March 16, 2020 | By John Cumbelich
In the March elections, San Franciscans approved Proposition D, a new tax sponsored by a member the Board of Supervisors that targets landlords of vacant retail space. The sponsor believes that these owners are intentionally keeping their properties vacant, despite tenant demand. The Supervisor commented that the tax is “about changing certain bad actor landlord’s behavior” and “creating a disincentive for long term vacancies.” Disincentive? Hmmm. Don’t mortgage payments already provide that stimulus, every 30 days?
Note that San Francisco is the same municipality that led the nation when it adopted its anti-chain store “formula retail” policy, which subjects proposed leases to a retailer or restaurant with more than 10 units to a discretionary approval or disapproval by the city. Virtually every other city in the nation (over 99%) allow private property owners to lease their retail and restaurant space to tenants whose use is consistent with the zoning. Not so San Francisco. By restricting brands with 10+ units, the city has done something far worse than limit “chain stores”; it has restricted high-quality, high credit brands with proven business models from serving the community, investing in their properties, paying rent to landlords, and creating jobs. Among those most impacted by these restrictions are entry-level workers and those who lack higher education – two cohorts that historically leverage employment opportunities with retail chains as an entry point into the workforce and steppingstone to higher employment. Having limited the field of quality users that landlords can lease their vacancies to with the formula retail policy, the city has now imposed a punishing tax for the very vacancies they have helped to create.
But the anti-chain store policy is only one of an array of challenges confronting landlords, retailers and restaurants hoping to do business in the city. San Francisco already imposes one of the highest minimum wage requirements in North America. Add to this the soaring costs of healthcare, and a picture starts to form about how single-party rule in California and San Francisco has legislated away the retailer’s and the restaurant’s already tiny profit margin. Retail and dining businesses are highly labor dependent, and the already cutthroat business of retailing winnows out the weak, forcing entrepreneurs to operate on razor thin margins. Despite the impacts of wage and insurance costs on profitability, and the restrictions on leasing spaces to multi-unit credit tenants, the city government now attacks the landlord facing these headwinds, when he and a tenant can’t solve for an economic solution.
But wait, there’s more. Ask any resident, visitor or employee who spends their workday in San Francisco, and they will all lament with disgust the out-of-control litter, graffiti, homelessness, panhandling and crime that characterize today’s San Francisco. The very city government who is responsible to address these blights, but is outmatched by them, is culpable for the disintegrating social environment that has made leasing retail space and often impossible task. Ask the City’s Board of Supervisors just how many of them would open a business where the sidewalks are filthy, the homeless sleep in their doorways and the sights and smells graffiti and urine greet the shopkeeper each morning.
Beyond the wage & healthcare burdens, the formula retail ordinance, and the litter/graffiti/homeless issues, a still larger macro-economic challenge to both retailers and their landlords has exploded in recent years. The unrelenting rise of e-commerce has created a paradigm shift in how consumers purchase their goods and services. No doubt each and every member of the San Francisco Board of Supervisors uses Amazon and other web-based platforms for some of their purchases. The ongoing shift of retail dollars away from bricks and mortar retail to e-commerce sales is a reality that confronts San Francisco and every other city in the nation.
Instead of assisting their landlords to cope with this paradigm shift in retailing, and the growing list of hurdles to consummate a lease, the Board of Supervisors has demonized them. The notion that the city’s landlords are “bad actors” because they have been unable to lease their spaces during an e-commerce revolution in retail, and in the face of myriad city-mandated challenges to doing business, could only be conceived in an ivory tower. The bad actors here are those who create the continuous roadblocks to growth, not the entrepreneurs or investors unable to overcome them.
While progressives like to slap themselves on the back and justify their policies as helping out the “little guy,” they have conveniently forgotten that some little guys are little property owners, little retailers, or little restaurateurs. Rather than coming to their aid with policies that help make their livelihoods possible, and thereby stimulate jobs, services, sales tax revenues and neighborhood vibrancy, San Francisco has determined to punish them with a tax. In essence, the new tax codifies the notion that landlords are to blame for the wage and healthcare costs that tenants can’t afford, for the homelessness, litter and graffiti that discourages retail investment, and for the inexorable rise of e-commerce. San Francisco’s progressives have determined to tax away these stark realities, rather than come alongside the community’s landlords and business owners to solve them.
No doubt an unintended consequence of this new tax will be the decision by owners to lease their spaces to just about any tenant, rather than wait for a good one. A tax like Proposition D is an economic incentive designed to spur action, and it will. When the vape shops, tattoo parlors, liquor stores and other worst-in-class concepts that sell everything from smut to tobacco products to hard liquor begin to open, the city will see the rise of a new brand of bad actors and learn what kind of incentive it has really chosen to create.
About John Cumbelich & Associates
John Cumbelich & Associates is a San Francisco Bay Area based firm that provides commercial real estate services to Fortune 500 retailers and select owners and developers of retail commercial properties. The firm's expertise is in developing store networks for retailers seeking to penetrate the Northern California marketplace and the representation of premier Power Center and Lifestyle developments.