It’s hard to miss Pamela Mendelsohn’s name when strolling along Fillmore Street. The principal of Maven Commercial has worked as a broker in San Francisco for four decades and represents a fair portion of the landlords in the neighborhood, evidenced by the number of placards advertising her services.
But business hasn’t exactly been booming since the pandemic started nearly two years ago.
“It has been a roller coaster,” Mendelsohn said. “Everyone thought things were going to be better when a vaccine was in eyesight. Now we’re in the latest roller coaster drop because of the new variant.”
That sinking feeling is intensifying for some property owners across the city as the New Year also ushered in a new vacancy tax that affects commercial properties in 32 districts. The tax passed with 68% of the vote in March 2020—mere weeks before the pandemic led to city-wide shutdowns. The new levy will charge landlords $250 per linear foot of street frontage if the owner (or tenant) keeps it unoccupied for more than 182 consecutive days. The fee goes up to $500 in 2023 and $1,000 in subsequent years.
“I think the policy made more sense in 2017 and 2018 when there weren’t a ton of vacancies,” Mendelsohn said. “The whole world has basically changed since the voting in of the vacancy tax.”
An SF Controller’s Economic Impact Report from November 2019 shows evidence of that divide. The report cites “a time of unprecedented strength in the city’s overall economy,” a characterization few would agree with today.
According to the Controller’s report, the tax is expected to raise between $300,000 and $5 million, which would go to the Small Business Assistance Fund. An updated estimate under the current economic situation has not been conducted.
But the report also highlighted an inconvenient truth: the growth of e-commerce has contributed to an increase in vacancies. And the decline in brick-and-mortar retail has only accelerated because of the pandemic.
The report admits that "a tax is unlikely to improve the situation" if a vacancy was caused by a business failing, and such a tax could "depress the value of all properties in neighborhood commercial areas."
The controller’s report recommended a recession exemption for the tax, but the concept wasn’t included in the finalized law.
Lee Hepner, a legislative aide for Supervisor Aaron Peskin, who spearheaded the ballot measure, defended the tax and said it is designed to target those “relatively small number of landlords who are squatting on their property and not participating in the community.”
“We’re certainly not out of the pandemic, but we’re also not in a shutdown phase of the pandemic,” Hepner said. “It’s a behavior changer at the end of the day, we’re not trying to make revenue from it. In a perfect world, we would never have to charge the tax.”
In her tour down Fillmore Street, Mendelsohn explained the complicated stories behind a number of vacant storefronts. One vacant space was the site of a short-term holiday pop-up. Another was leased but the tenant was having difficulty finding a contractor. And one seemingly shuttered shop has closed off and on the last two years depending on Covid rates.
Sue Truoccolo owns the building at 1928 Fillmore St., which has been vacant since Prana—a clothing shop that occupied the space for eight years—went out of business in August 2020. The building has been in her family for more than 30 years and was previously the site of a bathhouse operated by her brother and his partner.
“I’ve had to deplete my savings to pay my mortgage and property taxes,” Truoccolo said.
She said one interested restaurant tenant quickly looked for the exit when they realized the cost and time associated with a change-of-use permit. Truoccolo cited this as an example of how rules meant to preserve neighborhood character have hampered the recovery.
“I don’t think we should be punished for the situation that the supervisors and the mayor have imposed on us,” Truoccolo said. “Everything just turns into an extended process and makes it just really difficult for people to do business in San Francisco.”
Amanda Fried, the chief of policy and communications with the Office of Treasurer and Tax Collector, said those subject to the tax in the first year would be required to file and pay in 2023 with an expected filing deadline due at the end of next February.
Like all business taxes, Fried said, the commercial vacancy tax is based on self-reported numbers. Potential scofflaws could face enforcement through the office’s investigation and compliance team, as well as possible public reporting measures like a call-in line.
Proponents and opponents of the tax agree that “bad actors” targeted by the law do exist, but there’s an open question on how best to address them.
Dean Eriksen, co-owner of local fitness company Fit Local Fit, said he alerted his landlord in Bernal Heights about the impending commercial vacancy tax to bring her to the negotiating table, as his business was forced to close during the lockdown orders.
“I had hoped that the tax in and of itself would be a decent lever for tenants to lean on in an effort to work out solutions with their landlords,” Eriksen said. “But even knowing the tax was going to be reinstated in January, she wasn't interested in really speaking with us.”
Eriksen was able to find a location down the street for a longer lease term in a space vacated by a yoga studio that went out of business during the pandemic.
He supports the measure because of its ability to potentially change the calculus for landlords and drive some rental prices down, but he added that the charge from the tax may not be enough to spur a behavior change.
Hepner said the law includes a number of “escape hatches,” or payment exemptions, for landlords who actively try to improve a property or sign a lease.
These include a one-year grace period when applying or receiving a city permit for repair, rehabilitation or construction, a 183-day grace period when a property owner applies for a conditional-use permit and a two-year exemption period in the case of severe damage because of fire or natural disaster.
Hepner said his office is working with the Office of Economic and Workforce Development to host a series of meetings in coming months to educate landlords on taking advantage of these exemptions.
George McNabb, who owns a mixed-use building at 1700 Market St. on the edge of Hayes Valley, said that while he largely agrees with the concept of targeting unresponsive landlords, the six-month deadline posed by the law just doesn’t square with reality.
In an ideal pre-pandemic situation, he said, it would take at least a year to get a tenant to occupy a retail space because of the complex process of lease negotiation, finding design professionals, finalizing the design, applying for permits, receiving the permits and commencing construction.
“The problem is that politicians draft legislation meant to hit specific people and they end up shooting everyone in the process,” McNabb said.