San Francisco Chronicle - (Sunday)
Loophole sinks S.F.’s vacancy tax
Exemptions water down plan for keeping homes occupied
Residential vacancies have risen sharply in San Francisco in recent years, from 26,000 in 2013 to more than 40,000 — 10% of all homes in the city — in 2019. In response, Supervisor Dean Preston and his allies have put forward a ballot initiative, the Empty Homes Tax, that would assess an escalating fee on housing units left vacant at least six months out of the year. The tax could incentivize some property owners to put their vacant homes back on the market, either for rent or sale. It’ll also raise millions of dollars in revenue from those who would rather just pay the fee.
How big an impact will it really have? Pointing to similar policies in Oakland, Washington, D.C., and Vancouver, British Columbia, Preston says the tax could generate $38 million per year and put 4,500 homes back on the market. He has also claimed that vacancies are “overwhelmingly” concentrated in the sleek new condo and apartment buildings in the city’s eastern and northeastern neighborhoods. The initiative itself says the tax applies only to larger buildings because they’re “more likely to include one or more units held vacant by choice.”
The problem is, when it comes to long-term vacancies, large condo and apartment buildings aren’t the worst offenders — it’s two-unit homes, and they’re exempt.
The initiative’s proponents might be forgiven for the misconception. Before 2020, detailed data on the duration of vacancies wasn’t available: We knew why a unit was vacant — because it was for sale or rent, rented or sold but not yet occupied, or being used as a vacation home, for example — but the Census Bureau didn’t distinguish between units vacant for a week, a month or a year. That distinction is critical because shortterm vacancies are a natural part of the housing market: When someone moves out of a rental, the landlord has to clean it up, put it back on the market and find a new tenant. An owner might vacate a home for renovations before listing it, or a buyer might spend several months on renovations before moving in. We could look to cities like Vancouver and Oakland and make inferences about longterm vacancies in San Francisco, but no one really knew.
But now we do.
In 2020, for the first time, the Census Bureau estimated vacancy duration alongside vacancy type and building size in its American Community Survey. And while the overall case for a vacancy tax looks strong, its exemptions are critical, unforced errors, according to my analysis of census data.
Vacancies continued their rise in 2020, to more than 56,000 units, or 14% of the overall stock. Given the disproportionate impact of COVID-19 on the San Francisco housing market, this shouldn’t be too surprising. Of those 56,000 empty homes, nearly 20,000 were vacant for at least six months. But roughly 8,200 — 41% of long-term vacancies — are in buildings of one or two units. They won’t be subject to the tax, and they’ll be more likely to remain empty.
Long-term vacancies in the biggest buildings — those with 50 units or more — are surprisingly rare: Only 5.5% were empty for at least six months. Two-unit homes, with a rate of 11.9%, have the most long-term vacancies by a wide margin. About 9% of homes with three or four units were vacant for at least half the year, and the rate was under 6% for all other building types.
What can this vacancy data tell us about the likely impact of the San Francisco tax?
Vancouver’s experience may be instructive. Its tax went into effect in 2017, and that year the owners of nearly 2,200 homes were required to pay it. Another 5,500 long-term vacancies were exempted, mostly because of property transfers and renovations or redevelopments. By 2020, the number of taxed properties fell by nearly 600 and exempt properties declined by 1,250 — about a 25% drop in both cases. The tax generated nearly $34 million in 2018, according to the city’s annual Empty Homes Tax Report, though collections had fallen to $21 million by 2021, as vacant homes were returned to market.
In San Francisco, up to 12,000 homes could be eligible for the vacancy tax. If two-thirds are exempt, as in Vancouver, roughly 4,000 might actually pay it. This won’t amount to much revenue. In the first year of vacancy, owners will pay between $2,500 and $5,000, depending on the size of their unit. Homes in larger buildings tend to be smaller, on average, and buildings with one and two units are exempt, so most homeowners will pay the smaller amount.
Vancouver, meanwhile, assesses a tax equal to 1.25% of a property’s assessed value, or roughly $16,000 per vacant unit. Vacant one- and two-unit homes pay a disproportionate share of revenue — $31,000 each, on average — because their typical values ($2.5 million) are double those of condos ($1.26 million). All told, San Francisco’s tax might generate $10 million to $15 million in its first year, a far cry from Preston’s estimate of $38 million. It could have doubled that amount, or more, if one-unit and twounit homes weren’t exempt.
In a nod to the important role of supply in the price of housing, the primary goal of the tax isn’t to raise revenue, but to turn vacant homes into occupied homes. If San Francisco’s tax is as successful as Vancouver’s, it could put around 3,000 homes back on the market within several years. Given that the proposed San Francisco tax is substantially lower, however, this might be optimistic. It’s also less than the 4,000 units built in the city each year, on average, from 2015 to 2020. In Vancouver, the average value of vacant homes is higher than their occupied counterparts, so the homes that return to market may not be particularly affordable, either.
These criticisms don’t mean that a vacancy tax is a bad idea. Especially in a hot housing market like San Francisco’s, it’s better to have houses occupied than not, and revenue generated from units that remain vacant can be put to good use. Long-term vacancies are also a bigger problem in San Francisco — in 2020, at least — where 4.9% of units have been vacant six months or more, compared with 4.3% in Oakland and 2.4% in Los Angeles. But by exempting one- and two-unit buildings, the initiative’s authors have left thousands of empty homes and millions of dollars on the table — and for what?
Political concerns shouldn’t have been an issue: Oakland’s vacancy tax, put on the ballot in 2018, didn’t include these exemptions and it passed easily, with 70% support. The tax raised nearly $10 million last year. Vacant single-unit properties paid twice as much as owners of vacant condo, duplex and town home units. This is a good thing. One- and two-unit homeowners tend to be higherincome and have higher home values, so fairness and equity would suggest heavier penalties, not a special dispensation.
In the end, unfounded biases against new, higher-density housing seem to have won the day in San Francisco. City residents will be the ones to lose out.