Since California passed Proposition 13 in 1978, property tax rates for those San Franciscans who owned property back then have been severely capped. Owners may pay Nixon-era property tax rates, while renting out those spaces at rates that have exploded in the last 40 years. They, too, can afford to let buildings sit empty.
Best case it will apply to commercial properties. I dont foresee changes to prop 13 for residential. They would also have to undo rent control, which is sort of like non-owners prop 13.
There's probably a stronger argument for "it's just business" than forcing grandma to move out of the house she grew up in because she can no longer afford the property taxes. But, yes for better or worse, it's certainly an aspect of gentrification when the long time family-owned pizza place gets forced out to be replaced by a trendy bar, Starbucks, or a bank branch.
Poor little small businesses will always get crushed and it's just a matter of who by. I often see this kind of what-about argument trotted out against regulation (if we ban polluting cars, what about the poor folks who can't afford to get their old car serviced?).
But if we're so worried about the pizza joint, are we going to protect them if a chain restaurant offers cheaper pizza? What if the neighborhood changes and now people don't like pizza as much?
I think the answers to all these questions are the same.
Property taxes should be proportional to the value of the property. We shouldn't give special breaks to one group or another just because we like them more.
Remember that SF's rent stabilization ordinance was the renter's response to Prop 13, enacted one year later. It shouldn't be used as an excuse to preserve a bad law.
This is going to be difficult to unwind fairly but it is only going to get worse if we don't.
> "The majority of the building owners, and certainly retail brokers like myself, all are aggressively trying to fill these vacant spaces," wrote Hansson. "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."
I don't buy that argument fully. Why is the place vacant in the first place? Usually because the pervious, sometimes long-term business, could not afford the double, or triple rent increase. The question is, Did the owner of Sparky's really want to close, or were they not able to afford the rent increase? And now, we are suppose to believe that the place is empty only because a new business wants to pay that new amount and they're just waiting on permits?
The Castro area has more retail vacancies than most. Many of the vacancies are owned by a single landlord, last name is Natali I think. He kept the Patio Cafe space vacant for something like 15 years. Thanks to Prop 13 it costs him very little to do so and he has plenty of profit from the other buildings.
There is a pattern of landlords raising rents to a level that existing businesses will not be able to afford, and then leaving them vacant. Supposedly there are big brands that will pay these rents, but they are kept out by a San Francisco law against chain stores. Without this law, the Castro would turn into a sort of high end rainbow themed mall. Some of the writing about Greenwich Village in NYC captures this dynamic better - there are national brands that can afford to run a flagship store in a tourist neighborhood, at a loss.
The granolashotgun blogger has pointed out that in much of the US, there is simply more retail-zoned space than is necessary in the delivery age. I don't think that's what's going on in the Castro though. Prop 13 is a massive market distortion and the distortion is only growing, just as it was designed to do. That which is not sustainable must end, preferably before it gets worse.
>there is simply more retail-zoned space than is necessary in the delivery age
Although higher-end malls in growing cities are mostly doing pretty well, there's certainly no reason to think that urban retail in general should be immune from at least some of the same forces that help create the "dead mall" phenomenon.
I was walking through Cambridge yesterday for the first time in a while. In addition to a non-trivial number of empty storefronts my sense was that there was at least a bit of a shift away from retail and towards trendy-looking restaurants.
Yeah, that's why prop 13 passed in the first place... "Oh how am I going to retire if my property taxes keep going up on my small 2br apartment in the Castro?"
Commercial real estate companies assume they will have X% vacancy so it’s factored in. Meanwhile, they pass rent increases onto their other tenants/properties and overall they just keep pushing prices up. They can just sit on the property as prices continue to rise and it won’t really matter. In the end they still come out ahead.
Given the duration of business leases, it's often more worthwhile to wait for a tenant who's willing to pay "market rate", especially if you own many buildings which can help smooth out any temporary blips in rental income.
Having a tenant is some risk -- they might mess the place up and cost you some money. If you've got profitable housing above then a new tenant might make noise or smells that upset the neighbors. If it's empty you can wait for a really excellent tenant to come along.
Of course, that's only sane if the cost of leaving it empty is very low. Which is indeed the case.
I lived next to some church property that was similarly blighted: the church paid little or no taxes and wasn't fined for having the property in disrepair. The congregation had all fled to the suburbs. So what was the incentive to put in work finding someone to rehabilitate and then buy or rent the property?
Why invest money in the maintenance and management of a building at the level required for its ongoing use, when you can do so at a much lower margin when it’s unoccupied and (potentially) capture a greater future return.
I believe (but would love someone to prove) that it has to do with the way real estate is financed.
The value of the property for loan collateral is based on rental rates and assessors understand vacancies happen. Therefore it makes more sense to have some vacancy to trade up for a higher rental rate.
Given how leveraged commercial real estate companies are it wouldn’t surprise me to learn that they optimize around this rather than true cash flow.
That usually means there’s something worse going on with the property but fixing it, if it’s even fixable (location, for example, isn’t unless the local situation changes) is even more expensive on whatever timeframe is being used to evaluate that.
This is a question I have; We have a similar problem in Atlanta.
A new residential apartment building goes in with 300+ units; leases to 70%, but 2 of 3 shops/restaurants closes/moves to the next high rise at the 1 year mark for lease renewal.
Managing tenants can be more trouble than it's worth. The people buying up these properties likely prefer security and liquidity more than maximizing their return. Tenants make the building more difficult to sell because they often come with very long leases.
There's also a strategy of waiting for rent prices to appreciate enough before leasing to corporate clients. You could get 10y $1000/mo from a small time coffee shop, or you can wait 5 years and maybe get Starbucks locked into a 10y, $5000/mo lease after the area grows up a bit.
Seeing this exact story happen all over DC right now. Just yesterday a locally owned bar announced it was closing because it couldn't come to terms on a new lease with the property owner. The insinuation was that the owner would happily let the place sit empty until a national chain was willing to take it.
Similarly, 14th St in DC even just a few years ago was becoming a vibrant, fun spot to shop, drink, and eat in. This was after years of neglect in the area. Over the last year or so though a string of bars and shops have closed and all been replaced with banks. Capital One Cafes, Citi, etc. I have no idea how all these banks are functioning (I thought brick and mortar banks were on their way out?) but it's a damn shame.
It's always a matter of some surprise to me just how much prime retail real estate banks fill up. As you say, it's not so much for the tellers any longer. But I guess it's to project an image for people getting loans or doing other types of more complex financial transactions. In general, they're likely profitable enough that even though the branches are inefficient in some sense, the fact that people will be more inclined to use financial institutions with local branches they can go into in person probably makes it a worthwhile tradeoff.
Usually the pattern is allow a local small business lease to expire and wait for a big company that will pay at the highest end of the market or above market rents. So kick out local business with thin margins who wants to negotiate the rent and wait for Starbucks or Chipotle to pay you $$$.
No clue if it is actually financially beneficial for the renter but many believe it's beneficial to keep a store empty to wait around for a big company to want the property rather than committing to a small entity who can't pay big company rates.
Tenants also make the building more difficult to sell, if you are trying to sell.
I do not know much about commercial real estate but why would big chains pay top dollar? McDonalds is famous for seeking bargains on real estate and here in dowtown Toronto Starbucks did not flinch to axe several underperforming locations.
Gentrifying neighborhoods tend to have more of this behavior from renters because the big corps are new to the neighborhood and expect to have a long future presence there as neighborhood property values and incomes only increase. Whereas an existing competitive market like downtown Toronto with lots of big corporate chains should have renters with less optimism their space will be particularly desirable.
Another somewhat related problem that I know happens in NYC is a building is owned by a parent who dies and leaves the property into split ownership amongst the children. Then the children cannot agree on a strategy to rent the building. And the fight results in an empty property.
I was talking to a friend last night about just such a thing. It was a rural rather than urban property but same idea. Two siblings inherited a property and couldn't agree on what to do with it going forward--and I gather maybe didn't get along under the best of circumstances--and ended up selling it at a cheap price just to be done with it.
If you own a one million dollar property that appreciates 10% unencumbered and loses 7% of value encumbered then you need to get a lot on your lease to make it make sense.
What you gain from leaving the building empty is that you can sell to a big guy who wants the whole space. He won't do that if you give him six out of ten units and say "The other guys move out in five years" especially since the other guys will fleece you on buyout.
San Francisco is just a really poorly run city, but so many people are willing to look past that because there are tech jobs. There are literally people shooting heroin and smoking meth in public (across from City Hall no less), property crime is ignored, and they just keep trying to raise taxes and throw more money at the problem. It just seems like it’s obvious they are making these problems worse and not better. I don’t blame businesses for leaving. After the sky high rent and thefts, it’s probably hard to survive. We chose this though.
Remember that social services and law enforcement are starved for cash because of Prop 13 and that the oligarchy doesn't have to care - they can afford gated estates and private security. That's the Brazilian model.
About half of the budget goes immediately to enterprise departments. Things like SFO, MTA, and the Port of San Fran. Another quarter goes directly to prop-approved set-asides for things such as libraries and Medi-Cal. Then some other large chunk goes to jails, courts, and hospitals. Then there is payroll for the 30,000+ city employees.
Not to mention San Francisco has a massive pension liability in excess of $6 billion. The city really is bankrupt.
And during the longest economic expansion in US history the city has done virtually nothing to shore up its finances. Not like San Fran is alone in that regard.
Still, absolute budget seems huge, to me. So if police and social services really are starved (are they?), it's a problem of allocation rather than absolute revenue (as implied by GP w/ reference to prop 13).
It is a massive budget. The residents just keep passing ballot initiatives and spending.
For comparison NYC has a budget per resident of ~$9,500. But don't let that fool you into think NYC has it figured out. The city is nearly $200 billion in debt and will probably go bankrupt if there is another big recession.
I've read a lot of reports that most of the big cities in California are going downhill hard. I'm nowhere near informed enough to have an opinion on these complex issues, but the constant reports of "state of emergency" and "poop patrols" make me angry for the people who live there.
It's ponderous how some of the wealthiest cities in the world can't manage themselves. How do they not sweep out the current administration, and bring in people willing to change things?
Other cities literally buy homeless people tickets to LA or SF to get rid of them, and cities generally don't have the amount of revenue they should have because of Prop 13.
Please propose a fix for dealing with the homeless population of the entire country on a budget that is mostly pre-allocated by propositions with no ability to raise taxes.
Nobody really wants to address the elephant in the room because they're all Temporarily Embarrassed Millionaires who might hypothetically benefit from Prop 13 someday.
You don’t have to be temporarily embarrassed to benefit from prop 13, merely one of the 55 percent of Californians that own their home. Homeowners vote, and they vote in their own self interest.
It is simple, because the voters are selfish and don't want to take their medicine for their known ailment. Getting rid of Prop 13 and allowing more development which they fear would compromise their own situation. Indeed doing anything to help fix the situation is the surest way to make people angry, see their anger at effectively /carpooling/ with Google bus.
The harsh truth is that if voters want to find the source of the problem instead of a scapegoat they should look in a mirror.
Everyone wants the amenities and economic securities of an urban, densely populated city with the comforts and space of a suburban home including a vehicle and socioeconomically segregated schools. And everyone wants a to be part of the wealthy and not re-distribute their own wealth to the poor/mentally disabled/etc.
I'm not saying the problems don't exist, but it feels like they have been amplified in a smear campaign. I think there's been a lot of propaganda to make SF and California look terrible in general, for political reasons.
Washington D.C. has a large percentage of homeless people than SF. It has been documented that other cities will buy bus passes for homeless persons to get them to California cities or other places like Portland, Oregon. It's a nationwide problem and it feels like the places trying to help the most are the ones getting flak for it.
You simply can't fix this problem from 1 or 2 states - or a few well known cities.
I've heard even worse things about Portland, for instance. But I just heard that the wealthy in San Francisco have started employing private police forces to handle the homeless and sanitation issues in their neighborhoods. Some areas have mandatory taxes (somehow) for homeowners to finance them.
Maybe it's a good thing, not for me to say, but that does seem like a very clear indication of mismanagement.
Regarding the mandatory taxes, I think you're talking about "green neighborhood" district taxes that supposedly help to deal with quality of life issues.
I've read that some building/condos/whatever have HOA's that require them to fund it. I'm not providing an opinion. I just found it surprising, if true.
I'm not part of a smear campaign, but in the last year I've had homeless tweakers squatting in my garage, had to get a restraining order against a mentally ill and violent homeless person who just decided to harass my apartment building, I've seen a HUGE guy sexually assault multiple women on BART, I've seen multiple people smoking meth/crack and shooting heroin in BART on my way to work, I see feces and needles DAILY. It's not a smear campaign. We're sick of living in these Medieval conditions when we work this hard and pay this much. It's not like this anywhere else in the country. It's really gotten worse in the past 2 years and seems to be getting worse by the day now.
The final straw for me, was when a bullet came through the wall of my bathroom at 1AM and when I called the cops they took 2 hours to get there, threw the bullet in a ziplock bag, then never called me or had any follow up. If this city doesn't take gun shots or violent crime seriously, then what good is the government or PD?
People largely don't agree on what it is that should be changed. Some insist that building more is the silver bullet; others argue that we need to tax tech companies more, or get better at building shelters in neighborhoods that don't want them.
It’s not starved for cash, SF's budget is bigger than many countries and with less a population. Also Prop 13 rates do go up, just not the bubbly rate that prices do.
City budget for homeless services is a quarter of a billion dollars[1], and we just spent another quarter of a billion dollars building a new Public Safety Building (police H.Q.)[2]
It's a problem all over in many big cities. Toronto is experiencing the same issues. Small businesses are being pushed out. You have a Deli or a Coffee shop that has been there for decades close and some kind of Boutique shop move in since they can afford the 5-10k a month in rent.
The trend now is for small shopping plazas or outdoor malls being sold off to developers to build Condo complexes. Complete neighborhoods have no shopping anymore forcing residents to drive instead of walk to get groceries or enjoy a stroll.
It doesn't help that these cash strapped cities (Toronto) just rubber stamp any new development since the tax haul will be several times what they got for what was there. A 20 story Condo brings in a lot more revenue then a parking lot and strip mall. I won't even start about all the green space they are selling off to developers. It's out of control.
I don't know Toronto, but your description is the exact opposite of what is happening in San Francisco.
All residential development has been frozen. There are a few small areas where very modest amount of housing has been built, but even there it has been with an abundance of retail, that takes a long time to find retail tenants. And because most of the city is blocked from any development; and only small areas get what look like massive changes, it take many years to adapt.
The entire western side of SF is basically unchanged in the 20 years I've been in the area, and the age of the buildings say that it's been unchanged for decades more.
Mission bay and soma are the two places where residential is being built but it’s all expensive high rise esque units that middle income can not afford.
When you limit building, the most expensive forms of building get built first, and existing buildings go to those who can pay the most.
The only other way to deal with the mismatch of shortages is to have waiting lists or lotteries. Both of those are used for subsidized housing in SF, and the lotteries are ridiculously lopsided, to a tragically comic degree.
The only people who benefit from the shortage are landowners, and boy do they take it in.
I have never understood the mindset that new housing has to be cheap or "affordable" to middle income people. New things whether it be a car or a home is always going to be more expensive and it being in the bay increases that immensely.
I grew up in the bay and now live elsewhere because the price of living in the bay became unjustifiable to me. I don't see why so many people feel that they are entitled to live in a place that they do not own and feel its the role of the gov't to ensure that they have a place to live.
I'm glad that you escaped before the economic system got as messed up as it currently is, but there's a lot wrong with your point of view on this.
Those of us who live here do not exist as islands. We all participate in a rich economic web that requires exchanging services with lots of people. Teachers, bus drivers, delivery people, shop keepers, mechanics, plumbers, police officers... it takes a lot of people to run a society.
Typically the "not everybody has to be able to afford to live here" mindset has worked only when there is a wealthy exclusive enclave that tries to keep out poorer people and races they don't like, but when that community can still draw workers from more affordable places nearby.
The Bay Area has taken that "these people we depend upon for our lifestyle don't deserve to live here" attitude and applied it a region so large that people can no longer commute in. It leads to extremely dysfunctional societies.
Toronto's problems are very different from San Francisco's. Toronto currently has more cranes in the sky than New York City, Los Angeles, Seattle and Boston combined.
Maybe I’m missing something but 120 buildings doesn’t seem a lot. Also only 27 new buildings in the whole New York seems wrong by at least an order of magnitude. What am I missing with this crane index?
It may seem like a lot of cranes and a lot of construction, but like tigershark notes below, on a relative basis it’s not even close to the amount of construction needed to meet demand (and thereby induce lower prices). Today’s building boom is a pittance relative to population.
New York, Boston, most expensive urban areas are experiencing some version of this. Landlords with commercial space either want a bank or some other national chain that afford an expensive long-term lease, or they're willing to let the space sit empty because it's just a safe-deposit box for some investor's cash--the appreciation of property value is worth more than the rent.
Boston is kind of a funny case because Boston itself is decently good about letting development happen so long as said development isn't politically incorrect (relative to local politics/beliefs) or can't be construed by the pearl clutchers as being unsafe, bad for the children or bad for some protected class. Yes I know you can drive a container ship through those exceptions but it's pretty darn pro-building as far as Eastern MA goes. By contrast everywhere around Boston is zoned and run like SF. This has the side effect of creating rising real estate prices, rent, etc. in Boston proper even though Boston is mostly sort of doing things right (with regard to zoning) because land is limited and Boston may as well be an island because it's the only place development can happen.
Really? I live near Kendall Square in Cambridge and there's been a massive mount of development there. It's been a nonstop construction zone for a decade, with no end in sight.
Kendall is one of the only places outside Boston proper. Large parts of Cambridge and Somerville are basically zoned as leafy commuter suburbs with New England small-town charm.
> It doesn't help that these cash strapped cities (Toronto) just rubber stamp any new development since the tax haul will be several times what they got for what was there.
The problem is not too much building, but not enough. The only real solution to the real estate problems in expensive cities is to get enough new building that real estate values tank.
I could fix the SF real estate market in 10 seconds (although it would take maybe 10-20 years for developers to enact the change).
1. Minimum residential zoning is 15 story multi-family (subject to engineering limitations)
2. Axe rent control
3. No requirement to conform to the character of the neighborhood
This would make lots of people very unhappy. People wouldn't like it that huge buildings are going up next to their 1 story house. People wouldn't like it that their real estate values will tank my 80-90%. That's a big part of the reason why there will never be a fix.
But that level of change is what's necessary to fix the problems the city has.
That would definitely create a lot of value ("fixing the problems"), but it needs not tank real estate values at all - Manhattan NYC does not have "cheap" real estate. What helps people looking for "cheap" RE is that this gives them more options in terms of moving to surrounding communities, since these would be incented to develop and densify in turn.
Why do you assume that demand would remain constant despite a large increase in density? More density tends to mean more amenities and more services like mass transit, hence raising demand.
> Why do you assume that demand would remain constant despite a large increase in density?
Sure - induced demand is a thing. But induced demand is a secondary effect: people move to a place because the cost of living is now lower; it can slow the decrease in rent, but it can't stop it
More importantly, it's completely possible to just out-build induced demand. There are simply a limited number of people who want to live in SF (although admittedly, that number is quite a bit larger than the number who are currently living there).
So the more nuanced relation is: when supply dramatically outpaces demand, price will go down.
Just to make sure we're both on the same page, I'm advocating increasing the number of bedrooms in the city by a minimum of 1-2 orders of magnitude.
That may be a thing is San Francisco, but this issue exists far beyond it.
I live in Albany, NY, a tiny city that has a mix of middle-income and low income residents. It's the state capital, so the fairly narrow salary bands of government workers define the market. The city adopted a model zoning ordinance to make building easier, and now there's a mini-boom of medium-density apartment construction, all of which is upmarket. All of the development is 4-5 story stick on brick buildings. New York provides generous tax incentives for apartments with retail space, so most have that, and most of that space is vacant.
It's creating some potentially bad outcomes, as it's cutting off the oxygen for aging flats and single family homes that have been rentals. You have more vacancies as people with money move into new apartments that are cheaper due to the tax abatements. The older properties that pay taxes are going downmarket, and the bottom tier properties are increasingly vacant as they don't meet the code requirements for Section 8 subsidy, and the landlords cannot afford to cut the rent to let the market fill the units.
My point is that there are no easy fixes. SFO is a supply/demand problem and while supply is a problem, demand is too -- the outlier is that the extended gold rush is allowing tech companies to make irrational decisions with respect to employee compensation. The market has decided that it's cheaper to pay workers incredibly well than to move to Omaha.
One thing I don't understand is the "their real estate values will tank 80-90%" part. I live in a transforming rural area and one-by-one all the farmers have been selling their land to developers to make planned neighborhoods. They control the supervisors, zoning, and planning boards, and they have to be dragged kicking and screaming to allow these developments. However, their land values have gone up a ton in the last decade: basically a whole order of magnitude from on the order of 10's of thousands per acre to 100's of thousands per acre.
I think the same applies to your single family home next to a 15 story condo building. Instead of selling to a another family, now they're selling to a big developer and can price it waaaaay higher, because the developer will be getting significantly more value out of the land than they were.
And still, they'll not want to do it. There's still farmers holding out, despite single digit million dollar offers for 10-ish acre plots. And it's great if a small number of them do hold out, because it makes it possible to have some green space down the line when the area has fully developed to a single family house level suburb.
But I think the main issue is the culture. Farmers want to maintain their way of life. Single family home people want to maintain their way of life. And so on. People don't like change.
> One thing I don't understand is the "their real estate values will tank 80-90%" part. I live in a transforming rural area and one-by-one all the farmers have been selling their land to developers to make planned neighborhoods. They control the supervisors, zoning, and planning boards, and they have to be dragged kicking and screaming to allow these developments. However, their land values have gone up a ton in the last decade: basically a whole order of magnitude from on the order of 10's of thousands per acre to 100's of thousands per acre.
> I think the same applies to your single family home next to a 15 story condo building. Instead of selling to a another family, now they're selling to a big developer and can price it waaaaay higher, because the developer will be getting significantly more value out of the land than they were.
I think the way to think about property values is this: what is the highest value economic activity that can be accomplished on the property?
In your first example, it's pretty clear that building lots of houses (in the presence of sufficient demand) is a much higher value economic activity than farming.
The home to condo example is a bit more complicated. For the very first person to sell to a developer, I think your point is sound.
However, each additional bedroom that's created in the city decreases the value of all other bedrooms by a small amount. This not only directly decreases the value of a single family home, but it also decreases the value of a condo building, which means that developers will be willing to play less money for land.
Eventually, builders will stop building - the cost of construction will be more than they can sell new condos for. At that point, I believe the remaining home owners will have suffered a dramatic decrease in the value of their property.
Where does the equilibrium land? I don't think anyone knows for sure. But new construction goes up in some pretty low value real estate markets. 80-90% is just a guess on my part, but I don't think it's too far off based on current prices.
That's a great explanation. One other thing that contributes to the equilibrium I think we haven't mentioned here is migration. You mention that as the number of accommodations increase, the price of existing residences is shifted down. This is supply. But demand is changing too. And I think that demand to live in the bay area is absolutely huge. As supply increases, I believe that either new people will move in to meet that supply. Or, under-housed current residents of the bay area will level up (ie. move out of a van / garage / attic and into a "real" dwelling).
Another thing to mention is that the remaining single family houses will have a different kind of value once they become rarer. Owning one of the final single family houses in San Francisco is the ultimate flex. You still have a backyard; you can still walk to things. So some super-rich person will come knocking and want to buy just as a status symbol or as a way to get the way of life they want but still in the city.
There is an excellent documentary by Fredrik Gertten called "Push" that explores this phenomenon, definitely worth a watch if there's a screening nearby: http://www.pushthefilm.com/
Looks interesting, but it seems there is no way to see this film outside of the organized screenings which for most people means that they will never see it.
Seems like an important topic to discuss.
Serious question, how do should I understand the concluding sentence/word,
"But walk through parts of San Francisco today, and you get a different sense altogether: not an uncanny effectiveness, but a panicked swirl of homeless capital."
What is meant by "homeless capital"? does it mean SF is the capital city for homeless like Washington DC, or does capital go to opposite of venture capital, like in banking/finance/Wall St?
Possibly the phrase 'homeless capital' could mean human capital that is experiencing homelessness? The way the clause is constructed is pretty unclear. It could just mean there are a lot of homeless people, and is failing at being poetic.
The author personifies capital earlier in the piece when he writes “noncommittal capitalism.” The way he structures the last sentence does seem to point towards the idea that the capital in SF is homeless.
The last 2 paragraphs mention venture capital and VC dollars. I think the "homeless capital" refers to funds that are not being invested and have not found a "home" in new long-term businesses.
I take it to mean capital (in the banking/finance sense). So "homeless capital" might suggest that there is more invesment money available than there are good places to invest it.
Both; there is so much venture capital sloshing about that is in search of a "home", an investment with a positive return. This results in all sorts of weird things getting funded - but only weird things. It's much better to lose money on Juicero than it is to lose money on opening a restaurant. And of course it also alludes to the homeless humans sleeping outside the empty buildings.
It’s a bubble. Get out while you can. Properties with zero income being sold and resold in a closed loop- an ourobouros of prosperity. What could go wrong?
Government must remove the ability to claim an income loss on the balance sheets of property owners that purposely leave spaces empty. There is no reason to double (or more) the rent on a space. They are doing it because maybe someone will pay, and until then, they get to claim the loss of income as a write off on their taxes. If this is not true, then how can property owners, who claim that they need the new rental rate, afford to leave a place empty for a year or more???
Paraphrasing someone below, if you as a property owner had the option to sign a 5y lease at $1,000/mo. with a local business that could fail, or hold out a year or two to sign a 10y lease at $2,500/mo. with a national bank that will pay on time forever, which would you do?
The OP is pointing out that the property owner also has the ability and incentive to wait by deferring the unrented space as a loss which essentially distorts the "Free Market".
I'm not a tax lawyer but I see the link you posted states owners can get a tax deduction for upto $25k a year, which is ~$2k/month which means you can wait for that comfy Bank to come and lease your space.
Of course this is based on owners with deep pockets that can benefit from this, and not the rest of us that might actually need that rental income; but like they say, the rich get richer...
Real estate investor here. You can't claim "lost rent" as an expense. The deduction you're referring to allows you to deduct up to $25k per year of actual rental losses against your other income, but only if your income is below $150k / year. In no way is this an incentive to leave your property vacant.
The OP is guessing/presuming that this is the case, and asking why else would a property owner leave their space vacant for a year or more. I'm offering an alternative reason.
That's not the point. Even if they did qualify, you can't claim loss of income as an expense. In other words, you can't say "well, the market rate for this space is $30,000 per year but it was vacant, so I get a $30,000 deduction!". That's not how taxes work, at all. So this isn't an incentive to leaving a space vacant.
If you want to prevent emptyness, it's better to directly fight that. E.g. say that the government will set a rental rate after 12 months of no renter. That will force property owners to set a fair rent that the market will bear or risk the government setting it at way lower rate.
That's not how income tax works. You can't claim "loss of income" as a tax write off. However maintenance expenses on a rental property can potentially be written off as a business expense whether it is rented or not.
You do have to have some income to offset - the IRS might let you take a loss on paper for a year or two, but they tend to look at small businesses that never show profits but keep going year after year...
You have to have some income to offset, but you also need actual costs (money going out the door). Not renting to someone at $5,000 per month isn’t an expense, it’s forgone revenue.
> Some might say this is all simply market Darwinism, just with more cold-pressed beet juice. But it’s interesting that the free market exists only on one side of the equation. Since California passed Proposition 13 in 1978, property tax rates for those San Franciscans who owned property back then have been severely capped. Owners may pay Nixon-era property tax rates, while renting out those spaces at rates that have exploded in the last 40 years. They, too, can afford to let buildings sit empty.
Tax policies play a big role in setting up market distortions like those happening in San Francisco. It's not just the rate, but the basis. Strong Towns has a discussion of the idea that taxing land, not improvements leads to better outcomes:
> A parking lot in a bustling downtown is the classic example of a property where nearly all of the value is in the land itself, not the asphalt on top of it. In a rising market, you can hold onto the land and watch its value go steadily up (thanks to all the things your neighbors are doing to make the place more productive and successful). You can collect enough in parking fees to cover the taxes, and cash out when you're ready to cash out. Your property tax bill will be relatively low, because it's based on the sum of land value and improvements. The land may be in a central, prized location, but the "improvements" on the property (that's tax-assessor speak for any sort of structure built on the land) are worth next to zero.
This line of thinking may also apply to empty shops in SF. As long as the overall property is covering expenses, why bother making the improvements needed to attract new tenants (and thereby adding the tax burden) when you can just sit back and watch real estate prices head to the moon.
That was a relevant passage indeed - hadn't heard of George before:
> George was in a position to discover this pattern [mere land possession harms the poor, and can be discouraged through a land tax], having experienced poverty himself, knowing many different societies from his travels, and living in California at a time of rapid growth [1870s]. In particular he had noticed that the construction of railroads in California was increasing land values and rents as fast as or faster than wages were rising.
I live in NY but travel often to SF. It's definitely an issue in NY but nowhere near SF's league. Walking around the area the article focuses on feels like walking around a movie set. Everything's just hollowed out.
So what would the unintended consequences be for changing property tax to be a percentage of the actual annual rent for leased or pay-to-stay properties, assume a statutory minimum rent for vacant properties, and stay with assessed valuation times mill rate for owner-occupied properties? The property tax assessed in this way would be deducted from income, to avoid double-taxation.
The desire to minimize the cost of owning a property should create an incentive to ensure a residence is occupied by at least one person who can pay, so the statutory minimum would probably be set such that renting at below-market rates would be slightly less costly after taxes and insurance than the tax rate for a vacancy.
Blaming prop 13 for high housing costs ignores the real reasons - restrictive zoning codes, too many environmental reviews, and too many regulations in general. These combined make it nigh impossible to build enough housing around the Bay Area for rent to come down. Rent control makes things worse by reducing the amount of profit on each building. Then add “affordable housing requirements” which mean each new complex has to essentially lose money on 20% or so of the units to give them to low income people... and no wonder the rent is too $&@! high.
I mean look at NYC - property taxes are really high there and the rent is almost as high as SF, and higher than LA.
Like so many things in the Bay Area, this is a self-created problem. Despite living here, I have little sympathy for the sob-stories who voted for the exact policies that put them out of business. It infects every level of policymaker thinking (at least what they choose to publicly state and run for office on). It's a fruitless desire to resist development and population growth, no matter what the cost. And we're seeing the costs obviously now.
The political inclination of government (and the mistaken belief of voters) to "keep things the same" and prevent gentrification or any kind of development matching the demand for people to move here may play well for votes, but is causing every problem you can see.
The constraints on housing and development trickle down to everything. The cost of hiring people, the price of retail/commercial space, the inability to police / prevent crime, the emptying out of formerly affordable neighborhoods, traffic, homelessness, etc.
This is not a puzzle. When you make land so valuable (which pleases some), it leads to things that cannot show their value clearly to be priced out. And the very policies that are intended to protect the people who got here first (a very questionable policy), end up hurting them. The more you try to control rent, the worse the situation gets. Politicians intend well. But intentions are highly overrated. Effects are what matter.
As long as we refuse to build up, out, and have rational transportation systems (overcoming local inertia against building them), and accept that we're growing, this will continue.
I had an offer from a FAANG a few years back, for a BA job, and turned it down because I realized I couldn't afford to live there on the offer. I can't imagine how "ordinary" people survive.
I sort of regret having not done this in my 20s, but decades later, there's no way I'm putting up with that, when so many better alternatives are available.
Also (and especially for those of us from the Old World) remember that SF is ridiculously young as cities go, even for American cities. The continent was largely settled from East to West. The Western part of the city was sand dunes and scrub. People panned for gold next to Lake Merced.
> I set out to replicate the DataBook's methodology over a wider range of years, but quickly gave up on including just two-bedroom apartments, because ads in the early 1960s rarely referred to apartment sizes in these terms. Instead, for each first Sunday in April from 1948 through 1979, plus a few other years, I made a list of all the advertised unfurnished apartments, flats, houses, and, later, condos, regardless of size, that were advertised in the Chronicle. Mostly I used the San Francisco Public Library's page scans of the newspaper but resorted to microfilm for the few later years where no page scans are available.
Here's the main take-away:
> in 1956, apartments began to be listed in increasing numbers, but their prices also began to rise. Overall, they went up 6.6% every year. Today's outrageous prices are exactly in line with the 6.6% trend that began 60 years ago.
So, big long complicated history, dead simple stable 6.6%/year increase.
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Solutions: Bucky Fuller mega-city Old Man River City
Look at the cross-section: the structure is hollow. It's built like a suspension bridge. Imagine rotating the Golden Gate bridge around a vertical axis though its midpoint. See the article for the rest of the description.
Since California passed Proposition 13 in 1978, property tax rates for those San Franciscans who owned property back then have been severely capped. Owners may pay Nixon-era property tax rates, while renting out those spaces at rates that have exploded in the last 40 years. They, too, can afford to let buildings sit empty.
There have also been vacancy taxes proposed: https://reason.com/2019/12/10/san-francisco-ballot-measure-w..., but Prop 13 reform would seem to be the more obvious route.
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