|How San Francisco’s New Commercial Rent Tax will Impact Property Owners and Tenants
|By Manuel Fishman, Partner at Buchalter
Manuel Fishman is a Partner at Buchalter, a full business
law firm with offices in Northern and Southern California. Mr. Fishman served as a member of the BOMA San
Francisco Board of Directors and past chair of the BOMA Government Affairs
Committee and the current BOMA liaison on the Gross Receipts and Commercial
Rent Tax Ordinances. Mr. Fishman
can be reached at 415.227.3504 or MFishman@buchalter.com
On July 17, 2018 I was honored to lead a panel discussion
for BOMA members on the newly enacted San Francisco commercial rent tax –
formally known as the “Early Care and Education Commercial Rents Tax,” because
the large portion of the tax receipts (about 85% of tax revenues) are dedicated
to fund early child care and education programs in San Francisco for children
under age 6 in families that earn less than 85% of California median
While none of us in the commercial real estate industry object,
as a general matter, to the social goal that is trying to be achieved, our
industry does object to being viewed as an open checkbook for funding
social programs that benefit all San Franciscans – and a rent tax on commercial
office space and certain retail space – a tax that is anticipated to raise over
$145MM a year beginning in 2019, targets a specific industry and its tenants,
to achieve a societal benefit. To make
matters worse, this law was not adopted by a vote of our Supervisors. It was placed on the June 2018 ballot by just
10,000 voters and then passed by the slimmest of margins, 50.3% of the people
who voted in the June election.
Here is a short summary of some of the questions we
Q: Is the tax the
same as the Gross Receipts Tax?
A: No. This is a new
tax, and property owners have to pay it in addition to the Gross Receipts
Tax. So, rents subject to the commercial
rent tax are taxed twice – once as a gross receipt under the Gross Receipts Tax
and second as rents under the commercial rents tax.
Q: What is being
taxed and is it different from what is being taxed under the Gross Receipts
A: This commercial
rents tax only tax “gross receipts from the lease of commercial space” in San Francisco–
which, for the most part, means rents.
The San Francisco Gross Receipts Tax is a tax on a broader group of
income – all gross receipts from all business activities in San Francisco.
Q: How much is the
A: The tax is 1% on
“gross receipts from the lease” of warehouse space, and 3.5% on “gross receipts
from the lease” of other “commercial space”, which includes office and retail unless
the property class is excluded.
Q: What is a “gross
receipt from the lease of commercial space”?
A: We don’t
know. The Ordinance uses the word
“lease” in several places, as opposed to the Gross Receipts Tax, which also
refers to licenses and other business activities. Does it include parking management fees? Does it include service fees in connection
with management services/ administrative services/construction management
services provided to tenants? Are
rooftop license agreements considered leases of commercial space? What about “profits” shared with landlords by
tenants who sublease space? Property
managers need to get specific advice on these questions.
Q: What property
classes are excluded?
A: Commercial space
excludes space that is used for industrial uses, art uses (a use that refers to
art studios and theatres, but not movie theatres) and for retail sales or service
activities that are not formula retail. “Formula retail” is a retail
establishment that has 11 or more establishments in operation located anywhere
in the world and has certain standardized operations or decor. In addition, rents received from non profits
and from federal, state and local governments are excluded.
Q: Are certain person
exempt from the tax?
A: Yes. Non profits that own or lease property are
exempt from the tax and nationally chartered banks and certain insurance and
public pension funds that directly own real estate are exempt from the tax. Small businesses with total gross receipts
(not just rents) in San Francisco of less than $1MM per year are also exempt.
Q: How are our tenants affected?
A: Tenants are
impacted two ways. First, a tenant that
subleases space in San Francisco has to pay the tax on the rents it is
paid. Second, landlords will most
definitely pass along to tenants the cost of the commercial rent tax assessed
on the rents paid by tenants. This
clearly makes it more expensive for tenants to do business in San Francisco,
and certain start-up industries will find the tax burdensome.
Q: Do my leases allow
me as a property owner to pass along the commercial rent tax to tenants.
A: It should – so
please check with your attorney. This is very important as the tax goes into
effect in January 2019, and if you have a base year lease you want to exclude
the tax from the base year.
Q: How is the City
going to collect this tax?
A: There is no formal
guidance from the City. The tax is
administered by the Tax Collector. Based
on preliminary discussions with the Tax Collector’s office, the City intends to
add a page to the current Gross Receipts Tax filing for the commercial rent
tax, and estimated payments will be required to be made quarterly together with
the Gross Receipts Tax.