June 12, 2020

SF Supes' failed storefront policies demand volte-face

Businesses encounter many obstacles in leasing commercial space in San Francisco neighborhoods, and some may not even enter them. The supervisor created restrictions are the leading cause, starting with formula retail.¹ These restrictions are iatrogenic, thereby increasing storefront vacancies. Iatrogenesis is harm done by a healer, and by extension, harm caused by policymakers. ² Frustrated by their prior failure to stanch neighborhood vacancies, the supervisors doubled down with a new ballot measure last March taxing empty storefronts hoping to contain the cascading catastrophe.

Despite warnings from the City's chief economist, Dr. Egan, the supervisors pursued the ill-advised measure to punish small property owners. Dr. Egan warned them that imposing the tax would have little effect in reducing vacancies. He noted Internet shopping, and unpredictable economic events were larger forces that could and would cause vacancies. ³ Another factor contributing to vacant storefronts is the trend from selling merchandise to offering personal services, e.g., shoe store to nail salon.

While the Supervisors were targeting storefront owners, the Wuhan pandemic came ashore. The ensuing population lockdown gravely wounded neighborhood businesses. Many tenants upon reopening will limp along until they collapse from diminished revenue.

Renewing neighborhood businesses requires a supervisorial volte-face. It is the sine qua non. The supervisors must immediately impose a three-year moratorium on the stifling rules, regulations, and convoluted procedures to repopulate the neighborhoods with tenants. During the freeze, an appointed task force will write new rules for storefront tenants to obtain operating or change-of-use-permits quickly, economically, and with limited interference. The task force's goal is to prevent iatrogenic calamities.

Supes' big lie.

In March, the voters passed the Board of Supervisors initiated vacant storefront tax. The punitive tax to begin in 2021 applies to all storefront property owners with a vacancy more than 182 days during a calendar year unless exempted. ⁴ There is no exemption for actively marketed properties listed with a broker or advertised on the Internet.

Class warfare propaganda bamboozled the electorate. Supervisor Peskin claimed, "Proposition D is our best opportunity to target bad actors...[the tax is] narrowly tailored to property owners who have inflated their rents and let properties fall into blight and disrepair..." ⁵ (emphasis added)

The San Francisco Small Business Commissioners placed a duplicitous statement in the voter pamphlet. They wrote: "We are grateful that the legislation has been tailored to ensure that only bad actor property owners are targeted by this tax..." ⁶ (emphasis added)

These statements are lies. Nowhere in the legislation is a "bad actor" defined, nor is the property owner's motive or situation a factor in assessing the tax. Instead, the tax applies to all storefront property owners with a vacancy more than 182 days during a calendar year unless exempted.

Finally, the pamphlet's Ballot Simplification Committee Digest was economical with the truth. It said to voters: "A "YES" Vote Means:..., you want the City to tax owners ...that keep ground floor retail ...space vacant..." (emphasis added) By reading only the mini-summary, the voters' natural inclination was to punish bad actors.

Consider how the law applies hypothetically to a conscientious owner. Every year Suzie rents her space to a pop-up clothing designer for the Spring and Fall collections. The tenant is neighborhood-serving. The combined three-month lease terms leave the property vacant more than 182 days, and the vindictive tax applies to Suzie. In 2023, the tax will be $15,000 based on her fifteen-foot street-facing frontage. Even though she does not rent gouge, own a blighted property, or allow it to fall into disrepair, the law treats Suzie as a bad actor.

Supes' lack empathy.

Why have the supervisors made it so difficult for businesses to enter the shopping districts while excluding many others? The rules can even bar homegrown favorites with eleven locations.

Unlike the supervisors, the storefront property owners and new tenants have skin-in-the-game, making them risk-takers. Entrepreneurs risk everything, whether they make a mistake, have bad luck or timing.

Storefront owners face escalating taxes and fees, bureaucratic obstacles and lethargy, uncertainty over rent collection, loan payments if financed, and tenant bankruptcies.

In San Francisco, numerous first-generation immigrants own neighborhood businesses. Operating a small business is rough. Merchants and personal service providers must placate fickle customers, manage cash-flow, and contend with burdensome regulations. Unrelenting internet competition can be brutal.

Conversely, if things go right, the storefront owner and the proprietor can achieve financial success and personal satisfaction.

In contrast to the risk-takers, the supervisors come from the public and non-profit sectors. Their online official biographies, see below, display no entrepreneurial or commercial real estate experience. The exception is Mr. Mandelman, a former Oakland City attorney handling property matters.

San Francisco Board of Supervisors

The supervisors' lack empathy for the property owners. Unlike sympathy, having feelings for someone's misfortune, empathy requires the ability to understand the feelings of another. When there has been no skin-in-the-game and prior experience, they are unlikely to comprehend how their policies create the roadblocks and dead ends.

Unconstrained by empathy and first-hand experience, supervisors engage in magical thinking, i.e., what they want the world to be. Magical thinkers believe they can influence events. Policy myopia forces to the periphery iatrogenic impact considerations. If they were consultants, we would call them charlatans.

Atychiphobia, fear of failure, is another explanation for their animosity. Silicon Valley believes failure makes a system robust. In contrast, the supervisors seem to believe everyone deserves a trophy by just being there. In the shopping districts, protecting the status quo results in soaring vacancies.

Are storefront property owners class enemies?

During committee hearings, while the elected officials showed little understanding about leasing storefronts, they also displayed animus towards owners. In the supervisors' world, property owners are rapacious and have no downside risk. Their mindset disregards adverse economic conditions and tenant failures.

On November 18, 2019, Supervisor Fewer stated the following during a Budget and Finance committee hearing:⁷

As a self-proclaimed fourth-generation San Franciscan,⁸ why is she oblivious to changing residents and neighborhoods? A perfect example is Clement Street between Arguello and Park Presidio in San Francisco. The newcomers introduced the area to more and better restaurants, personal services, and merchants.

Supervisors who believe tenants should occupy the same space or neighborhood for decades display willful ignorance and invite economic stagnation and decay.

What is it about a monthly $20,000 asking rent that bothers Supervisor Fewer? Is it the absolute amount? A significant difference between neighborhood rents per sq. ft.? Or is she advocating a different rent structure for politically favored tenants?

If her goal is to impose commercial rent control to benefit non-profits and favored businesses, then mandated rents are foreseeable. If the City's approved rents fail to lower vacancies, what is next? Is it expropriation, and reeducation camps for class enemies?

If commercial rent control is the goal, why not require other lease modifications? The government could dictate:

• Maximum lease length and minimum font size.
• Permitted lease provisions.
• Minimum and maximum lease term.
• Minimum and maximum option term(s).
• Limit or eliminate triple net charges. The nets can include real property taxes, rent taxes, insurance costs, maintenance and repair charges, building mandated code upgrades, etc.

Fortunately, State law prohibits commercial rent control. ⁹ Unfortunately, California's one-party government could quickly impose one in the name of "fairness, diversity, and equity" or in a calamity.

On May 14, State Senator Weiner, a former SF supervisor, and attorney introduced SB 939. The proposed bill gives some small businesses the right to terminate their leases after failing to receive rent or economic concessions from a property owner. ¹⁰ The legislation gives a powerful negotiating advantage to these tenants. The proposed solution is likely to backfire.

Consider a restaurant. Restaurants require substantial infrastructure investment, e.g., a cooking hood, Ansul fire suppression, sufficient HVAC, plumbing including a grease trap, and electrical systems along with furniture, fixtures, and equipment. If the tenant paid for the improvements, will she walk away and absorb the loss? Another consideration is the location. Will a new venue generate sufficient revenue?

Restaurant investors and owners are collateral damage. They will lose everything. The backers see their investment gone, and restaurant owners forego selling their business profitably. Those with favorable long-term leases suffer even more.

If enacted, Weiner's law will become an iatrogenic train wreck. Expect a ferocious litigation assault to prevent its implementation based on constitutional and bedrock legal principals.

While the Madame Mao wannabe excoriated her class enemies, Supervisor Mandelman had earlier undermined the bad actor trope. In a November 13 hearing, he noted leasing storefronts could take considerable time. ¹¹ He recounted not being able to lease a non-profit's space for five years. While the supervisor did not explain why the storefront remained empty for so long, it is useful to explore some possible factors. They include:

• Poor location (bums shooting-up, filthy sidewalks and streets, and no beat cops)?
• Not enough foot-traffic and parking?
• Restrictive zoning limiting potential tenants?
• Space poorly configured for commercial use?
• Low ceiling?
• Asking rent out of line with neighborhood rates?
• Inadequate tenant improvement money or limited free rent?
• Listing broker skills not matched with the challenge?

Why Mr. Mandelman voted to punish private property owners unable to get their deals done in six months, given his professional experience remains a mystery.

Peskin's bad actor obsession.

If vacant storefronts cause blight, why was the City reluctant to issue abatement and repair orders under existing law? ¹² How severe was the problem? Supervisor Peskin said at the November 13 hearing; there were a "handful of bad actors" ¹³

So why call for a ballot measure covering designated areas throughout the City when the existing legal tools could handle a "handful of bad actors"? ¹⁴ The likely reason was Supervisor Peskin's crafty calculation to enhance his political stature and power.

Can controlling neighborhood access and a vacant storefront tax lead to legal shakedowns?

Duality is a Japanese cultural norm. One displays certain behavior and opinions in public, the tatemae while keeping to oneself true feelings and desires, the honne. ¹⁵ Supervisorial actions and motivation suggest a similar duality. Ostensibly, the supervisors' tatemae is to protect neighborhood merchants from malevolent forces like competition and changing storefront uses.

While the honne for the supervisors is very different, it can generate legal bribes. What is a legal bribe? It is a disparaging term used to describe perfectly legal campaign contributions or contributions to a favored program.

How can the contribution system work? For example, the Vacant Storefront Tax law contains an anodyne provision related to its modification. Unlike the law itself requiring voter approval, the Board can amend the law with a two-thirds vote. ¹⁶

On its face, the provision seems reasonable; this is the tatemae. However, we can infer giving the supervisors the power to modify the law and juggle things around without additional voter approval is their real intention.

Those in the know can decipher the honne. Just considering a change causes hyperventilation for many. Thus, the supplicants offer tribute to placate their protectors.

The legislation presents many opportunities to leverage the Board's power. They could change the trigger date from 182 days to 91 days, ¹⁷ modify or remove exemptions, ¹⁸and subject non-profits to the tax.¹⁹

Surprisingly, the tax applies to City-owned storefronts.²⁰ Making the City a bad actor is a howler. Perhaps the supervisors thought that by imposing the punitive tax on the City, it showed impartiality, but what comes across is a hoax. If violated, who pays the tax, and what is the funding source? The sanction is a sham when no elected official or government employee comes out-of-pocket to pay the tax nor suffer a reprimand.

Pandemic gobsmacks Supes.

The Wuhan pandemic upends supervisorial control over business access to the neighborhoods.

How do restaurants, bars, coffee shops, nail and beauty salons, clothing stores, gyms, and many other small tenants survive a steep loss in revenue? Even after the pandemic subsides, many will die from reduced revenue caused by social distancing.

The coming tenant wipeout will produce a surreal streetscape as "For Lease" signs festoon affluent shopping streets like Chestnut, Fillmore, and Union. A similar scenario will unfold in other neighborhoods. The pandemic spawned boarded-up storefronts could remain a neighborhood fixture.

Paradoxically, as more residents go online, San Francisco may collect enough sales tax revenue from internet commerce to off-set the in-store sales decline. If so, there will be less pressure on the supervisors to change policy. However, higher vacancies accompanied by a pandemic induced rent contraction will significantly impact real estate values and property taxes collected.

Game up for Supes.

Can we expect wholesale changes from the supervisors to counter neighborhood carnage? Unlikely, given their rigid ideology and scant empathy.

Initially, they will propose palliatives and offer excuses for their dereliction.

An example is their half-measure proposing exterior seating for restaurants.²² Postponing the vacant storefront tax is another. ²³ However, the supervisors are incapable of introspection to understand what neighborhood survival requires after the lockdown ends.

They may claim a Black Swan defense as the economic crisis unfolds. If claimed, the excuse is bogus. A Black Swan is an unexpected event with dire consequences. However, students of calamity know pandemics are not a Black Swan; they are a White Swan "...something that would eventually take place with great certainty." ²⁴

Dr. Egan knew the vacant storefront tax legislation had problems. He noted how a recession keeping tenants scarce would unduly burden storefront owners. His concerns were prescient. ²⁵

Supes' future shock.

Soon, shoppers will pass abandoned bars, boutiques, cafes, nail and beauty salons, restaurants, and other favorite places, noting the missing commercial rhythm. They will recoil from the "For Lease" signs, and the supervisors' feeble excuses and half-measures.

Anticipate voter dissatisfaction to explode as residents discover how a bloated, costly, and dysfunctional tenant control system hinders or prevents new businesses from entering their neighborhoods. Voters will take to social media in a "name them and shame them" campaign. Some citizens may even demand contribution refunds.

Public hearings will come to be a unique forum to humiliate the supervisors. Expect invective from storefront owners lacking tenants, neighborhood associations fighting blight, restricted or prohibited tenants, the unemployed, and others. The aggrieved will denounce the supervisors for creating a scheme benefiting themselves while letting the shopping districts deteriorate.

Somnolent local TV, radio and newspaper reporters will awake to investigate. Luckily much incriminating information is in the public domain and not tricky to find.

Radical change requires Supes' volte-face.

In mid-May, restaurateurs, their architects, and several leasing brokers issued a report pleading for the City to initiate significant planning and building department reforms to forestall a massive culling.²⁶ Small retail and personal service businesses would face a similar fate.

While the report advocated a phased change, radical change is necessary. The guiding principle is common-sense with a light regulatory touch to prevent supervisorial conniving. The radical shift combines three elements for bringing businesses back to the neighborhoods.

First, declare an emergency. The declaration suspends for three years the rules beginning with the 2004 formula retail limitations and subsequent actions hindering or preventing businesses from opening in the neighborhoods. The declaration will contain the supervisors' mea culpa by admitting their false worldview, and confess their policies caused iatrogenic hardship.²⁷

Second, expand over-the-counter permits ("ministerial"), including change-of-use, e.g., dress shop becomes a take-out restaurant. Dispense with public hearings for over-the-counter permits. The public hearing process results in unnecessary delays and costs. However, bars and cannabis shops will continue to follow the existing rules. Also, indefinitely suspend the vacant storefront tax.

Third, convene a task force to develop flexible neighborhood tenancy guidelines, including iatrogenic analysis.

The task force members must understand praxis; they will know how things work and why they fail. Disqualified from membership are dilettantes who never applied for a permit, pushed through City paperwork, or dealt with building inspectors or planners. They are the least likely to overthrow the ancien regime.

Skin-in-the-game is another qualification. Exclude those with nothing to lose or who deal in abstractions. Not suitable for inclusion are persons from consulting firms, the government, specialized pleading organizations, and similar groups. The members must know how everything fits together before explaining the changes to a broader audience.

Those suspicious about allowing the real estate brokers, storefront owners, tenants, contractors, and their allies to formulate policy should reflect on why the prior policy failed so severely. The wrong people having the wrong ideas and experiences are to blame for the dysfunctional system.

The task force's recommendation should be subject to a public referendum similar to the Vacant Storefront Tax. Other groups could submit competing proposals. Giving the voters the final say is the democratic way to decide who can do business in one's neighborhood. (June 12, 2020)

Footnotes:

1 - Definition: Eleven or more stores with "a standardized array of merchandise, a standardized façade, a standardized decor and color scheme, a uniform apparel, standardized signage, trademark or a servicemark." See (https://www.spur.org/publications/voter-guide/2006-11-01/proposition-g-limitations-formula-retail-stores) ; (https://sfplanning.org/project/policy-basis-formula-retail-chain-stores) ; (https://sfplanning.org/permit/chain-stores-businesses)