Retail Vacancy Tax

Just in case you thought being the owner of a retail storefront location wasn’t difficult enough, the City of San Francisco is going to punish those bad landlords who are responsible for the vacancies in retail. That’s right the government is here to help you with additional incentives to run a successful real estate business.

According to a report in the Wall Street Journal, the City of San Francisco is voting today on whether to impose a punitive tax on commercial storefronts that remain vacant for more than 6 months. They’re hoping this new measure will put an end to the blight of empty storefronts.

According to the wording in the proposal, the tax is intended to "reinvigorate commercial corridors and stabilize commercial rents, thereby allowing new small businesses to open and existing small businesses to thrive”.

We’re in an environment where there are major shifts happening in the world of retail. 2019 saw about 10,000 retail store closures across the US. A similar number of closures are expected for 2020. At the same time that 10,000 stores closed, the industry opened about 3,500 new stores across the nation.

Under the San Francisco initiative, building owners would have to pay $250 per foot of linear frontage, which could rise to $1,000 per linear foot in the future.

Think about it, a grocery store goes under with 100 feet of frontage and then all of a sudden the owner gets an extra bill for $100,000 through no fault of their own, because their tenant went out of business. It’s outrageous, and frankly I hope this gets challenged in the courts.

In my home city of Ottawa Canada, there has been an excessive amount of retail construction in my opinion. The West end of our city has been well served over the years by shopping malls of all types. I never would have considered that there was a shortage of retail in my area. We have had three new supermarkets open up.

Recently, a new outlet mall opened with 78 new stores about a 10 minute drive from my house. The impact on existing shopping centres has been clear. Another shopping district that is about 5 minutes from my house is suffering. Are vacancies the result of irresponsible landlords failing to keep their properties full?

New York City Mayor Bill DeBlasio has proposed a similar tax in the past month.

In his State of the City address that Mayor said, “If a landlord leaves that storefront vacant, hurts the community, makes the community less whole, deprives someone from having that storefront so they can be part of our community, then that landlord needs to pay more in taxes,”

In 2016, Arlington, Mass., passed a bylaw that requires owners of vacant storefronts to register the vacancy and pay an annual fee of $400.

Proponents of the approach would argue that the measure has worked. Vacancies in the central business district in Arlington fell from 6.4%—when the bylaw was passed—to 2% today.

Retail space is subject to the laws of supply and demand. There are a lot of forces that are affecting this aspect of the business. There’s new supply coming into the market making older properties comparatively less desirable. Our society has a tendency to discard older properties and allow them to fall into disrepair. This is particularly true when you have a major anchor tenant disappear from the market. We have seen many traditional anchors including Sears, JC Penny, Target, and Macys closing vast numbers of stores. We have seen supermarkets closing across the country. Walmart’s experiment into neighborhood markets has not been very successful and many of these stores have closed.

When a retail shop closes down, there is not a lineup of new small businesses waiting in the wings to take over that space. You can only have so many coffee shops in a given area.