ELECTION 2022
SF’s Tax on Empty Storefronts, Delayed by COVID, Is Just Getting Started
While city voters mull an ‘empty homes’ tax for November, let’s consider how the commercial version is rolling out.
John Yelding-Sloan is offering a 50 percent discount on rent, but no one is calling. The ground-floor commercial space in his three-story Hayes Valley building has been vacant since the last business there closed in January 2020.
It’s not for lack of effort. He has spent an additional $10,000 over the years trying to make the Gough Street space more attractive. And he’s no absentee landlord; he lives on the second floor in a small apartment with his wife and two kids.
Now, Yelding-Sloan is facing a vacancy tax that took effect on January 1 and could cost him about $6,250 this year. “That’s six grand I don’t have,” he said over the phone, as he pushed his daughter on a swing in a nearby park.
The new tax was championed by Sup. Aaron Peskin and passed by voters in 2020, just before the pandemic shut down the city. It was a response to conditions in neighborhoods like North Beach, in Peskin’s district, where multiple vacant storefronts were contributing to blight. Peskin and other city boosters pitched the tax as a stick to threaten landlords holding out for higher rents or using empty spaces as tax breaks.
It’s important to gauge if the tax is working, not only for its own sake, but also because Sup. Dean Preston and allies are pushing a similar concept on the residential side: a tax on empty homes that will be on the jam-packed November ballot.
It’s still early, but the storefront tax’s potential problems are worth exploring. Peskin and his board colleagues had to postpone it for a year because of the pandemic. Then there’s the fact that several neighborhoods, some in Peskin’s district, were carved out as exemptions. One glaring issue is a lack of data. SF’s Department of Building Inspection has a database of empty properties, but as DBI assistant director Christine Gasparac pointed out, the department cannot currently parse which vacancies are commercial and which are residential.
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By contrast, lawmakers in New York considered a similar tax before the pandemic but first began collecting data. Now, as New Yorkers debate the tax, they at least have some data to make an informed decision. San Francisco, however, decided to act first and think later.
All hearsay
In early 2019, Peskin stood in front of a long-abandoned building in North Beach and proclaimed that his vacancy tax proposal would be “a behavior changer for certain problematic landlords.”
Months later, a report from the city controller said if done right the tax would “likely lead to fewer vacancies,” but followed with several caveats. With online shopping eating into physical retail demand, for example, many vacancies could be “beyond the control of the owner.” (And that was back when the SF economy was showing “unprecedented strength,” according to the report.) The controller also warned that the tax would hit landlords especially hard during a recession.
Voters still approved Peskin’s measure on March 3, 2020 by a wide margin. They couldn’t imagine how the world would change just a few weeks later. The tax was supposed to kick in on January 1, 2021, but with small businesses decimated by the pandemic lockdown, the Board of Supervisors postponed it for a year.
Now that the tax’s clock has begun ticking, any landlord of a property that has been vacant for half a year will incur a fee of $250 per foot of storefront in the first year. (Tenants would be fined instead if responsible for the vacancy.) If the vacancy continues into a second year, those fines go up to $500, then $1,000 per foot for a third year. For Yelding-Sloan’s property, that’s $6,250 this year, $12,500 in 2023, and $25,000 if he still can’t fill his space in 2024. Landlords are expected to self-report vacancies and pay the related tax.
Landlords who prove they’re building or remodeling, or at least trying to get permits, don’t have to pay. There’s an exemption for natural disasters too, but not recessions — or pandemics. In theory, these exemptions were meant to focus the tax on speculative landlords.
Peskin told The Frisc that he’s heard from “merchant groups across the city” about businesses opening in storefronts that were vacant even before the pandemic. North Beach Business Association board member Dan Macchiarini reported six new businesses, as well as for-lease signs popping up. Macchiarini, a big man with white hair and handlebar mustache, runs a metalworks shop that his father opened in 1948. He has “fought for that tax since 2000,” he told The Frisc.
Haight Ashbury Merchant Association president Christin Evans also reported positive movement. In SoMa and the Richmond, though, merchant group officials said the tax is hurting landlords who are already struggling to find tenants.
From either perspective, it’s only hearsay. Or in at least one case, disputed: Peskin’s former aide Lee Hepner recently tweeted that the reopening of Café Flore in the Castro was a vacancy tax “success story.” Yet Flore’s owner told The Frisc that the tax had nothing to do with the move.
Peskin’s exemptions
No one is collecting data systematically. And in some neighborhoods that are exempt from the tax, no one ever will. For example, Betty Louie, board advisor to the Chinatown Merchants Association, says 10 percent of businesses on her Grant Avenue block are vacant. She opposes the tax and says she’s grateful that Peskin exempted the neighborhood. Chinatown is in his district, as is Union Square and most of Fisherman’s Wharf, which also are exempt.
The tax only applies to neighborhoods specifically named as “neighborhood commercial” or “neighborhood commercial transit” districts in the SF Planning code.
That shows the tax has been misapplied, according to Santino DeRose, a managing broker at Maven Commercial. Some exempt neighborhoods like Union Square are in fact the ones with the corporate landlords and high vacancy rates, while districts where the tax applies have more mom-and-pop shops.
When it was on the ballot, the tax had some support from the pro-business side, such as the urban planning nonprofit SPUR and SF Small Business Commission president Sharky Laguana. They felt in 2019 that speculative landlords were indeed a part of the problem, and the tax offered wiggle room that well-meaning landlords could use. “There’s all kinds of ways to extend this out before you’re actually on the hook for the tax,” Laguana told The Frisc.
But the pandemic brought even more pain to local retail, and Laguana noted he probably wouldn’t support the tax now.
(UPDATE: After publication, Laguana asked The Frisc to clarify that in his interview, when asked if he would support the vacancy tax now, his full response was, “That’s an interesting question. Probably not as constructed. I think I’d want to see something with a lot more muscle and through a different angle. I’m more carrot-based when I think about policy, and this is stick-based.”)
Empty grocery aisles
Even if the tax forces recalcitrant landlords to consider renting their empty spaces, the city’s bureaucracy will still pose obstacles, says Ben Bleiman, the founder of the SF Bar Owner Alliance.
Bleiman likes to joke about the “five horsemen of the apocalypse for small businesses”: taxes and fees, zoning and permitting, safety and clean streets, commercial rents, and online retail competition. For example, a zoning permit from SF Planning takes an average of four to six months to obtain, even with streamlining promised by 2020’s Save Our Small Businesses measure that Bleiman helped pass.
In the Excelsior, Los Olivos, an immigrant-owned grocery store, sits empty. Karla Aguilar Lux and her husband, Miguel Pérez, have been waiting a year and a half to open. That’s $60,000 in rent they’ve had to pay as they wait for the city’s permitters to catch up with their aspirations.
“We’re not the only ones who have waited more than a year,” Pérez says in Spanish, standing among his store’s empty aisles. “The taquería in front was delayed and so was the sweet shop.”
Because their building has been vacant for 20 years, the process is especially complicated. For example, before they hook up their utilities, the city must re-register the address; it’s been three weeks and counting.
‘I would hope that landlords explore the many ways to activate their storefronts before falling back on since disproven excuses.’
— Sup. Aaron Peskin
Our burdensome bureaucratic thicket is no secret. As the city reeled from COVID in 2020, dozens of top officials — including Peskin, the mayor, the treasurer, and city assessor — signed off on an economic report that highlighted the need for reform.
By delaying the vacancy tax in the teeth of the pandemic, supervisors at least acknowledged the extra regulatory burden could wait a while. But not forever. “Of course, commercial landlords are still in the process of adapting to this law, which implementation we delayed one year due to COVID,” Peskin said. “I would hope that they explore the many ways to activate their storefronts before falling back on since disproven excuses.”
In recent weeks, a committee of supervisors has discussed waiving late fees, giving folks like Yelding-Sloan a little more breathing room. But he’ll still have to pay up if the economy doesn’t cooperate.
“I mean, the place is listed,” he said. “I’m trying.”
Adam Echelman covers housing and development for The Frisc.
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