth Council) consent that establishment of the local agency would further statewide greenhouse gas reduction goals.
• Department of Finance review and approval based on specified standards, including state fiscal capacity and consistency with a to-be-negotiated tax revenue cap.
• Housing preservation and development requirements, including implementation of anti-displacement policies, and dedication of at least 30% of the available increment to affordable housing.
• Detailed auditing and record keeping, with major fines for non-compliance.
• Authority to issue bonds to finance housing or infrastructure projects.

We will continue to track this legislation as it moves through Committee hearings.