A California proposal to tax properties that are vacant for more than six months is rattling some commercial real estate professionals, with critics warning it could deepen vacancies and deter investment in struggling retail and office corridors.
Senate Bill 789, introduced by State Sen. Caroline Menjivar, who represents Burbank and the San Fernando Valley, would impose a $5-per-square-foot annual tax on commercial properties that remain vacant for 182 or more days in a calendar year. If passed, it would be one of the most expansive vacancy tax measures in the United States and the first to apply throughout any state. The measure is set for an Assembly hearing April 23 and needs approval from two-thirds of both state legislative chambers.
The bill aims to discourage prolonged commercial vacancies, which it says undermine economic vitality, reduce tax revenue and contribute to neighborhood decline. Its stated goals are to incentivize “property activation,” support “equitable community development” and generate funding to address California’s housing and homelessness crises.
Developers and leasing brokers say the bill could inadvertently penalize landlords who are already investing in their communities — and may delay rather than accelerate lease-up activity.
“This is insanity,” said Ed Sachse, president of Los Angeles-based KWP Real Estate, a manager of commercial properties across Southern California. “You’re penalizing landlords who are doing everything right but still need 12 to 24 months to bring a space back online.”
In response to requests for comment from CoStar News, Menjivar's staff said the senator was "working on addressing concerns and will be amending the bill in the next week to refine the language."
The bill would make California the first state to impose this type of broad-based commercial vacancy. Critics say it borrows logic from residential policy — where turnover costs are lower — and applies it to commercial real estate, where bringing in a new tenant can run into the hundreds of thousands of dollars.
“The cost to lease a commercial space isn’t in the same universe as turning over an apartment,” said Chris Wilson, JLL's U.S. and Southwest retail lead. “With legal fees, commissions and tenant improvements, just getting one 5,000-square-foot space leased could cost $200,000 or more.”
Unintended consequences
If the measure passes the high bar of two-thirds approval, some in the industry say the state could be sending the wrong message to capital markets already skittish about investing in California’s high-cost, high-regulation real estate environment.
“Everyone has the same goal,” Sachse said. “Owners want to lease their space. Their lenders want them to lease it. But this tax is counterproductive to everything they’re trying to do.”
As currently written, the measure targets long-term vacancies in shopping centers, office buildings and other commercial properties. Proceeds would be deposited into California’s “Dream for All” fund, designated for first-time homebuyer assistance. Property owners would be required to submit tax payments electronically each March for the previous calendar year.
The bill includes exemptions for properties that are undergoing active renovation or held up by environmental or legal delays. But some industry professionals argue the tax overlooks the time, cost and complexity involved in filling vacancies — especially in California’s most highly regulated cities.
“This would only drive more properties into receivership and reduce capital available to reposition them,” Hudson Pacific Properties CEO Victor Coleman wrote in a LinkedIn post. “Imposing a significant tax on top of mortgage payments, property taxes, insurance and operating expenses will only further elongate extended periods of vacancy.”
Sachse described the leasing cycle in detail: Owners hire brokers, market the space, identify a qualified tenant, negotiate a lease and secure city permits — steps that often take a year or more, particularly in a soft leasing market. He warned the proposed tax could strip resources needed for tenant improvement allowances or redevelopment projects.
Rushing leasing decisions under the pressure of a vacancy tax could lead to tenant mismatches and premature failures, Wilson said. “A tax that pressures speed over fit could create even more vacancies,” he said.
The bill also fails to account for legitimate causes of vacancy, from demographic shifts to zoning constraints, according to David Greensfelder, managing principal at Greensfelder Commercial Real Estate.
“All vacancies are not created equal,” Greensfelder told CoStar News.
Targeting blight
Vacancy taxes exist across the country, but most are local ordinances targeting specific types of blight. Industry experts say California’s proposed tax stands out for its scale, cost and statewide reach.
Though lawmakers may adjust that scope in the coming weeks, questions remain about whether such taxes work to reduce vacancies. San Francisco became one of the first big cities in the country to levy such a tax in early 2020, prior to the pandemic, when voters wondered why the city was riddled with empty storefronts despite its booming economy. Backers of the tax argued that landlords were keeping properties vacant as they held out for higher rents.
Today, San Francisco is dotted with "for lease" signs, though it's difficult to use that to determine the effectiveness of the vacancy tax, which didn't take effect until 2022 because of the pandemic. Moreover, the tax excludes the city's main downtown commercial districts, and compliance has been low, in part because the system has confused property owners and leaseholders, officials say. Fewer than 200 storefront owners paid the tax the first year it was enacted, according to city data, even after enforcement efforts by tax officials.
Retail vacancies have exploded in San Francisco since the COVID-19 pandemic. (Rachel Scheier)
The San Francisco tax requires landlords or tenants of properties left vacant for longer than six months to pay $250 per foot of street frontage on the first year, then $500 for the second and $1,000 for the third and beyond.
An economic impact report on the tax written by the San Francisco controller's office chief economist, Ted Egan, in 2019, before it was enacted, acknowledged that a "narrowly tailored tax" could discourage "speculative or negligent behavior by property owners," but it stressed that "properties can also remain vacant for long periods because of economic conditions beyond the control of the owner."
In other words, larger economic factors such as the rise of e-commerce could be the real main culprits behind the widespread retail vacancies plaguing American cities.
"There's a perception that landlords are greedy," said longtime San Francisco retail broker Kazuko Morgan of Cushman & Wakefield. "But landlords want to rent out their spaces."
She added that given the current challenges facing traditional retailers, officials should be doing all they can to make life easier for retailers, including lifting restrictions and easing permitting requirements.