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Sunday, July 25, 2021

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UncategorizedThe Big Lie on the anti-speculation tax

The Big Lie on the anti-speculation tax

The answer is Zero -- and that's just fine
The answer is Zero — and that’s just fine

By Tim Redmond

The campaign against San Francisco’s anti-speculation tax is trying to replay the successful effort in Richmond to shoot down a soda tax. It’s not just misleading, it ignores the entire point of the tax measure.

A flier that arrived in my mailbox today – similar to one that was on the Board of Realtors website – argues that none of the money from the tax will go to affordable housing.

That’s what Big Soda did in Richmond – the companies argued that none of the money from a sugary-drink tax would go to fight obesity.

Clue phone: The state of California, thanks to some very bad laws, forbids cities from levying taxes to fund specific programs, unless there’s two-thirds voter approval.

The soda tax in San Francisco needs two-thirds for that very reason; organizers here were willing to risk winning a much higher threshold to avoid the argument that the money might (gasp!) go to general government activities (you know, like police, and fire, and parks, and Muni … that sort of thing.) They feared a repeat of the Richmond campaign.

The anti-spec tax drafters decided they would have a tough enough time getting 50 percent of the vote against a well-funded landlord onslaught, and two-thirds would be nearly impossible. So it’s not a special tax; it’s a general tax.

So what does the No on G flier say? “How much of the revenue raised from the Prop. G housing tax must go to creating affordable housing? Zero.” Yes, thank you: That happens to be state law.

But there’s a much larger point here.

The anti-speculation tax – no, it’s not a “housing tax,” it’s a tax on flipping property – isn’t designed to raise money.

Odd – a tax that isn’t about raising money. Most of the time, when you pass a tax bill, you expect revenue.

But in this case, the sponsors of Prop. G would be thrilled if it never brings in a penny.

That’s because the tax is designed to take the profit out of speculation, to make it much more expensive to buy a building, Ellis the tenants, and resell it quickly. You tax away a lot of the profit, and speculators won’t do the deal.

Nobody wants speculators to keep flipping buildings just so the city can bring in tax revenue – which, by the way, won’t make a dent in the affordable housing problem. It’s supposed to be a penalty, a disincentive to do something that most of us think is socially detrimental.

You can’t outlaw speculation; this is America, after all, and even the grossest forms of capitalist excess are protected by the Constitution. But you can make it unprofitable, maybe – and that’s why Prop. G exists.

So the campaign thus far is not only misleading; it’s completely wrong. Who cares where the money goes? If Prop. G works, people won’t flip buildings and we won’t get any money, not one cent for affordable housing. And the housing and tenant advocates will declare victory.

Tim Redmond
Tim Redmond has been a political and investigative reporter in San Francisco for more than 30 years. He spent much of that time as executive editor of the Bay Guardian. He is the founder of 48hills.
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74 COMMENTS

  1. I am 100% with Sam here. People should understand that this proposal will absolutely do nothing to deter evictions. In fact if you read the proposal line by line it doesn’t have one part mentioning tenants or evictions. It is an arbitrary tax that focuses on 2-30 units or single family homes with inlaws. If this proposition passes, first thing a single family home landlord will do is to eliminate their inlaw so that they are not subject to this proposition. What is the only way to do that: evict the tenant. Simple as that. Also this will limit the inventory available in San Francisco and put more upward pressure on prices. Already the prices are out of control. They will even go higher. Just so that we are all on the same page. Higher prices directly translate into higher rents. So if anyone thinks tenants will benefit from Prop G, wake up. It will certainly hurt tenants and it will annoy a lot of landlords. I am actually at a loss on who it will benefit.

    We all want evictions to stop and housing to be more affordable. Prop G has absolutely nothing to do with these goals. It will accomplish the opposite goal.

    I read the proposal line by line. Please take time to read the proposal (it is only 11 pages) before voting yes. It is well intended but will have disastrous consequences.

  2. Tim,

    This proposal, as written, is extremely unfair to small landlords (large landlords are exempt given the fact that the supporters prefer not to antagonize their benefactors). The punitive tax is applied regardless of whether the landlord has performed an eviction and is purely based on the sale price. So if a landlord buys a building, puts his/her money into rehabilitating the building, and then needs to sell within 5 years, he/she is subject to a VERY excessive transfer tax. There is no consideration as to whether said landlord performed ANY evictions whatsoever or whether there is a profit made on the sale.

    If the tenant activists continue down the path of punishing small landlords and refusing to acknowledge the very real imbalances in the cost to maintain rental housing then they will see the supply of affordable rentals dropping still further.

  3. Yes, Medalist, I personally know the two people who have bought a TIC in the city in the last few years. One is a teacher and the other is a nurse. Both were tenants before they bought.

    Exactly the kind of evil rich people that Tim hates, right?

  4. Tim, it’s not the market to blame for the cost of the new units. Do you know it costs $600k just to build a 700sqft basic 2 bedroom in this city? With 200k of that for land 200k for construction and the remainder JUST for getting it through the city? That includes a permit process that can take over 5 years just to break ground. How the hell is a developer gonna build anything except for the rich if they want to even turn a 20% profit and with an abnormaly long and therefor extremely risky investment period?

    Btw I saw some $500k TIC sell recently. All average workers, no very rich buyers, payments were all around $2k/mo. Shouldn’t we be pushing for more of this?

  5. No, the only relevant return on investment here is the one you are currently getting, which is compared to the yield you could get on the same sum invested elsewhere.

    And the sum that could be invested elsewhere is the net proceeds of any sale i.e. the current value not the original value.

    The point being that if I can increase my income by switching to another property or investment, then I would and should do that. That is why an investor would quit on a rental property even though his income has not gone down and his costs have not gone up.

  6. If you want to use technical terms, use them correctly. ROI is calculated based on initial costs. The argument people are making here is that a landlord’s income is not going to go down, whether or not the tenants are rent controlled, and that’s where the ROI (by it’s correct definition, not yours) applies.
    (References: Look up the first 5 or 20 financial websites that come up when you search “Return on Investment.”)

  7. However many homes are currently being built in SF, it is clearly not enough. And the fact that 500,000 SF workers commute in from outside the city shows that SF has massively failed to build enough homes for the workers it needs, and the rest of the Bay Area has bailed us out by building more homes than they need for their workers.

    The fundamental problem is that you’re trying to be a NIMBY and a supporter of affordable housing at the same time, when in fact the two are contradictory. It is the city’s own land use policies that have made housing scarce and expensive.

    To the other, sure a 60 year old landlord can sell up when he gets sick of the business. But who is going to buy a building for 2 million that produces rents of 50K a year (and I’ve seen real-life examples of that for sale)? Only an investor who will Ellis.

    Anyone who has “paid rent for many years” has had a very good deal because their landlord has had an increasingly bad deal. Sooner or later the imbalance has to be remedied.

    Finally, yes, perhaps there are some tenants who deserve to be subsidized (although many others do not). But the obligation for that should not be pushed out to a relatively small number of private individuals as at present. Rather, those subsidies should come from the community (assuming voters agree), and they should be targeted on cases of real need. The Section 8 model is much better and fairer. Public housing, on the other hand, has been a failure.

  8. Medalist, there is a ton of housing being built in San Francisco right now. None of it is affordable to the average SF worker. It’s not about the city’s climate, it’s about a failed market the only creates housing for the very rich.

    Sam: If you don’t want to be a landlord at age 60, sell the building.

    I will be honest here: I don’t think housing should be treated as a speculative commodity. It’s a human right. People who have lived in a building and paid the rent for many years deserve the right to stay. You obviously disagree. But don’t be telling me that it’s unfair to the poor landlords.

  9. Tim, it is entirely possible to make a real estate investment and have a variety of outcomes, some of which are favorable and some which are not. As Medalist says above, this is less of a concern with large rental buildings because, due to the law of large numbers, they will always have turnover.

    But for a 2-6 unit building, there is a huge disparity of outcomes depending almost exclusively on the turnover you get. And that means that a certain subset of owners will experience zero turnover meaning that the building is no longer viable, even if it was viable upon purchase.

    Bear in mind also that tenants come in many different varieties. Good ones are an asset; bad tenants can be a nightmare. It can make a difference.

    Finally landlords get older like everyone else and what was fun to do at age 40 can become stressful at age 60.

    For all these reasons, things change and so owners may need to Ellis (or sell, but then the only likely buyers will Ellis anyway because the numbers don’t stack).

    Finally, let me rephrase your last sentence:

    “Meanwhile: If you don’t want to be Ellis evicted — under the laws of California, which include fundamental property rights — then it’s easy: DON’T BE A TENANT in a building that is likely to be Ellis’ed.. Nobody forces you to rent the kind of home that is more likely to be Ellis’ed, i.e. a building where everyone is paying a low rent.

  10. Tim, we really can’t blame the middle man – the buyer, operator, flipper, or speculator. The fact is they are just a vessel to meet a demand for housing. Nor can we blame the buyer of the TIC, or the newly arrived renter for needing the demand. Shoot, the fact that there is an enormous demand for housing should be a good thing for a city that is well managed. It’s that the City has failed create an environment where enough housing is available for both those that require the benefit of subsidies and those that want $1m units. Trying to stop the supply side won’t stop the demand nor the middle mans who are fulfilling the demands through speculation and arbitrage.

  11. Y, I don’t know which textbook you think you got that from but no serious investor thinks that way. It’s the current value (less selling costs) that is important because that is the sum of money you would have to invest elsewhere is the yields are better elsewhere.

    The historic cost basis is used for computing capital gains but otherwise it is a historical footnote. It’s now that matters. The so-called “yield on cost” isn’t that relevant.

  12. There’s a simple solution here for people who don’t think they can made adequate profits as landlords in San Francisco: Don’t buy a rental building. If you think the only way you can make money is to Ellis your tenants, then the price is too high (driven by speculators). If you can’t make a decent return WITH rent control, WITHOUT evicting tenants, then you paid too much for the building. Put your money somewhere else. Seriously: Rental property in SF rarely sits on the market for months and months. Someone else will buy it. Maybe once we make it clear that speculation driven by Ellis evictions and flipping has to stop, and the city moves to stop it, prices for rental property will stabilize.

    Meanwhile: If you don’t want to be a landlord — under the laws of San Francisco, which include rent control and tenant protections — then it’s easy: DON’T BE A LANDLORD. Nobody forces you to buy rental property.

  13. It’s called “Return on Investment”, not “Return on Current Hypothetical Market Value”. It’s calculated based on the money you actually put into an asset in real life.

  14. Most larger commercial properties bought by sophisticated investors have ok returns. Although I have seen some in the 3 CAP range which probably only for those that need depreciation or simply a place to store wealth as to not lose it when the next massive confiscation comes around. It’s the smaller properties that have lacked turnover is where appreciation has GREATLY outpaced rents and they simply can’t be operated as an investment as they will lose money at the sale price. There are so many examples of these. Just like the owner of the Park Lane realized, he required at least 5% growth to even just maintain the property and with 1% rent increases he would lose money over time. Thus he Ellised.

  15. Of course it will, because you look at the ROI as a percentage of what the building is worth now, and not what you paid for it years or decades earlier. Because it is the current value that you would realize by selling and investing elsewhere.

    If I paid a million for a building yielding 100K a year in rent, then that’s an initial 10% return. But after a few years and the building is worth 2 million, then that 100K annual rent is now only 5%. But if I reinvest that 2 million elsewhere, I will get 10% a year. So it’s an easy decision to switch.

    It’s a fairly simple concept.

  16. 94103, Eli’s point, which I agree with, is that maintenance costs are generally predictable (including reroofing every 20 years or whatever) when you buy the rental property. Before the real estate boom landlords were still able to reroof their property. That’s not even considering maintenance passthroughs.

  17. Y, as a building gets older the plumbing, roof, dryrot issues etc… need to be addressed. A reroof is $10,000!

  18. If the property returned 10%/yr when you bought it, it’s not going to give you any less now, even with rent control.

  19. The argument isn’t that landlords make a loss (although many more would but for some favorable tax breaks like the ability to deduct depreciation) but rather that if a landlord is unlucky and gets no turnover, then the profits each year will dwindle to the point where the returns are not as good as on other investments.

    And when a business is inadequately profitable, it will be closed down. Ellis is the safety valve for those who provide rental housing long-term but who are unlucky. It restores balance to the equation.

    The effect of rent control is to reduce the supply of rental housing, thereby driving rents up, not down. You cannot force people to run a business where the profits are stagnant and you cannot get rid of unprofitable customers.

  20. I’m not alarmed because the tax will be ruled illegal by the courts.

    You are not subsidizing your landlord. You are paying for a service – the provision of housing in a town where housing is scarce and valuable. Or do you think your landlord should provide you with a home for free?

  21. Eli, you may be or have been a property investor but you don’t think like one. What matters to an investor isn’t the avoidance of a loss. After all, why take all that risk, incur a large mortgage and commit all that capital if all you are going to do is break even?

    No, an investor looks at his ROI, usually expressed as an annual percentage return on his capital, and then compares it to the return available on other investments. And he also takes into account the relative risk of those comparable investments, and how much time and effort they will consume.

    The stock market has returned an average of about 10% a year for decades now, and those returns come from you doing nothing other than sitting in an armchair. So running a SF rental property must give you more than 10% for it to be worth all the extra hassle and risk.

    If your SF rental property is only giving you 5% a year, because of rent control, then it makes sense to switch your business. Ellis is simply the mechanism to do that. You cannot force someone to run a business if they no longer wish to.

    And yes, an investor knew the figures and the risks when he bought. but then any tenant who rented his place since 1985 knew about the Ellis Act and so cannot complain either. That argument cuts both ways.

  22. Here is a real life scenario What if during the eviction process you decide to rescind the eviction and sell (ala pineapple boy llc). You sell it for the SAME price you bought it (1.25 million). Did you know that the Prop G tax will be over 250,000?

  23. Thank you, Sam, as always, you are what in Buddhism we call a good friend, an adversary who stirs up passion and unites the people to stand up and fight. Great article, Tim! I am proud to have been in attendance at the tenant conferences with remarkable folks who came up with this idea!

  24. Eli makes so much sense here. When you buy rental property, you need to pencil out whether the (existing, rent-controlled) rents will bring in enough to cover the (fixed) mortgage and the (fixed) property taxes and the (predictable) maintenance. If you don’t, the bank will do it for you when the people there decided whether to loan you the money. You can make MORE profit by evicting tenants, but very few landlords are LOSING money in San Francisco.

  25. “It is quite simply not viable to rent out housing at a loss…”

    What are you talking about?

    I have bought and rented out property. Have you? If so, you first sat down and calculated what your expenses would be and whether the likely rental income and future value of the property would be worth it. No one forced you to buy something that you couldn’t possibly make money on. If there were existing tenants with rent control, then the seller’s asking price should have taken that into account; otherwise, either you paid too much, or you were a speculator counting on being able to evict those tenants (or being able to convince some other buyer down the road to pay an even more inflated price in the hope that they would be able to). But if the price was reasonable and the property was worth it for you, there’s no reason you should be losing money on it. Your property taxes and utilities are not going up faster than the rents. Your mortgage payments are not going up. You’ll be doing repairs and maintenance, which, again, should’ve been figured into your due diligence. It’s likely that some of your tenants will move out at some point, in which case you’ll start making money faster, but the world doesn’t owe that to you.

    Of course, these days we’re in a bubble and there are so many speculators around that every seller thinks they’d be a sucker to ask for a realistic price… so it’s not a good time to buy a building. But that’s not the tenants’ fault; the market is broken. And if Prop G helps to discourage speculation, that will actually make it easier to become a property owner.

  26. Fiacre, you should show your landlord who’s boss and leave your unit. Screw him he doesn’t deserve your hard earned money! That’ll show him!

  27. Methinks poor Sam here is confused on who’s subsidizing whom. I’ve been sending monthly checks to my landlord for years. I live under rent control yet he drives a Mercedes.

    Sam’s alarmism is a good sign that Prop. G could work to curb the speculative landlords’ worst abuses. Yes on G!

  28. So you totally ignore the real problems with this tax i.e. that it is discriminatory, punitive, confiscatory and is almost definitely going to be bounced by the courts.

    Not to mention that this anti-profit tax is not a tax on profits at all, but rather a tax on the gross value of the property, which is un-related to any putative profit. Oh, and that larger landlords are exempt anyway, and that this tax specifically targets mom’n’pop property owners.

    You cannot strong-arm small property owners into becoming welfare providers. It is quite simply not viable to rent out housing at a loss to anyone who thinks they deserve to live in a town that they cannot afford. Your journey here is futile because it relies endlessly on the infinite kindness of strangers.

    We are done with handouts. If the city wants to subsidize rents, then it should go to the voters and ask for billions in tax hikes.

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