San Francisco currently grapples with a pressing issue as major property owners, including some of the city’s most influential landlords, dispute their property tax assessments. Notable entities like Brookfield, Columbia Property Trust, and Blackstone are among those advocating for marked reductions in their evaluated property costs, putting the city’s fiscal stability to the test.

Key Insights:

• In the fiscal year concluding June 30, appeals have sought an average of a 48% deduction on properties appraised at over $60 billion.
• San Francisco projects a staggering $780M budget shortfall extending through FY 2025.
• The city has witnessed a sharp 60% fall in office property evaluations, while residential property prices shrunk by 16% in June compared to the previous year.
• A major tech enterprise in San Francisco, boasting $30B in revenue and a workforce of 10,000, could pay up to 20 times more in local business levies compared to if they were based in nearby locales like Mountain View.
• The city’s main business tax, the Gross Receipts Tax, which yields approximately $800M yearly, saw over half of its 2021 revenue evaporate due to the pandemic-induced remote working trends prevalent in three pivotal tech sectors.

Understanding the Valuation Dip: 

Recent submissions to the San Francisco Assessment Appeals Board underscore the severity. Brookfield, for example, has filed for a staggering 75% slash in the valuation of its office building situated at 685 Market Street. Blackstone, in contrast, is advocating for reductions between 20% to 25% for its waterfront properties. These requests have driven the average reduction appeal to 48% for properties valued cumulatively at over $60 billion as of June 30.

The decline isn’t confined to office properties; the broader market reflects similar trends. Current data indicates a significant valuation drop for commercial properties, alongside a noticeable decrease in home prices.

Challenges to City’s Finances: 

San Francisco’s financial landscape is becoming increasingly complex, with a projected budget shortfall of $780M anticipated to stretch into FY 2025. This significant deficit already poses challenges for city planners and officials, and the situation is further complicated by potential refunds stemming from property tax appeals. An estimated $167M might need to be returned to property owners if these appeals succeed, adding another layer of uncertainty to the city’s financial planning efforts.

The volume and success rate of these appeals underscore the gravity of the situation. By the midpoint of the year, the Assessment Appeals Board had processed 2,420 appeals, and a striking 55% of these resulted in approved reductions. This high approval rate indicates not only the merit of many of these appeals but also the shifting dynamics of the property market in San Francisco, which could have long-term implications for the city’s revenue streams.

Reassessing the Tax Landscape: 

San Francisco’s existing tax regime faces mounting criticism. Over the years, with local support, the city has imposed substantial business taxes, with some tech behemoths, generating billions in sales, bearing a disproportionate brunt compared to their counterparts in neighboring cities.

Conclusion

In a bid to rectify this imbalance, Mayor London Breed has proposed an extensive revamp of the city’s tax architecture. Slated for a November 2024 presentation to the electorate, the proposal envisions deferred tax hikes for specific sectors and potential incentives for businesses considering downtown San Francisco as a potential base. 

As San Francisco grapples with its financial challenges—highlighted by the projected $780M deficit lasting until FY 2025 and potential property tax appeal payouts—the city’s real estate and financial dynamics are gaining national attention. 

By June 30, of the 2,420 appeals reviewed by the Assessment Appeals Board, 55% received reductions. This is not a trend isolated to San Francisco. Major cities like Kansas City and Chicago are beginning to experience similar challenges, hinting at a broader urban shift in property valuations and municipal finance across the nation.