San Francisco Taxpayers Face Distress Over Real Estate Decline
Demand Asset Reassessment and Tax Relief from City Authorities
Local Government Also Fears 'Tax Revenue Cliff'
As the U.S. real estate market cools down, property owners in San Francisco, known for its high housing prices, are demanding asset reassessments and tax reductions from city authorities. They are requesting tax cuts to reflect the decline in real estate prices, raising concerns about a potential 'revenue cliff' for local governments in the U.S.
On the 16th, Bloomberg reported that an analysis of city data revealed San Francisco taxpayers requested an average tax reduction of 48% on assets worth over $60 billion (approximately 80.3 trillion KRW) during the fiscal year ending in June. Taxpayers are demanding a reassessment of real estate values to reduce taxes in line with falling land and building prices.
The city commission reviewed 2,420 requests submitted by taxpayers over the past year and granted tax reductions on more than 55% of them. Anticipating continued protests from taxpayers, San Francisco recently prepared its budget assuming it will need to refund $167 million (about 224 billion KRW) in property taxes over the next two fiscal years.
Asset management firms owning real estate, such as Brookfield and Blackstone, have also requested asset reassessments and tax reductions from city authorities. Independent Tax Representative, acting on behalf of its clients, demanded such measures for $11 billion (approximately 14.72 trillion KRW) worth of real estate last year. Mark Ong, the founder of the company, described the volume of tax reduction requests as "like drinking water from a fire hose," adding, "I've been doing this for 37 years, but I've never seen a year like this."
The U.S. real estate market experienced a prolonged period of low interest rates, which led to increased real estate investments aimed at capital gains and rising prices. However, since the Federal Reserve's rapid interest rate hikes starting in March last year, the market has quickly cooled. Over the past year, rising interest rates have caused the value of residential and commercial real estate to decline rapidly. Especially with the increase in remote work after COVID-19, office vacancy rates have surged, making commercial real estate a significant weak point in the market.
According to the global consulting group Boston Consulting Group (BCG), office building prices in San Francisco are expected to fall by up to 60% compared to pre-pandemic levels. Loan delinquencies and defaults are also increasing. In fact, owners of San Francisco's largest shopping mall, two hotels, and two office buildings managed by institutional investor Pacific Investment Management have stopped repaying their mortgage loans this year. The median home price in San Francisco also dropped 16% year-over-year in June, and residential home sales decreased by 17%.
The decline in real estate prices is not unique to San Francisco. Joint research by New York University and Columbia University predicts that New York office prices will fall by 44% by 2029 compared to pre-pandemic levels due to the impact of remote work. New York City's real estate tax revenue is expected to decrease by about 20%. Similarly, property owners in Los Angeles, Chicago, and New York are strongly demanding reassessments of property values and tax reductions from city authorities due to the sharp drop in real estate prices.
Jay A. Nebloff, a real estate attorney at the Manhattan-based law firm Kramer Levin, stated, "In New York, everyone protests their taxes. It's like a rite of passage. But this time, the protests are truly justified."
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