California Supreme Court Rejects Challenge to San Francisco’s Real Property Transfer Tax

$11.7 million properly levied and collected from REITs

For Immediate Release
Date: June 2, 2022
Contact: Adam S. Mehis, (415) 554-5502

***Statement***

SAN FRANCISCO, CA – Yesterday, California Supreme Court denied a petition to review a case that upheld the application of San Francisco’s transfer tax to a corporate merger. In March 2022, the California Court of Appeal had upheld the application of the transfer tax to a corporate merger resulting in the transfer of interests in an entity that indirectly held real property in San Francisco. The court held that the transfer was subject to transfer tax under San Francisco’s Real Property Transfer Tax Ordinance because the transfer of interests constituted a change in ownership for property tax purposes (CIM Urban REIT 211 Main Street (SF) L.P., et al., v. City and County of San Francisco et al).

“Transfer tax must be paid when real property changes ownership. This law applies equally to homeowners who sell their homes just as much as to legal entities that hold real property through corporate structures and transfer it when the entity is sold or restructured. The court’s decision confirms the work my office does: reviewing legal entity transactions to ensure entities do not avoid the transfer tax by holding real property through complicated corporate structures,” said San Francisco Assessor-Recorder Joaquín Torres. “I applaud the diligent work of our Transfer Tax Audit team and our colleagues at the City Attorney’s Office for ensuring the city's taxes are fairly collected to fund San Francisco’s fundamental services. In this case, nearly $12 million in under-reported transfer taxes, penalties, and interest was recovered. This decision, together with our ongoing audit program, acts to deter the non-reporting of real estate ownership changes and the under-reporting of taxable value, ensures equity, and creates accountability so that everyone pays their fair share.”

In 2014, the parent entity and 100% owner of the title-holding entities of the real property, CIM Urban Partners, L.P., experienced a change in ownership as a result of a corporate merger. Before the merger, CIM Urban REIT 211 Main Street (SF), L.P., and CIM Urban REIT Properties II, L.P. directly owned two commercial office buildings in San Francisco. After the merger, they still directly owned the properties. What changed was the ownership of the parent entity, CIM Urban Partners, L.P., that indirectly owners the real property. In 2017, the Office of the Assessor-Recorder issued a notice and demand for payment of the transfer tax, penalties, and interest totaling $12 million. After losing their challenges to the City’s lawsuit seeking to collect the delinquent taxes, penalties, and interest, the taxpayers paid the full amount due, and filed a refund action in court.

In 2015, the Office of the Assessor-Recorder launched the Transfer Tax Audit Program on its own initiative to identify instances of non-payment or under-payment of transfer taxes. San Francisco is currently the only county in the state with this type of robust audit program for transfer tax. Since inception, over $75 million in unreported or under-reported transfer tax, penalties, and interest have been identified for collection.

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