State high court rejects challenge to S.F. property transfer tax that cost a corporation $12 million

San Francisco’s tax also applies to the value of liens held on a property, personal property and other assets connected to the real estate holding. In addition, the city defines transactions broadly to include changes in ownership of corporations and other entities that possess the property.

The owner of two San Francisco office buildings that face nearly $12 million in taxes, interest and penalties contended San Francisco was bound to follow the lower state tax rate. A state appeals court disagreed in March, saying transfer taxes were subject to local regulation and noting that San Francisco is the state’s sole “city and county.” The ruling became final Wednesday when the state’s high court unanimously denied review of the owner’s appeal.

The buildings cover 17 stories at 211 Main St., a few blocks from the Embarcadero, and 11 stories at 260 Townsend St., south of Market Street. San Francisco assessed transfer taxes on the owner, CIM Urban REIT, after a merger in 2014 changed the ownership of CIM’s parent company.

In a 2020 decision upholding the taxes, Superior Court Judge Ethan Schulman said a local real estate transfer tax “is a municipal affair that does not implicate significant state interests.” The First District Court of Appeal agreed in its March 3 ruling and also rejected CIM’s argument that ownership of the two buildings had not actually changed, so they should not be subject to a transfer tax.

Although the titles to the buildings had not changed hands, the court said, a 2008 ballot measure, Proposition N, approved by more than 68% of San Francisco voters, allowed the city to levy a transfer tax after a change to the corporate ownership of real estate.

Prop. N was “intended to avoid evasion of transfer taxes by entities transferring ownership interests in lieu of transferring real property,” Justice Henry Needham said in the 3-0 ruling.

Needham quoted ballot arguments by sponsors of Prop. N who said multinational companies were costing San Francisco millions of dollars by using shell companies to hide ownership transfers. He noted that the measure, which also increased transfer tax rates, applied only to property worth more than $5 million.

City Attorney David Chiu, whose office defended the law in court, said Wednesday, “We have consistently maintained that San Francisco voters have the authority to choose how the city taxes real estate transactions within its borders, and today’s decision by the California Supreme Court confirms that. This ensures that large corporate entities cannot use complicated ownership schemes to avoid paying their fair share of taxes.”

Lawyers for the property owners were not immediately available for comment.

The case is CIM Urban REIT v. San Francisco, S274032.

Bob Egelko is a San Francisco Chronicle staff writer. Email: Twitter: @BobEgelko

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