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4 DATE:August 25, 2025
TO: Mayor and Members of the City Council
VIA: Stefan Chatwin, City Manager
FROM: Benjamin L. Stock, City Attorney
DEPARTMENT: City Attorney
SUBJECT: DISCUSSION REGARDING POTENTIAL COMMERCIAL
VACANCY TAX
RECOMMENDATION
It is recommended that the City Council, by Minute Order, receive this informational report regarding commercial vacancy tax and provide direction to staff.
EXECUTIVE SUMMARY
On April 7, 2025, Mayor Jimenez requested a future agenda item to discuss a commercial vacancy tax and other options to address vacant commercial parcels in the City. This request was supported by a majority of the Council.
BACKGROUND
The topic of vacant parcels and properties has been of interest in many cities due to a need to locate sites for housing or commercial use, concerns of blighted vacant properties, empty buildings and vacant storefronts, and a lack of development on vacant parcels over prolonged periods of time. To address these issues, some jurisdictions have adopted a tax on properties, either commercial or residential, that are unoccupied or vacant, for a specified amount of time.
Vacancy taxes have been enacted to achieve various goals including:
Encourage occupancy: Commercial property owners can be motivated to lease or sell vacant properties.
Combat speculation: Discouraging investors from leaving properties vacant while waiting for values to rise.
Address the blight that can often occur on a vacant parcel or a vacant building.
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4 A. Examples of Commercial Vacancy Taxes
For commercial vacancy taxes, local cities such as San Francisco and Oakland have adopted commercial vacancy taxes.
City and County of San Francisco:
Proposition D passed in 20201 (Vacancy Tax Ordinance or “VTO”) imposes a vacancy tax to stimulate the rehabilitation of long-term retail vacancies, and, in turn, to reinvigorate commercial corridors and stabilize commercial rents, thereby allowing new small businesses to open and existing small businesses to thrive. City of Oakland
Measure W passed in 20182 (Vacant Property Tax), imposes a tax specifically directed at various types of vacant property, including ground floor commercial, to use the revenue for homeless services.
Other cities that have adopted commercial vacancy taxes are Washington D.C. and New York.
B. Potential Statewide Legislation – Senate Bill 789 (SB 789) On Feb. 21, 2025, California State Sen. Menjivar introduced SB 789, proposing a vacancy tax aimed at commercial real property (property) to address prolonged vacancies and incentivize property activation. As originally written, SB 789 would have imposed an annual tax of $5.00 per square foot on commercial properties with parcels that have been vacant for 182 days or more (either consecutive or nonconsecutive), within a calendar year and would have applied to all commercial buildings but not residential spaces within multi-use commercial properties. The bill received significant revisions as a result of opposition from various taxpayer advocates and real estate groups and in its current form does not impose a tax but instead would require that any person that owns commercial real property file an information return each year that includes specified information, including among other requirements, whether any buildings or portions of buildings were vacant in the previous calendar year.
The bill was placed on the Appropriation “suspense file” and is being held in committee.
C. Legal Challenges
In general, anytime a public agency adopts a tax, that tax is susceptible to legal challenges on a number of different fronts, including the imposition of the tax itself, as well as the process the agency undertakes to adopt the tax, the manner in which the tax is proposed to be collected, or the manner in which the taxes are spent. 1 City and County of San Francisco Municipal Code Section 2901 et seq.:ARTICLE 29: VACANCY TAX
ORDINANCE
2 City of Oakland Municipal Code Chapter 4.56 et seq.:Chapter 4.56 - VACANT PROPERTY TAX | Code of Ordinances | Oakland, CA | Municode Library
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4 In 2023, the City and County of San Francisco’s residential vacancy tax adopted via Measure M (Empty Homes Tax) was challenged by property owners arguing that the tax violated the Takings Clause of the U.S. Constitution 3. On October 31, 2024 the San Francisco Superior Court granted the plaintiffs motion for summary judgment (and denied the City and County of San Francisco’s motion for summary judgment) finding that the Empty Homes Tax violates the Federal and State Constitutions and is preempted by California law (the Ellis Act, Government Code section 7060(a)) because among other things, it taxes units that are rented to family members of the owner while exempting units that are leased to strangers and that it violated the property owners’ right to privacy insofar as it compelled property owners to share the property on which they reside with others against their will. On November 26, 2024, the court issued its judgment and order, which prohibits the City and County of San Francisco from enforcing or administering the tax effective December 6, 2024.
The City and County of San Francisco has appealed this decision. Although the case relates to the residential vacancy tax and does not address the City and County of San Francisco’s VTO, it is unclear, at this point, whether the outcome of this litigation will have any impact on the imposition of a vacancy tax on commercial property.
ANALYSIS
California voters have imposed various limitations on local governments’ authority to impose taxes. One limitation is Proposition 13, which in relevant part: 1) restricts the ability of municipalities to impose ad valorem property taxes, which are property taxes based on a percentage of the assessed value of the property; and 2) provides that any “special tax” requires a two-thirds majority vote for approval. 4 Special taxes are distinct from general taxes, as the proceeds of special taxes may only be used for a specifically enumerated purpose.5 One common example of a special tax is a parcel tax, which may be imposed as either: 1) a flat rate imposed on every parcel; or 2) a flat, non-percentage rate that varies based on the size or other physical characteristics of the parcel.6 Whenever a public agency is considering imposing a tax, there are various legal and practical considerations that must be analyzed. In order to determine the appropriate tax mechanism and associated legal requirements, the City Council would need to consider various decision points relating to a potential commercial vacancy tax, which are discussed below.
A. Discussion Points for Potential Commercial Vacancy Tax How Would the City Determine Vacancy?
3 Eric Debbane et al v. City and County of San Francisco et al., San Francisco County Superior Court, Case No. CGC23604600.
4 Cal. Const. Art. XIII A, § 1; Neilson v. City of California City (2005) 133 Cal.App.4th 1296, 1306 (“Nielson”). 5 Ibid.
6 Heckendorn v. City of San Marino (1986) 42 Cal.3d 481 (holding that a parcel tax based on lot size rather than value was not an ad valorem tax).
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4 Any commercial vacancy tax would need to define the term “vacant” or “vacancy.” Generally, the definition includes a period of time that constitutes the “vacancy.” For example, in Oakland, a property is considered vacant if it is “in use less than fifty (50) days in a calendar year” while in San Francisco, “vacancy” is defined as commercial property that is unoccupied, uninhabited, or unused for more than 182 days, whether consecutive or nonconsecutive, in a tax year.
Which Properties Would be Subject to the Tax?
A commercial vacancy tax would also need to identify the properties to be included such as undeveloped/vacant parcels, ground floor commercial and stand-alone commercial buildings, etc. Oakland’s Vacant Property Tax identifies the following types of commercial properties that are subject to the tax:
A parcel of land where ground floor commercial activities are allowed by the applicable zoning (with or without a use permit) or are a legal nonconforming use and all of the ground floor space that could be lawfully occupied by commercial activities is in use less than fifty (50) days in a calendar year.
San Francisco’s VTO specifies that the taxable commercial space means the ground floor of any building or structure, or the ground floor of any portion of a building or structure, where such ground floor (1) is adjacent or tangent to a Public Right of Way, (2) is located in one of the “Named Neighborhood Commercial Districts” or “Named Neighborhood Commercial Transit Districts” listed in Section 201 of the Planning Code, as those districts exist on March 3, 2020, and (3) is not Residential Real Estate.
What Would Be the Amount of the Tax?
The tax rate imposed can vary depending on the type or size of the commercial property and could increase over time.
For example, Oakland’s Vacant Property Tax imposes a rate of $3,000 per parcel for any parcel with ground floor commercial activity that is allowed but is vacant. San Francisco’s VTO varies by year based on linear foot of Taxable Commercial Space. For the 2024 tax year and subsequent years, the rates for San Francisco’s VTO are as follows:
$250 per linear foot of frontage for taxable commercial space that has not been kept vacant by any person in the immediately preceding tax year; $500 per linear foot of frontage for taxable commercial space that has been kept vacant by any person in the immediately preceding tax year but not kept vacant by any person in the tax year immediately preceding that tax year; and
$1,000 per linear foot of frontage for all situations in which neither subsection above applies.
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4 Which Properties Would Be Exempt from the Tax?
Exemptions to the tax may be applied to the owner of the property or the commercial property itself. For example, Oakland provides exemptions for owners who are “very low income” or face “demonstrable hardship unrelated to personal finances,” or buildings that are under “active construction” or subject to a pending “building permit application.” San Francisco’s VTO also has exemptions for “time to fill vacant units before the tax applies ..., including repair of an existing unit, new construction, a natural disaster or death of the owner.”
How Would the Tax Proceeds Be Used?
Any tax on vacant commercial properties would likely need to be structured as a special tax and the proceeds of the tax measure must be directed towards a specific purpose. Such a special tax measure would require a majority vote of the Council, as well as a two-thirds vote of the electorate.
San Francisco’s VTO dedicates the proceeds to the Small Business Assistance Fund to assist small businesses and provide relief to those small businesses adversely affected by blight, crime, and other negative impacts caused by vacant storefronts in San Francisco.
Oakland’s Vacant Property Tax is dedicated to provide services and programs to homeless people, to reduce homelessness, and to support the protection of existing and production of new housing affordable to lower income households as defined in California Health and Safety Code Section 50079.5 at an affordable housing cost or affordable rent as defined in Health and Safety Code Sections 50052.5 and 50053.
If the Council is indeed interested in further analyzing a potential commercial vacancy tax, significant analysis would need to be undertaken to provide more factual information relating to the decision points identified above, including an analysis of the current commercial properties and vacant parcels that have been underutilized or vacant for prolonged periods of time. Some of the decision points may also need further research or analysis by a consultant that specializes in ballot measure preparation.
Note that all of the considerations outlined above would require significant staff time and resources to administer.
B. Alternatives to Commercial Vacancy Tax
The Council may also want to consider alternatives to a commercial vacancy tax depending on the desired goals of the Council to address vacant commercial property and/or blight.
For instance, if the Council desires to specifically address reducing blight and illegal activities associated with empty storefronts, the Council could consider adopting regulations that set specific standards for empty storefronts, similar to the “ Vibrancy Ordinance” adopted by the City of Santa Cruz, which also includes a registry requirement for empty storefronts that have been vacant for two years.
Another alternative may be to consider studying the underlying reasons for the commercial vacancies to determine the root causes to develop specific strategies to address those 4923-5003-5039 v4
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4 causes. For example, if the land use designation or zoning in a certain area is limiting the type of tenancy that is allowed it may be appropriate for the Council to consider revising the land use designation or zoning to allow broader uses in a commercial area.
CALIFORNIA ENVIRONMENTAL QUALITY ACT
This item does not constitute a project as defined by the California Environmental Quality Act (Public Resources Code § 21000, et seq.) (CEQA) as the adoption of the resolution does not have the potential to result in either a direct physical change in the environment, or a reasonably foreseeable indirect physical change in the environment (14 Cal. Code Regs. § 15378.).
FISCAL IMPACT
There is no direct fiscal impact associated with this action.
CITY COUNCIL VISION, MISSION, AND VALUE/PRIORITY AREA
City Council Operations and Improved Community Engagement.
ATTACHMENTS
None