Fewer regulations. Lower permit fees. Faster permit approvals. A talented workforce. These are a few of the reasons businesses gravitate to one city over another. They are also the key reasons why in the past eleven years, over 13,000 California businesses have left the state for friendlier destinations in Nevada, Texas, and beyond. But San Francisco Supervisor Aaron Peskin has a plan to keep local business booming: When he or one of his bureaucrats sees an empty retail space, he proposes to fine them up to $1,000 for every linear foot of their unleased storefront.
In Peskin’s words, his Vacancy Tax, which the Board of Supervisors voted unanimously to put on the March 2020 ballot, would encourage “bad actor landlords to get off their duffs” and lease out their properties. If approved by voters, it would go into effect January 2021.
Evidently, Peskin believes that penalizing the owners of vacant properties — $250/linear foot for the first year, $500/linear foot for the second year, and $1,000/foot for every subsequent year, will magically help these landlords slice through all the city’s red tape and fill their empty spaces.
The wonks who support this measure claim that the city’s high percentage of unused commercial space, is partly caused by greedy landlords who keep empty units unoccupied month after month in the hope of getting higher rents in the unforeseeable future. Anybody who has ever stood behind a lemonade stand with unsold lemonade at sunset might question this assumption.
In a weak attempt at fairness, Peskin’s proposed penalty gives a pass to owners whose buildings are empty because of construction, natural disasters, fires, or waiting for city permits that never come. Since it even mentions that this last exemption is necessary, that points directly to the heart of the problem.
In an opinion piece for the San Francisco Business Times, Hans Hansson, a managing principal of Starboard Commercial Real Estate, put it clearly: “The majority of the building owners, and certainly retail brokers like myself, all are aggressively trying to fill these vacant spaces. In almost all cases, the rent is not the stumbling block; it’s the high cost of starting the business, strict government regulations, and the risk of ultimate success.”
Even studies prepared for San Francisco City Hall agree: A 2018 “State of the Retail Sector” report blamed the time it takes to get permits from city agencies as a strain on the retail sector, and stated that “brokers, developers, and business assistance providers cited examples of permitting processes that took six to nine months, sometimes resulting in the applicant going bankrupt before they could open.”
Why thousands of businesses are leaving California
According to Spectrum Location Solutions, a nationally known business location service, over 13,000 businesses have left California. That number includes Nestle, who have taken their 1,200 jobs and $26 Billion annual revenue to Virginia and Kentucky. Putting two other giant dents in the LA economy, Toyota moved its U.S. headquarters and thousands of jobs to Dallas, and Occidental Petroleum moved its home office to Houston.
The biggest refugee of all is McKesson Corp. Most people don’t realize how big McKesson is, but with $208 Billion in revenue and 80,000 employees, they rank Number 7 on the Fortune 500 List. They officially left San Francisco on April Fool’s Day, 2019, and moved their headquarters from San Francisco to the Las Colinas, TX, just outside of Dallas.
Why is California being hit with this swarm of “disinvestment events”, which Spectrum defines as either relocating headquarters or opening new operations in any other state instead of expanding in California?
According to Spectrum president Joseph Vranich, high taxes and burdensome regulation are classic reasons why businesses leave California, but recently, more and more business owners refuse to put up with quality of life issues, including poorly performing public schools, tent cities on the streets, and the feces, needles, and other litter that surrounds homeless camps.
The situation is not likely to improve. In an interview with the San Francisco Business Times, Vranich said “The departures will accelerate because so many are sitting on the fence deciding whether to leave. Companies are leaving California because of its difficult business climate, which has worsened this year as politicians in Sacramento have approved harsh new policies.”
Fortunately, Mr. Vranich will not be around to personally experience the damage done by California politicians. Last year, he relocated his relocation service from Irvine, CA to Cranberry PA, a thriving community just north of Pittsburgh.
Photo: Bisnow/Julie Littman