Taxing vacant storefronts Is a levy on spaces landlords leave empty the solution for the blight on San Francisco’s streets?

Taxing vacant storefronts Is a levy on spaces landlords leave empty the solution for the blight on San Francisco’s streets?

San Francisco voters will decide whether to tax landlords of empty retail spaces.

Proposition D on Tuesday’s ballot proposes a levy on storefronts that stand vacant for more than six months. Supporters say it would motivate landlords to find tenants. It would put San Francisco at the forefront of the move to address the growing number of retail vacancies nationwide, making it the first major city to explicitly tax empty stores.

Supervisor Aaron Peskin, the sponsor of the measure, has argued that the tax is “about changing certain bad actor landlords’ behavior and creating a disincentive for long-term vacancies.” The tax seeks to prevent long-term vacancies and potentially push property owners to lease stores at lower rents, he said.

But opponents say the measure won’t fix bigger factors harming the city’s small businesses, including lengthy waits for permits, restrictive zoning and high operating costs — challenges that city officials have also acknowledged.

About the series Shuttered Stores looks at the problem of vacant retail storefronts and identifies causes and solutions. After taking a close look at three very different San Francisco neighborhoods — North Beach, West Portal and the Bayview — we will analyze why some commercial districts struggle and what residents, business owners and civic leaders can do.

Hans Hansson, owner of Starboard Commercial Real Estate in San Francisco, said Prop. D “is simply a bad idea and tied to a lack of true facts.”

“The reality is that rent is no longer the main reason to close a business or to decide to open. It’s high employment costs, long permit (times) and construction costs and delays and, more importantly, competing with online retail,” he said.

Prop. D would impose a tax on landlords based on a space’s street frontage and how long it has been empty, defining “vacant” as “unoccupied, uninhabited or unused for more than 182 days.” The tax would begin in 2021 and charge $250 per foot of frontage along a public right-of-way in year one, increase to $500 in year two, and double to $1,000 a year after that.

A small cafe space with a 20-foot-long storefront would pay $5,000 in the first year, while a bigger grocery-store space with 80 feet of sidewalk frontage would pay $20,000, for example. The levy would apply only to the city’s more than 30 neighborhood commercial corridors —including 12 that were newly designated in January, just in time for the March election. Union Square and most of downtown would not be subject to the tax.

In an economic impact report, the city’s chief economist, Ted Egan, wrote that “the tax is expected to affect few property owners,” estimating that 1% to 3% of vacant storefronts are empty for more than 182 days. The measure could help retail areas where landlords aren’t making efforts to fill empty spaces, but it could hurt property values and deter investment in areas with weakening business demand, Egan concluded.

San Francisco’s sales tax revenue, a barometer of the health of stores and restaurants, grew 4.4% annually to almost $168 million in 2018. Yet the city’s retail sector has struggled despite an economic boom, with retail employment falling 8% since 2015, while other private employment rose 13%, according to Egan’s report. A city survey at the end of 2019 found that the overall vacancy rate in 24 commercial districts was 13.2%, up from 12.2% in 2018. The city considers a rate between 5% and 10% healthy.

It is estimated that Prop. D would generate $300,000 to $5 million a year. It would go into a small business assistance fund, but Peskin has said the primary goal is to change behavior.

The measure requires a two-thirds vote to pass because it is a new tax. It has support from Mayor London Breed and the full Board of Supervisors. Supporters have raised $41,810, and no money has been raised in opposition, according to city campaign finance reports.

The tax wouldn’t apply for a year to property owners who are trying to renovate or repair properties, and buildings affected by a disaster such as a fire would have a two-year exemption. Nonprofits that own buildings would be exempt. There is a six-month exemption for spaces where a tenant has been identified but is seeking city approval for a type of permit known as a conditional use authorization, required in many circumstances by the city’s restrictive zoning code. (Common reasons include changing a retail space to a restaurant, or opening a chain store in the neighborhoods where they are allowed.)

Landlord Steven Lee said he understands the effort behind Prop. D but that he believes most landlords don’t intentionally let properties sit empty, because they would lose money. Experts say the claim that landlords somehow reap tax benefits from empty spaces doesn’t hold water.

Lee bought a 720-square-foot retail space in early 2019 and has been trying to rent the location for almost a year. He even halved the asking rent at 1151 Sutter St. to $1,500 a month from $3,000, but still hasn’t found a tenant, he said. He attributes the hesitation of prospective tenants to the street conditions outside.

“I can’t count the number of times I’ve found homeless folks sleeping in the doorway when I’ve showed up with potential tenants,” he said.

Lee’s property is within the Polk Street commercial district and would potentially be subject to the vacancy tax.

Egan’s report recommended suspending the tax during a recession, but that language was not added. If it passes, the Board of Supervisors can lower or repeal the tax with a two-thirds vote. Raising the tax would require another ballot measure.

The city’s Department of Building Inspection already penalizes owners of vacant storefronts by requiring them to register the properties and pay an annual fee of $711. The department has 445 vacant storefronts registered in the most recent fiscal year. A city survey of 24 commercial districts found 817 empty storefronts, though some have tenants awaiting city permits.

The city approved measures last year to make it easier to open some businesses, such as entertainment venues, and removed some permit requirements, but merchants said they’ve seen little evidence of faster approvals. The city’s Office of Economic and Workforce Development could not offer an example of a business that benefited from streamlined permit approval in the past year.

Other efforts are under way: Supervisor Hillary Ronen introduced a measure Tuesday for a temporary permit that would make it easier for nonprofits to operate in empty stores. (Such office uses are currently forbidden by zoning.) Peskin also recently proposed legislation to speed up conditional use authorizations.

Mattia Cosmi, co-owner of the Italian Homemade Co., has been enduring that lengthy process for months in North Beach, where the vacancy rate rose alarmingly in 2018 and is still among the worst in the city, despite efforts by Peskin and others to get stores reopened.

Cosmi bought the former home of Caffe Roma in October 2018 and planned to open a second North Beach pasta restaurant there. Caffe Roma served food and had cooking equipment — it even roasted its own coffee — but under zoning rules, it was defined as a “limited restaurant,” and what Cosmi had in mind required further city approvals.

He submitted an application at the end of last summer and is still waiting for a Planning Commission hearing date. Cosmi estimates that he’s spent more than $20,000 on city fees and hiring an architect.

“It’s frustrating. I don’t get why it takes so long,” he said. Although he can wait it out because he owns the building and isn’t paying rent, Cosmi isn’t sure whether he would have pursued the restaurant if he knew how long it would take.

Cosmi supports the vacancy tax but wants to see bigger changes.

“It’s going to do something, but it’s not enough,” he said. “I think they should reform completely their zoning policy.”

Other cities have passed vacancy taxes, though many focus on vacant land or empty homes, not exclusively retail.

In 2011, Washington raised its commercial property tax rate on vacant residential and commercial properties in the nation’s capital. In 2019, Oakland implemented a tax on privately owned property in the city, including residential, commercial and empty lots, that are not in use for more than 50 days. Vancouver, British Columbia, instituted a tax on residential vacancies, and New York’s mayor has proposed taxing empty stores.

“There’s always an incentive of finding some way of encouraging full occupancy, so this (Prop. D) is understandable,” said Joan Youngman, senior fellow at the Lincoln Institute of Land Policy in Cambridge, Mass.

But it is also questionable and problematic, Youngman said. She called the move a “blunt instrument.”

“Without more understanding of the underlying causes for the vacancies, the tax might be ineffective and might even cause complications,” she said.

“I think the one thing we can say about Oakland is that the tax is too new for any evaluation as to whether it has worked or not,” Youngman said. In Washington, “there is no conclusive evidence that the vacancy tax has affected land use.”

The San Francisco Chamber of Commerce opposes the measure.

“Small businesses are absolutely facing serious challenges in San Francisco,” said Jay Cheng, the chamber’s policy director. “In so many cases, storefront vacancies are a result of permitting delays and complexity at City Hall. We think the best way to approach the issue of vacancies is to remove those permitting roadblocks and (let) small businesses fill these storefronts..”

Albert Chow, president of People of Parkside Sunset, a neighborhood and merchant group, said he is “personally cautiously supportive” of the tax.

“I understand carrots haven’t really worked well,” he said.

Chow said he is concerned that landlords in bad locations or areas with high crime might be unfairly penalized.

Ixchel Acosta, president of the Clement Street Merchants Association in the Richmond District, also supports the tax, citing unmotivated landlords as a reason stores stay empty for years. The tax could push them to lower rents.

“I do support it. I think there are way too many empty storefronts here in San Francisco,” she said. “It’s time to put some flames under them.”

Acosta said she also wants to see more street cleaning, proper lighting and beat cops to promote safety.

But Kazuko Morgan, a retail broker at Cushman & Wakefield, said she thinks the tax will have minimal impact on vacancies. The city’s real challenges are filthy streets, the high cost of labor and a complex, lengthy and expensive permit process, she said.

In contrast, Southern California cities are trying to make it easier for businesses to open by working to guide them through the permit process, she said.

“In this retail environment, most other cities are saying, ‘What can we be doing to help?’” Morgan said. In San Francisco, “the process is not easy for anybody,” she said. “There’s no sense of urgency.”

Correction: An earlier version of this story misstated how the vacancy tax could be modified. The story has been corrected.

Shwanika Narayan and Roland Li are San Francisco Chronicle staff writers. Email: shwanika.narayan@sfchronicle.com, roland.li@sfchronicle.com Twitter: @shwanika, @rolandlisf