San Francisco Approves Vacant Property Tax

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On Tuesday, March 3, San Francisco voters approved Proposition D, a vacant property tax measure, with 69.8 percent of the vote. A two-thirds majority of 66.67 percent was required to pass the proposition. Starting January 1, 2021, San Francisco will “tax owners or tenants that keep ground floor retail or other commercial space vacant in some areas of the city and to use these revenues to assist small business,” according to the ballot measure.

Proponents of the vacant property tax include the Booksmith, Roxie Theater, Caffe Sapore, four small business commissioners, 11 elected members of San Francisco’s board of supervisors, the San Francisco Democratic Party, the Fillmore Merchants Association, the Haight Ashbury Merchants Association, and the North Beach Business Association.

Opponents of the measure include the San Francisco Republican Party, real estate broker and attorney Mark Borsuk, and small business owner and former candidate for the District 7 seat on San Francisco’s board of supervisors Ben Matranga.

The vacant property tax will be based on (1) “the number of feet facing the street of ground level commercial space that owners or tenants have kept vacant,” and (2) the length of time that commercial space has been left vacant. The tax ordinance defines “vacant” as “unoccupied, uninhabited, or unused for more than 182 days, whether consecutive or nonconsecutive, in a tax year.”

The tax will be determined each year in the following way:

  1. 2021 tax year: $250 per street-facing foot
  2. 2022 tax year: $250 per street-facing foot if the space was not vacant in 2021; $500 per street-facing foot if the space was vacant in 2021
  3. 2023 tax year and subsequent tax years:
  1. $250 per street-facing foot if the space was not vacant in the immediately preceding year;
  2. $500 per street-facing foot if the space was vacant in the immediately preceding year, but not vacant in the tax year immediately preceding that tax year; and
  3. $1,000 per street-facing foot for all situations in which neither (3)(A) nor (3)(B) applies

Owners of a commercial space will only be taxed if said space is left vacant for more than 182 days in a calendar year. If tenants or subtenants leave the commercial space vacant for more than 182 days in a calendar year, they will be taxed instead of the owner of the property.

There are exceptions for vacancies during a permit application period, construction period, disaster period, and/or conditional use application period. Additionally, tenants or subtenants that have a two-year or longer lease and have utilized the commercial property for business for at least 183 consecutive days are exempt from the tax. This helps protects businesses that close before their leases are up. Further, nonprofit organizations will be exempt from the tax. However, city-owned properties are not exempt.

The revenue generated from the tax, an estimated $5 million annually, will go to the Small Business Assistance Fund; the fund supports the operation and maintenance of local small businesses.

The vacant property tax was introduced on the ballot as a response to increasing vacant storefronts in San Francisco’s neighborhoods. The tax addresses one of the reasons for rising vacancies: landlords intentionally keep commercial spaces vacant to wait for a tenant willing to pay higher rent. (Other reasons include increased online shopping, high rents, and lengthy permit processes.)

“Retail vacancies may persist as property owners and landlords hold storefronts off of the market for extended periods of time or refuse to offer the space for a reasonable market rate,” states the tax ordinance. “The purpose of the Vacancy Tax is to stimulate the rehabilitation of long-term retail vacancies, and, in turn, to reinvigorate commercial corridors and stabilize commercial rents, thereby allowing new small businesses to open and existing small businesses to thrive.”

Proponents of the tax assert that the tax will provide much needed incentives for landlords to fill vacant storefronts, in turn reducing blight and crime, and they argue that the tax is avoidable if landlords take appropriate steps to attract tenants. Further, they contend that the tax has the potential to stabilize rent and prevent evictions for small businesses by giving them leverage in rent negotiations. Moreover, funds from the tax will be used to provide assistance to small businesses.

Opponents of the tax note that there is no exception for a recession and no appeals process for those unfairly taxed or facing hardship. Opponents also claim that the tax will discourage property ownership and that it is an infringement on individual ownership rights. Additionally, the tax may discriminate against pop-up stores, which may operate out of a location for only 90 days. Further, they argue that the vacancy period of 182 days may be too short, as the process to locate a tenant can take more than six months.

Similar vacancy taxes have been introduced in Oakland, California, in 2018 and Washington, D.C., in 2011, both of which include commercial and residential property.