What to Know about San Francisco's Storefront Vacancy Tax
March 8, 2020
With a little above the two-thirds majority necessary to become law, a ballot measure from last Tuesday’s election to tax vacant storefronts along major commercial corridors in San Francisco is set to pass.
As reported in the San Francisco Business Times, the “vacancy tax” would go into effect on Jan. 1, 2021, and impact building owners or tenants in certain areas of the city who do not activate vacant commercial storefronts for more than 182 days in a year. The tax would start out at $250 per street-facing foot in the first year of a vacancy, but would be raised each consecutive year if the property stays vacant.
In 2022, for example, owners or tenants would need to pay a tax of either $250 or $500 per-street-facing foot if the space was kept vacant in the previous year. And from 2023 on, a $250, $500 or $1,000 tax per street-facing foot would be levied, depending on how many years prior the space was kept vacant.
Tenants or subtenants with a two-year-plus lease agreement who have operated a business in the leased space for at least 183 consecutive days would not be taxed for having the space vacant, and nonprofit organizations are also exempt. The tax would apply to about three dozen commercial districts and major corridors in San Francisco, but not in the Union Square area, which is the city's main shopping district.
Opposed to the tax measure were the San Francisco Chamber of Commerce of which the Chamber President and CEO Rodney Fong said the organization is hopeful for “future incentives” that will encourage small businesses to open shops in San Francisco, where they already deal with challenges.
“We still think that small businesses are the backbone of San Francisco from a real estate perspective, but also (in regard to) job creation and that middle income,” said Fong. “But it's so difficult to go through the (city’s) permitting process to open a business. I believe there are 114 potential permits to open a business in San Francisco — there are many hoops and hurdles.”
“We are looking for other incentives and ideas other than taxes,” he added.
Supporters of the measure included Mayor London Breed, Sen. Scott Wiener, Assemblymember David Chiu and the San Francisco Board of Supervisors.
“I’m thrilled that San Francisco voters saw the wisdom in this tax which was designed to activate dormant, blighted storefronts in neighborhood commercial corridors across the city and to give small businesses a leg up in negotiating fair rents,” said District 3 Supervisor Aaron Peskin, who authored the measure, in a statement. “To the small business owners and merchants associations who believed in Proposition D, this is the beginning of a set of reforms that the Board of Supervisors will be undertaking to help small businesses survive and thrive.”
The vacancy tax revenue will go into a new fund to support small businesses, which is expected to raise up to $5 million annually.
In 2018, Supervisor Sandra Fewer introduced legislation that required the city to accurately track the number of vacant storefronts.
Fewer said Prop. D is “meant to be a behavior changer, not a revenue producer.”
“The threat of this tax will give small businesses the leverage they need to push commercial landlords to renegotiate fair leases, bring down rents to reasonable levels, and activate more of their vacant storefronts," she said.
In response to concerns that Prop. D could inadvertently hurt small businesses, Lee Hepner, Peskin’s legislative aide, said safeguards were built into the measure, including:
The Board of Supervisors may amend the vacancy tax by a two-thirds vote, which could include reducing the tax and/or its geographic scope to respond to market needs or a recession. The board can also vote to repeal the tax completely.
An amendment added to the measure by Supervisor Fewer provides that if a business operating in a storefront for at least six months goes out of business before the terms of its lease are fulfilled, the tax would not be assessed for that property for the rest of the lease term.
Since Prop. D's proceeds are dedicated to the operation and maintenance of small businesses, those funds can be repurposed or refunded if the assessment causes harm to a small business.
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