We all have experienced this: a favorite store or local restaurant closes down after decades in business, citing the difficult climate to do business in San Francisco. The rent is too high, costs to operate are too much, people shop and order food online instead of in person. The numbers of closures have proliferated over the past five years, hitting every sector of the market and every neighborhood in the City. The result is a vacancy rate between 2 and 24 percent in the neighborhood commercial corridors.[1]
On March 3, 2020, just 13 days before the City’s mandated stay-safe-at-home Order took effect, San Francisco voters approved the Prop D: Vacancy Tax Ordinance, which imposed an annual excise tax on landlords who had vacant ground floor commercial space. Sponsored by Supervisor Peskin, the law was intended as one tool in a larger toolbox, including streamlined permit processes, that would address San Francisco’s rising number of vacant storefronts in the neighborhood commercial corridors.
The tax, passed by 70.09% of the electorate (above the 66 2/3rds required to pass), was to begin in January 2021. It imposes a scaled tax on owners who keep their storefronts vacant for 6 months or longer, with the money going into the Small Business Assistance Fund to support the maintenance and operation of small businesses in San Francisco. The tax is calculated based upon the following:
1) the number of feet facing the street or ground level commercial space; and
2) how long the space has remained vacant.
The vacancy tax has tiered tax levels, which vary depending on how long the storefront was vacant. It would apply as follows:
- In 2021, owners or tenants would be taxed $250 per street-facing foot;
- In 2022, owners or tenants would be taxed either $250 or $500 per street-facing foot if the space was kept vacant in the immediately preceding year; and
- In 2023 and later, owners or tenants would be taxed either $250, $500 or $1,000 per street-facing foot depending on the number of immediately preceding years in a row the space was kept vacant.
For example, a storefront with 15 feet of frontage that was vacant on January 2021 and remained vacant for three years, would be taxed $3,750 in 2021, $7,500 in 2022, and then $15,000 in the years after. The law does take into account permit processing and contains exceptions for certain nonprofits.
While on paper it seems inconceivable that a storefront could remain vacant for a three-year period, certain San Francisco neighborhoods such as North Beach, consistently have vacancies for multi-year periods.[2] There has been many articles and studies done about the origin of the vacancies in San Francisco – the changing face of brick-and-mortar retail to online purchasing, the high costs of running a small business (from minimum wage to mandatory health insurance), zoning restrictions regulating large chain stores, and the onerous permit process which can take anywhere from 6 to 18 months.[3] However, proponents of the Vacancy Tax argued that one main reason for the high number of vacancies is the prohibitively high rents that landlords charge, hoping to draw higher-scale and larger businesses. Few small business owners, even the most profitable ones, can make the numbers work with high rents. Prop D was promoted as an antidote to that issue, with the thought that high tax rates would incentivize owners to lower rents, resulting in these spaces to be leased and occupied.
When Prop D passed in March of this year, few predicted that the City and nation would be impacted by Covid-19 and the subsequent economic fallout related to it. Between March 3rd (the day Prop D was passed) and March 6th, the City and State declared state of emergency, with a stay safe at home order imposed on March 16th. All non-essential business were forced to close, which impacted every neighborhood in San Francisco. Most stores were boarded up, with many unsure when or even if they can reopen. While San Francisco is currently operating under a phased reopening plan, it is too early to know the true vacancy rate in San Francisco resulting from Covid-19. Most expect it to be higher than before Prop D was passed on March 3rd. Even formerly “healthy” retail corridors such as Hayes Valley will see an increase in ground floor vacancies.
On June 9th, the Board of Supervisors unanimously passed an Ordinance on first read calling for the suspension of Prop D for the 2021 tax year (BOS File No. 20-0420). Recognizing that “one week after [the] election, our way of life was fundamentally flipped on its head,”[4] Supervisor Peskin called for the delay in its implementation so that studies could be done once the City fully reopens. It is likely that the high vacancy rate for ground floor spaces will continue well into 2021, with no real “normal” returning for retail and eating and drinking businesses in the near future. It is too early to tell whether the Vacancy Tax will be implemented in its current form, or if it will be delayed further due to a continued economic downturn.[5] Either way, this new tax, while well intentioned, conflicts with current conditions on the ground today. Owners of commercial spaces can point to one piece of good news – they won’t be penalized for vacant spaces until 2022.
[1] Mission Street Corridor Economic Analysis, August 30 2017, prepared for SF OEWD by Strategic Economics: https://oewd.org/sites/default/files/Invest%20In%20Neighborhoods/MissionStreetReport_Final_08-30-2017_0.pdf
[2] Shwanika Naryan, Ronald Li, Shuttered Stores: North Beach’s Crisis, SF Chronicle, June 13, 2019. https://www.sfchronicle.com/business/article/San-Francisco-s-North-Beach-is-littered-with-13972898.php
[3] See Shwanika Naryan, Ronald Li, Bayview Sees Loss and Change, SF Chronicle, December 13, 2019: https://www.sfchronicle.com/business/article/Bayview-retailers-haven-t-seen-San-14899446.php; Shwanika Naryan, Ronald Li, West Portal Worries, SF Chronicle, September 27, 2019: https://www.sfchronicle.com/business/article/Wealthy-worried-watching-In-West-Portal-14470344.php#photo-18342062
[4] https://www.sfchronicle.com/business/article/SF-supervisor-wants-to-delay-vacancy-tax-as-15232781.php#photo-19289895
[5] The Board of Supervisors is empowered to amend the measure to lower the rate with a two-thirds majority vote. State law requires that amendments to increase or extend local taxes be approved by the voters. However, amendments to lower a local tax may be passed legislatively (California Constitution, Article XII C).
See also:
State of the Retail Sector: Challenges and Opportunities for San Francisco’s Neighborhood Commercial Districts, February 15, 2018, prepared for SFOEWD by Strategic Economics: https://oewd.org/sites/default/files/Invest%20In%20Neighborhoods/State%20of%20the%20Retail%20Sector%20-%20Final%20Report.pdf;
Mission Street Corridor Economic Analysis, August 30 2017, prepared for SF OEWD by Strategic Economics: https://oewd.org/sites/default/files/Invest%20In%20Neighborhoods/MissionStreetReport_Final_08-30-2017_0.pdf;
SF Budget and Legislative Analysist, Policy Analysis Report: Preventing and Filling Commercial Vacancies in San Francisco, January 16, 2018: https://sfbos.org/sites/default/files/BLA_Report_Commercial_Vacancies-011618.pdf
Authored by Reuben, Junius & Rose, LLP Attorney Tara Sullivan.
The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose, LLP is a full service real estate law firm. We specialize in land use, development and entitlement law. We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.
