San Francisco passed a tax on vacant storefronts. What does that mean for NYC?

Voters in San Francisco recently approved a measure that has been floated before in New York — a tax on landlords that fail to fill their vacant storefronts before the clock runs out.

That tax, approved by 70 percent of voters, covers stores in some parts of the city that have been empty for at least 182 days and will go into effect next year. The annual revenue from the tax, which does not have an expiration date, is estimated to be around $5 million and will help support small businesses.

In New York City, many in the real estate industry are already sounding the alarm should a similar measure pass.

“From my point of view this is like taxing somebody who has coronavirus,” said Francis Greenburger, CEO and chairman of landlord Time Equities. “It’s not like owners are voluntarily keeping their stores vacant.”

Mayor Bill de Blasio has expressed support for such a measure, particularly as many high-end shopping districts in the city have struggled with store closures. And legislators in Albany already have two bills that would tax vacant storefronts on the table.

Assembly member Linda Rosenthal last year introduced a measure that would tax a vacant storefront based off 1 percent of a commercial building’s assessed value. The other measure comes from state Sen. Brad Hoylman and Assemblymember Deborah Glick.

“I think it’s the proper approach, to impose a tax, and the point isn’t actually to collect the tax,” Rosenthal said. “The point is to provide a stick. Sticks often work better than carrots.”

Rosenthal said her bill, which was introduced in June but is still in committee stage, provides exemptions for owners who show they are trying to find tenants, whether they are actively leasing the building or have a permit to make renovations.

“That’s only fair,” she said. “But there are some that are not doing anything.”

A report on the state of New York City’s retail industry released by the city comptroller in September found that the city-wide vacancy rate was 5.8 percent in 2017, up from 4.0 percent a decade before.

One of the reasons for the rising vacancy rate, according to the research, was rising rents: Rents shot up 22 percent on average during the same time frame. Another factor behind the growing number of empty storefronts are regulatory hurdles, like lengthy permit or liquor license approval times, the report found.

Steve Soutendijk, an executive managing director at Cushman & Wakefield and chair of the retail committee for the Real Estate Board of New York, said there has been a correction in rents in the city of late, as landlords try to lure tenants to fill those empty stores.

Soutendijk added that the market for retail tenants is not as liquid as people think; while there may be endless tenants on deck who can rent an apartment, there isn’t always a long list of retailers who could snap up an empty store.

“It’s a ship that takes a lot of time to turn around,” he said, “even at adjusted rents, even at substantially adjusted rents.”

During de Blasio’s state of the city address last month, the mayor proposed a vacancy tax once again, in a bid to tackle the city’s 12,000 empty storefronts.

“You’ve seen a storefront that’s vacant for two years, three years,” de Blasio said. “Guess what? 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.”

The mayor’s office did not return requests for comment.

Last fall, a City Council bill was introduced to regulate commercial rents to help stave rising rents for retail tenants, and allow the mayor to create a board that would be responsible for setting guidelines for commercial rent changes. The legislation was referred to a committee.

Brad Lander, who represents the 39th District in Brooklyn, co-sponsored the bill along with several other Council members. Lander said he, too, is frustrated when he sees landlords, particularly along high streets, keeping stores vacant to hold out for higher-paying tenants.

But he said a vacancy tax could have an unintended consequence, especially on landlords of smaller strip centers in the outer boroughs.

“The risk is that you implement that in a way that adds a tax penalty to somebody whose store is vacant even though they’re looking as hard as they can to get a tenant,” Lander told The Real Deal, noting that he prefers commercial rent control instead, because it would disincentivize landlords to hold out for higher rents.

Scott Plasky, a retail broker in Marcus & Millichap’s Manhattan office, said when the Council’s bill was introduced, he received about two dozen calls from people concerned about the measure.

“It would really hurt people’s [property] values,” said Plasky, who argued that it’s only a matter of time before a vacancy tax also becomes something landlords have to brace for. “Retail in general has taken it on the chin over the last few years,” he added.

Rosenthal argued that the coronavirus, which has led to buyers emptying shelves for supplies and food as people anticipate quarantining themselves for weeks, underscores the need for more local stores.

“It just shows how important and how integral local businesses are in the life of the city, and that’s what we’re on the way to losing,” she said. “And so we have to take action.”

Write to Mary Diduch at md@therealdeal.com