What the Measure Would Do
This measure would levy an annual tax on owners of commercial spaces that have been vacant for more than six months of a tax year.1 Beginning in tax year 2021, the tax would be calculated based on a building’s frontage (the total length of commercial space facing the street) and the amount of time the commercial space is vacant.
The tax would be $250 per linear foot of frontage in the first tax year the vacancy occurs. The tax would rise to $500 per linear foot for vacancies that occur in two consecutive tax years and to $1,000 per linear foot for vacancies that occur in three or more consecutive tax years. The tax would apply to commercial properties in neighborhood commercial business districts and commercial transit districts. This designation would include areas like Divisadero Street in NoPa, Taraval Street in the Sunset neighborhood and 24th Street in Noe Valley.
The measure lays out the following exceptions to calculating vacancy:
• The period after a property owner has applied for a permit for repair, rehabilitation or construction would not count toward a commercial space’s vacancy (but could not exceed one year).
• The one-year period after the city issues a permit for repair, rehabilitation or construction would not count toward a commercial space’s vacancy.
• The 183-day period after a property owner applies for a conditional use permit would not count toward a commercial space’s vacancy. If the Planning Commission has not granted or denied the permit within 183 days, this period could extend up to December 31 of the year the application is filed.
• The two-year period following the date that a commercial space is severely damaged because of fire or natural disaster would not count toward the space’s vacancy.
The tax would apply to city-owned properties, but nonprofit organizations would be exempt. Because Prop. D is an excise tax, it could be passed on to tenants, but the measure includes an exemption to protect tenants who go out of business. If a tenant or subtenant has kept a commercial space in use for more than six months during a lease of at least two years but then goes out of business, they would be exempt from paying the tax for the remainder of their lease.
Revenue generated by the tax would go into the Small Business Assistance Fund to support the maintenance and operation of small businesses in San Francisco. The measure would require the City Controller’s Office to submit an annual report that details the revenue generated by the tax and the expenditures of the fund. The Board of Supervisors could amend the measure to lower the rate with a two-thirds majority vote.2
The Backstory
Nearly every neighborhood commercial district in San Francisco struggles with vacant storefronts, despite a remarkable period of sustained overall economic growth in the city. The full picture of commercial vacancy is complicated because the city has incomplete information against which to compare anecdotal observations and complaints. Vacancy rates of commercial properties are not currently tracked citywide, although the Office of Economic and Workforce Development (OEWD) measures storefront vacancies across 24 commercial corridors on a biannual basis, and the U.S. Postal Service tracks undeliverable mail at vacant business addresses on a census-tract level. The
Department of Building Inspection maintains a registry of vacant buildings, including commercial space, which is self-reported.3 Although commercial broker reports show low and stable vacancy rates city-wide, these rates vary widely between neighborhoods (from 1% to as much as 24%). More recent data from OEWD indicate that from 2015 to 2017, vacancy rates in about a third of neighborhood commercial districts rose by at least 2%.4
Prop. D seeks to address one reason behind neighborhood commercial vacancies: landlords who intentionally keep properties vacant to wait for a higher-paying tenant. The measure’s author, Supervisor Peskin, points to examples in North Beach in particular, where vacancies have increased and long-time businesses have struggled to stay open. A recent OEWD report named landlords who hold out for higher rents as a possible reason for some long-term vacancies in certain districts, but it is unclear if the trend is widespread across the city.5
Aside from landlords, commercial vacancies in San Francisco can be caused by a number of other factors, including high rents, the cost of construction, the lengthy process to get a construction permit, the city’s seismic retrofitting requirement and rules around chain stores, among others. Importantly, retail vacancies are on the rise in cities across the country as the traditional retail, personal service and restaurant industries change.6 In San Francisco, private sector employment has grown by 32% since 2001, while brick-and-mortar retail employment has declined by 12%. Retail employment has declined by 8% since 2015 alone. On top of that, most small businesses agree that city processes are a major hurdle to filling vacancies and opening doors.7
The city has recently responded to commercial vacancies by increasing funding for small business assistance and implementing process reforms. Legislation passed in 2019 streamlined the permitting process, eliminated duplicative inspections and relaxed some restrictions around opening new lines of business in existing storefronts, such as serving coffee in laundromats or adding nighttime bar service at a daytime coworking space. Property owners are now required to register vacant properties with the Department of Building Inspection within 30 days of the space becoming vacant and to pay a $711 fee. Failure to register results in a further penalty of $2,844.8
This measure was placed on the ballot by a vote of eight supervisors. As a dedicated tax, it requires a two-thirds majority to pass.
Pros
• Prop. D is the result of an iterative process that included feedback and amendments from the small business community, neighborhood districts and city agencies.
• The measure includes exemptions to protect small businesses from paying the tax, including resetting the months of vacancy to zero when a new tenant signs a lease agreement with a property owner and allowing an exemption if a tenant goes out of business during their lease term.
• By creating a generous grace period before the onset of the tax, Prop. D is designed to protect landlords acting in good faith.
• The tax amount would probably be high enough to change behavior. Average frontage for neighborhood commercial properties is 25 feet, meaning a property in its third year of vacancy would face a $25,000 tax.
• Prop. D tax revenue would be appropriately tied to programs that help small businesses fight the impacts of neighborhood commercial vacancies.
• The tax could be amended legislatively in the future by the Board of Supervisors.
Cons
• Prop. D includes few details on implementation and could be challenging to enforce among the Tax Collector, the Department of Building Inspection, OEWD and other city agencies.
• The measure does not include an exception in the event of a recession.
• The measure does not include an appeals process to provide relief for those landlords unfairly taxed or experiencing hardship.
• This measure could unfairly impact property owners who don’t have the resources needed to navigate city processes, fund required retrofits or otherwise bring their properties into active use.
• It’s hard to know what percent of vacancies are due to landlords intentionally holding units vacant versus other factors like online shopping, the cost of labor or permitting barriers. It is therefore unknown how many vacancies this might resolve relative to other, less-penalizing solutions the city is working on.