A vacant storefront of 123 West Portal Avenue is seen in the West Portal district of San Francisco in September 19, 2019. The space remains vacant and would be subject to a new tax starting next month.
The coronavirus pandemic crushed the world’s retailers, unleashing a wave of bankruptcies, empty streets and scared customers who embraced online shopping. The Bay Area, which had the country’s first strict stay-at-home order, banned nonessential indoor shopping and indoor dining for months, and many businesses never reopened.
Now, as another new variant threatens to further disrupt business, landlords with empty spaces face a new cost: San Francisco will implement a new retail vacancy tax on Jan. 1, that was overwhelmingly passed by 68% of voters back in March 2020, just two weeks before the city and region shut down.
The tax affects storefronts that are empty more than 182 days in a year, at a rate starting at $250 per linear foot of storefront facing the street. The rate would rise to $500 per foot and then $1,000 per foot for additional years that a space is vacant. The tenant, not the landlord, would be subject to the tax if the space remains vacant even if it’s leased.
Around three dozen neighborhood commercial districts including North Beach, Japantown and the Mission are subject to the tax. The area doesn’t include the Financial District and Union Square, which have been grappling with diminished tourism, the absence of office workers and major retail thefts.
The tax was expected to raise an estimated $300,000 to $5 million a year before the pandemic hit, with money going to a small business assistance fund.
Supporters say the measure will bring more landlords to the bargaining table and help struggling tenants, but critics say it’s unfair to punish landlords while the economy is still in upheaval.
Supervisor Aaron Peskin, who sponsored the measure, and his colleagues delayed the tax for a year in the wake of the pandemic’s destruction. But no groups have called for further delay, said Peskin, who said he hopes it will put pressure on landlords to lower rents, a trend that’s already happening because of the weak economy.
“It’s designed to be a behavior changer, not a money generator,” Peskin said. “I’m watching a resurgence in the district that I represent. A lot of it is because of property owners’ reduced expectations.”
Before the pandemic, the city’s Office of Economic and Workforce Development surveyed two dozen neighborhood retail districts every six months and found at the end of 2019 that vacancies were up 13.2% from 12.2% in 2018, a level considered economically unhealthy. The department hasn’t conducted surveys since the pandemic and didn’t have new data.
The city’s Office of Treasurer & Tax Collector and Department of Building Inspection will enforce the measure and is holding information sessions in January.
Real estate brokers said vacancies have soared during the pandemic, though some areas of the city like Hayes Valley and the Marina have recovered as new shops have replaced those that have closed.
But the market is still far weaker than before the pandemic, they said.
“I don’t think we have enough demand yet to fill all the vacancies,” said Santino DeRose, a retail broker at Maven. “We’re still struggling in the outer neighborhoods.”
“It really should be kicked back another year. We need to give these landlords the opportunity to bounce back,” DeRose said. “Many of them have bent over backwards to keep their tenants’ doors open through the pandemic and they have also suffered some financial distress.”
Even when business was booming, retailers already faced huge obstacles, including the city’s daunting bureaucracy, which could delay store openings by months or even years, and high operating costs and rents. Supervisors and voters have passed multiple laws to quicken permitting, but frustrated owners continue to give up in the face of zoning restrictions and neighborhood opposition.
Betty Louie, a San Francisco landlord, said the vacancy tax would worsen people’s economic struggles.
“Who would want to open a business in S.F. at all now? There are 10,000 fees you have to pay, months-long permitting and other bureaucratic hurdles to go through. And now we have this tax? The timing couldn’t be more off,” said Louie, who declined to say if she owns vacant buildings.
“There are other ways to incentivize landlords to rent out spaces; everyone I know certainly wants tenants at this time. But there are not many people lining up to start or reopen shops during the pandemic,” she said.
Maryo Mogannam, president of the San Francisco Council of District Merchants Associations, which represents retailers, said 90% of landlords he knows already have worked with tenants to keep their spaces leased during the pandemic.
“I don’t think it will be as necessary because COVID,” he said of the tax.
Chandler Tang, owner of gift shop Post.Script in the Fillmore district, supports the vacancy tax as an incentive for landlords to get tenants and not hold out for high rents, but she isn’t sure if the timing works.
“Everyone is still recovering. I personally don’t feel settled,” she said. “There’s a lot of pandemic uncertainty around but I guess we have to ask, when will it be the right time?”
“I feel we need to show the city is open, that business is thriving and customers are out and about with safety protocols in place,” Tang said.
Christin Evans, board member of the Haight-Ashbury Merchant’s Association and owner of Booksmith and the Alembic bar, supports the tax.
“It gives building owners an incentive to fill the vacancy,” Evans said. “The tax is overdue. I don’t think they should have delayed it in the pandemic.”
“We need to have additional measures in place, like the vacancy tax, so landlords can put their properties on the market. Vacancies hurt us all. We want to see a thriving commercial corridor full of wonderful businesses.”
Landlord Danny Scher of Sugar Plum Properties has been able to keep around a dozen San Francisco storefronts leased during the pandemic but said he lowered rents by hundreds of thousands of dollars.
“I gave up a lot of money to keep my tenants, because we’re all in this together,” he said. “For the city to impose a tax when they know it’s a difficult time to rent is just blind to what’s going on. It’s really a reason to not do business in San Francisco.”
Roland Li and Shwanika Narayan are San Francisco Chronicle staff writers. Email: email@example.com, firstname.lastname@example.org Twitter: @rolandlisf, @Shwanika
Roland Li covers commercial real estate for the business desk, focusing on the Bay Area office and retail sectors.
He was previously a reporter at San Francisco Business Times, where he won one award from the California News Publishers Association and three from the National Association of Real Estate Editors.
He is the author of “Good Luck Have Fun: The Rise of eSports,” a 2016 book on the history of the competitive video game industry. Before moving to the Bay Area in 2015, he studied and worked in New York. He freelanced for the Wall Street Journal, the New York Times and other local publications. His hobbies include swimming and urban photography.
Shwanika Narayan covers workplace discrimination, income inequality, and poverty, at The San Francisco Chronicle. She previously covered retail and small businesses on the business desk. Before joining the paper in 2019, she worked at The Los Angeles Business Journal and freelanced for AJ+, NBC News, Quartz, and Hyphen magazine, covering national and global news and writing about Asian American identity. Shwanika has a master’s degree in journalism from Columbia University and a bachelor’s degree in political science from UCLA.