Lee Hepner, from the office of Supervisor Aaron Peskin and SFNBBA President Daniel Macchiarini speak out on the purpose of Prop D and its potential impact on Small Businesses in San Francisco in the Wall Street Journal on Tuesday, February 25th.

Learn more about Prop D at Neighbors for Small Business and remember to vote by Tuesday March 3rd!

[link to original article in the Wall Street Journal]

San Francisco Voting Whether to Tax Landlords for Empty Storefronts

Bill’s purpose is to ‘reinvigorate commercial corridors and stabilize commercial rents’

By Esther Fung

San Francisco will put to vote next Tuesday a punitive new approach to ending the blight of empty storefronts.

On the ballot is a tax on property owners or leaseholders whose storefronts stay vacant for six months or more. If two-thirds of voters approve the measure, San Francisco would become one of the first big U.S. cities to tax landlords for store vacancies when it goes into effect next year.

The purpose of the tax is to "reinvigorate commercial corridors and stabilize commercial rents, thereby allowing new small businesses to open and existing small businesses to thrive," the proposition's language says.

The results of the San Francisco vote will be closely watched from coast to coast. The issue of urban storefronts lingering vacant for many months or even years has plagued downtowns and residential neighborhoods from New York City and Boston to Berkeley, Calif., while city officials have struggled to find workable solutions.

Residents tend to blame landlords for the ugly pockmark of empty storefronts, which can make city streets less safe. Property owners are holding out for higher-paying tenants, critics maintain, a prospect these critics say is unrealistic with bricks-and-mortar stores under assault from online shopping and food delivery.

Landlords blame covenants in some loan agreements that require property owners to achieve certain revenue targets, or sign only creditworthy tenants on their leases. Owners also point to what they say are regulatory burdens that slow the process, and rising labor costs they need to offset with higher rents.

Under the San Francisco initiative, building owners would have to pay $250 per foot of linear frontage, which could rise to $1,000 in subsequent years. The measure won't tax landlords actively seeking a new tenant while renovating space.

"For good landlords who genuinely try to do the right thing, this is an avoidable tax," said Lee Hepner, legislative aide to supervisor Aaron Peskin, who oversees the North Beach and Chinatown neighborhoods. "We hope this tax brings landlords and tenants to the table to have a conversation around what fair rent should be."

Even getting the tax on the ballot may be already having the desired effect, said Daniel Macchiarini, president of the North Beach Business Association. At least 18 new North Beach tenants have signed leases since the tax was proposed early last year, he said. Of the neighborhood's 30 remaining vacancies, landlords at 20 of them are now marketing the space, he said.

"Suddenly, for-rent signs started going up on all these buildings," said Mr. Macchiarini.

San Francisco holds great appeal to retailers but vacancies in many neighborhoods have dulled its sheen. At Union Square, the direct vacancy rate reached 6.4% in the fourth quarter of 2019, up from 1.9% in 2014, according to property consulting firm Cushman & Wakefield.

Brokers say regulation is to blame, such as mandatory seismic retrofits and bureaucracy around permits. In an effort to support local businesses, San Francisco's planning code often makes it difficult for formula retailers or chain stores to open. A Starbucks outlet, for instance, has to apply for an additional layer of permits that usually take months.

"They don't take into account e-commerce or the long permitting process, and instead they blame it all on the landlords," said David Blatteis, chairman of Blatteis Realty Co., whose firm handles leases in the North Beach neighborhood. "In the last couple of years, some landlords have cut rents by 10% to a third," he added.

New York City Mayor Bill de Blasio this month proposed a vacancy tax on landlords who keep storefronts vacant.

"If a landlord leaves that storefront vacant, hurts the community, makes the community less whole, deprives someone from having that storefront so they can be part of our community, then that landlord needs to pay more in taxes," he said in his 2020 State of the City address.

At the end of 2019, 67 out of 639 stores in Manhattan's SoHo neighborhood were empty, effecting a 10.5% vacancy rate, according to Cushman & Wakefield. Many owners there have brought in pop-ups or temporary tenants, aiding occupancy. The Meatpacking district, with fewer pop-ups, had a 20.7% vacancy rate.

Lawyers expect landlords to challenge any move to regulate rents on grounds that it amounts to a government taking of private property.

"Rent regulation is unconstitutional," said Joshua Stein, a commercial real- estate lawyer.

The Department of City Planning last year noted that while vacancy is often attributed to high rents, retail industry shifts, conditions of buildings, zoning regulations, landmark designations and redevelopment plans also play a role.

In 2016, Arlington, Mass., passed a bylaw that requires owners of vacant storefronts to register the vacancy and pay an annual fee of $400.

Many owners stepped up leasing efforts, said Ali Carter, Economic Development coordinator at Arlington's Department of Planning and Community Development. Vacancies in the central business district fell from 6.4% -- when the bylaw was passed -- to 2% today.

Still, she said the solution is not a perfect one and it hit small owners harder than big ones able to absorb the cost.

"There might be some unintended consequences," she added.