Oakland could tap its distressed downtown real estate for revenue with 'foreclosure tax'

A rule of thumb for city finances: if the real estate market is doing well, so are city coffers.

But now, as a number of Oakland apartment and office buildings face foreclosure, city leaders are looking to capture revenue from a downturn too.

Earlier this month, the Oakland City Council advanced a measure to the November ballot that would allow the city to impose its real estate transfer tax on certain foreclosure-related transactions, which are currently exempt. 

"We're seeing a substantial increase in foreclosures," said Council Member Charlene Wang, who sponsored the proposal, during the July meeting. "That will not last forever."

Oakland's Finance Department estimates that, if authorized by voters, the measure could generate $4 million to $13 million a year.

Commercial real estate investors who jumped into Oakland in the late 2010s seeking to benefit from the spillover of San Francisco's tech boom have seen their fortunes reverse quickly. Remote work hollowed out Oakland's downtown core, and even six years after the start of the pandemic, it still hasn't recovered. Downtown's vacancy rate was 30% last quarter, according to Colliers, up from single digits in 2019.

Apartment developers have also struggled. Rents remained largely flat for several years, frustrating investors who had counted on steady increases to cover construction loans and other debt. Although rents have recently started to climb again, many owners have already defaulted.

The list of foreclosed properties includes the Clorox Building on Broadway; ZO Oakland, a 206-unit apartment building on Webster; and a trio of office buildings that Starwood Capital Group spent nearly $500 million on in 2019. Just this week, the owners of 1 Kaiser Plaza, home to the national headquarters for Kaiser Permanente, defaulted on a loan, a sign of a potential foreclosure.

Oakland's real estate transfer tax, paid when properties change hands, can be volatile, rising and falling with the real estate market. It's also one of the city's most significant sources of revenue. Last year, the transfer tax generated $93.2 million, making it the city's third-largest tax revenue source behind property taxes, which brought in $309.7 million, and business license taxes, which generated $129.7 million.

As the Federal Reserve started raising interest rates in 2022 to combat rampant inflation, the higher borrowing costs slowed the sale of homes, offices and other properties across Oakland. As a result, transfer tax collections have been down.

Oakland leaders are also scrambling for new sources of revenue after voters in June rejected a parcel tax that city leaders had hoped would raise $34 million a year to preserve existing services. 

The city charter requires any changes to the business tax to go to voters, and it's unclear whether they'll sign off on the change. But residents might be relieved to see Oakland squeezing corporations and large lenders for revenue, rather than turning to them again.

But city staff warned that foreclosure transactions often involve complex ownership arrangements that can make it difficult to determine who should pay, and that the tax could be a challenge to enforce.

Foreclosure transactions would be taxed under the city's existing tiered property transfer tax, approved by voters in 2018. Properties worth over $5 million are taxed at 2.5%, and most other properties are taxed around 1.75%.

The measure would preserve exemptions for foreclosures initiated by small California community banks and for single-family homes and other residential properties with fewer than four units. Properties converted into homeless shelters within three years of foreclosure would also be exempt.

Oakland's measure follows a similar "foreclosure tax" proposed by San Francisco Mayor Daniel Lurie and Supervisor Bilal Mahmood in June. Their proposal would exempt single-family homes and residential buildings with fewer than five units. Mahmood estimates it could generate roughly $67 million annually during its first three years for the city.

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