Decline in high-end real estate sales this year means less money for The City

Transfer tax revenues on track to come in far below previous years

Fewer properties are being bought and sold in San Francisco as compared to before the coronavirus pandemic, with the number of high-value transactions taking a particularly steep nosedive.

And that means less money coming in to city coffers.

Every time a real estate transaction occurs in San Francisco, it is subject to a one-time fee collected by The City known as the transfer tax. Last year, The City earned $335 million off of 7,447 real sales.

Those earnings are on track to come in far below prior years, though the scale of the decline remains unknown just one quarter into the current fiscal period, City Assessor Carmen Chu said Monday.

The number of monthly sales dropped by 36 percent almost immediately once the pandemic hit, and The City’s earned revenue fell right alongside it.

From July 2019 to March 2020, 682 property sales occurred on average every month citywide, generating approximately $33 million. That number dropped to 435 average monthly transactions, bringing in a comparatively meager $12 million monthly in April, May and June, according to the most recent transfer tax data from the County Assessor-Recorder Office.

Chu said that the market has since ticked back up, with the number of transactions roughly reaching pre-pandemic levels; however transfer tax revenue is still down at about $22 million monthly.

This points to a decline in the number of high-value transactions happening across San Francisco, “which will drive our revenues down pretty significantly” over time, she said.

“If you are a transaction that’s higher valued, you’re taxed at a higher rate,” she said. “Typically, much of our revenue has come from large value transactions. If we don’t see many of those large, expensive properties transitioning — downtown office space or hotels, for example — you won’t see as much revenue come in for The City.”

In other words, as COVID-19 introduces uncertainty to the future of former San Francisco hallmarks such as glitzy downtown office space, commercial headquarters and millionaire penthouses, the market for these kinds of properties stagnates, which means The City’s revenue from the transfer tax takes a hit.

Looking at the first quarter of the current fiscal year — July through October — that trend has continued.

Though the number of transactions remained fairly steady — 2,977 during the same period last fiscal year as compared to 2,774 this year — revenue declined from $157 million to $88 million.

Of that $88 million, $41 million of it was earned through just 13 sales, revealing the dependency of transfer tax revenue on large transactions, Chu explained. Going further, 53 percent of the revenue to date comes from sales of property valued at $10 million or more.

Chu speculated that skittishness or unease about COVID-19’s long term impact on the nature of work was partly to blame for the significant change in buying and selling behavior, though she described herself as “bullish” in the belief that companies and workers will continue to see value in office space.

She also said she’d heard anecdotal evidence to support the idea that some people were waiting to see what happened with Proposition I, a ballot measure passed by voters in November that doubled the tax rate on property sales valued between $10 million and $25 million.

Proposition I was authored by Supervisor Dean Preston, who told the Examiner at the time he introduced the measure in May that it was intended to protect renters against displacement, combat real estate speculation and raise funds for The City.

Chu said there might be a flurry of sales activity during December as sellers and buyers seek to avoid the tax increase, which goes into effect January 1 and will affect both residential and commercial properties.

What impact these first quarter numbers will have on The City’s already dire budget picture remains unclear for the moment, Chu said, noting it’s still early in the fiscal year and what matters more than revenue decline compared to last year is its decline compared to budget.

“I believe the controller had already assumed the budget impact, so it’s not much about whether it’s higher or lower than previous years,” she said, adding her office’s next data analysis would include how revenue changes track against this fiscal year’s budget.

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