San Francisco Puts Retail Vacancy Tax on Ballot

(CN) – San Francisco will ask voters to approve an innovative approach to a rash of empty storefronts in the city’s shopping districts: Tax the landlords.

The Golden Gate Bridge and San Francisco skyline from the Marin Headlands above Sausalito, Calif., on Oct. 28, 2015. (AP Photo/Eric Risberg, File)

The San Francisco Board of Supervisors unanimously approved the landlord vacancy tax during a special meeting Thursday, although not without trepidation.

“It’s fine to create a tax, but I also think we need to allow small businesses in San Francisco to open up in a fast manner,” said Ahsha Safai, District 11 supervisor.

Supervisor Aaron Peskin, author of the proposed ballot measure, said a tax is needed to address “bad actor” landlords who wait for tenants willing to pay exorbitant rents rather than give storefronts to those willing to pay. Peskin said this trend creates a high barrier for entrepreneurs who would be willing to open a business, provide services and reduce the feeling of blight in many of the city’s iconic neighborhoods.

If the voters approve the ballot in March, landlords with a storefront vacant for more than 182 days will face a fee that is calculated according to the length of their storefront and the amount of time it has been empty.

“We’ve been dealing with this issue for years,” said Norman Yee, president of the Board of Supervisors. “We’ve been trying different things but nothing has been all that effective.”

San Francisco isn’t unique and is not even in the top 10 for retail vacancy rates in the country. The Inland Empire just east of Los Angeles has the highest vacancy rate in the nation at 7.1% according to a July report based on data compiled by CoStar, a commercial real estate information company.

Sacramento (6%) has the fifth highest rate in the nation and Fresno is number 8 (5.6%).

Many outside experts attribute the decline in viable brick and mortar businesses to factors such as online shopping rather than unscrupulous landlords. The Amazon Effect, as it is commonly known, has caused significant disruption in the retail industry, particularly as it relates to physical properties.

But the supervisors said San Francisco needs to act to restore the leverage balance between small business owners and landlords.

“I think this changes the balance of power between landlords and business owners,” said Safai.

The proposed ordinance grants landlords certain exemptions, including a pass for those undertaking construction projects or proceeding through the city’s onerous permitting process.

Many in attendance say San Francisco’s retail vacancy problem has more to do with that prolonged permitting process, which typically takes 18 months to two years. Other restrictions, such as limits on liquor licenses for restaurants put certain landlords in a bind, the supervisors noted.

“We need to work with landlords to make sure they have options to get businesses into spaces,” said Vallie Brown, District 5 supervisor.

San Francisco’s tax is believed to be the first of its kind in the United States to pertain specifically to retail space. Across the bay, Oakland implemented a vacancy tax on residential landlords after voters overwhelmingly approved Measure W last November.

The Oakland ordinance allows the city to tax a property owner $6,000 per parcel or $3,000 per condo if units remain vacant for more than 50 days. The theory behind the tax is that landlords will be incentivized to fill their properties to avoid fines, willing to lower prices to attract tenants.

The Los Angeles City Council has entertained the idea of passing an ordinance like Oakland’s, as has New York City.

Vancouver, British Columbia, has had a vacancy tax on the books since 2017 and the early returns show promise, as some of the high-end properties have come down in price. But some economists believe there are greater economic forces in play, including restrictions on money flowing out of China.

Opponents of the landlord vacancy tax say the policy could backfire.

“This policy could have the opposite effect by driving up rent and making the property harder to market,” said Hans Hansen of Starboard Commercial Real Estate.

Landlords say the costs are already high enough that they are properly incentivized by market conditions to keep their buildings occupied.

Instead, San Francisco’s problems can be attributed to the high cost of doing business.

Ben Wyman is a small business owner who commended the board for taking on the problem of blight but said he hoped the board fully considered the potential side effects of the policy.

“The costs of doing business are high,” he said. “The incentives are against us and we are forced to have less ability to compete against big business.”

All the supervisors acknowledged that a vacancy tax would be one of many tools used to encourage retail occupancy, but if it is shown to have a non-negligible effect, other cities may soon follow suit.

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