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Retail Vacancy Tax, Office Cap Close To Victories In S.F.

San Franciscans appear to have supported two ballot measures in Tuesday’s election that are sure to induce some headaches for the CRE community.

San Francisco

With 100% of precincts reporting but thousands of vote-by-mail ballots left to process as of late Thursday afternoon, Proposition D, a measure that would tax vacant ground-floor retail or other commercial space, had 69.32% of votes, above the two-thirds majority it must receive to pass.

Proposition E, which would tie annual office space construction to affordable housing production, had 54.48% of votes, several thousand votes above the simple majority it needs to pass. 

The ballot measures stem from concerns over the Bay Area's housing crisis and are fueled by an influx of new jobs, as well as ongoing retail vacancies in S.F., which critics say is partially due to unreasonably high asking rents by landlords. 

Even though San Francisco’s retail corridors have outperformed national benchmarks, certain neighborhoods have struggled with a number of shuttered storefronts. Put on the ballot by Supervisor Aaron Peskin, Prop D would take effect on Jan. 1, 2021, starting with a tax of $250 per street-facing foot of vacant commercial property that could rise to $1,000 in subsequent years with more prolonged violations.

The measure applies to properties in certain parts of the city vacant for more than 182 days in a calendar year, with limited exceptions while permits are processed or if a disaster, like a fire, strikes.

Prop E, sponsored by SoMa neighborhood nonprofit Todco, would link the city’s yearly, 875K SF large-project office development cap to how fully it meets affordable housing goals in a given year, namely those specified by the state’s Regional Housing Need Allocation conclusions for cities.

San Francisco Chamber of Commerce Public Policy Director Jay Cheng said the organization is against both measures. For Prop E, he cites the city's economic impact report projecting lost economic growth with the measure.

“The city economist was very clear that Prop E is going to cause the city’s economy to shrink by 8.5% over the next 20 years,” Cheng said.

The Chamber of Commerce is against Prop D because of concerns vacancy fees on landlords will get passed on to small businesses, Cheng said. 

Some of local CRE had spoken out against both measures in the lead up to Tuesday’s votes, including in November when San Francisco’s Board of Supervisors voted unanimously to put the vacancy penalty on the ballot.

“I understand that they’re trying to get rid of vacancies, but I’m not sure this is the best means to alleviate this matter,” SRS Real Estate Partners Executive Vice President and partner Matt Alexander said. 

Alexander, who largely represents tenants, points to street conditions, construction costs, excessive permit-processing time and the city's formula retail restrictions as bigger reasons for vacancies than high asking rents.

In most of San Francisco, chains are either banned entirely or require conditional use authorization, which usually takes around eight months if granted.

“What’s happened now is just that there is a shortage of retail tenants who are even looking,” Alexander said.

On Wednesday, San Francisco's Department of Elections said it estimates it still must review and then process 104,000 vote-by-mail and provisional and conditional voter registration ballots. Updated results will come daily through the weekend, according to the department.