Construction & Claims: March 2024

Welcome to Construction & Claims, a periodic digest of the headlines, statutory and regulatory changes and court cases involving construction news, claims, bid protests, contract administration and payment-related disputes. 

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San Francisco Voters Approve Measure C

On March 5, 2024, San Francisco voters approved Measure C, a proposed ordinance which aims to encourage the conversion of vacant office buildings to housing by exempting existing commercial buildings that have been converted to residential use from the City’s real estate transfer tax. Measure C, which was proposed by San Franciso mayor London Breed, is the latest in a series of measures that aim to incentivize and promote commercial-to-residential conversions in California.

Measure C exempts – from San Francisco’s transfer tax – an owner’s first five million square feet of office space converted to residential use. The transfer tax, which was adopted by San Francisco voters in November 2020, generally taxes property transfers at a rate of .5% to 6%, with higher-value transfers generally taxed at a higher rate. Measure C creates a one-time exemption from the transfer tax for any building converted from commercial to residential use before January 1, 2030. San Francisco voters adopted Measure C by a margin of more than five percent in the face of record-high commercial vacancies and steadily climbing Bay Area real estate prices.

Measure C follows the California Building Standards Commission’s decision to add to California’s Existing Building Code to encourage the adaptive reuse of vacant office buildings. Under these amendments, which adopt several chapters from the International Existing Building Code, design professionals will have considerably more paths to code compliance when working on projects that involve the conversion of an existing building from one use to another. Specifically, these changes, which take effect on July 1, 2024, add the “Work Area” and “Performance” compliance paths to the California Existing Building Code, where they join the “Prescriptive” compliance path already in effect. Design professionals have praised the Commission’s decision, claiming that adaptive reuse is a model sustainable construction practice because it repurposes existing buildings in lieu of building new ones.

Commercial-to-residential conversion likewise has the attention of the Legislature. Last fall, the Legislature passed, and Governor Newsom signed, AB 529, which directs various state agencies to convene a working group to support and promote adaptive reuse projects. The Legislature has also considered, but not yet passed, bills that would streamline commercial-to-residential conversion by exempting them from local discretionary review processes and from CEQA.