With San Francisco’s Budget Crisis, Time for Some Bold Moves

San Francisco faces a dramatic budget crisis that can only get worst with the recent news that the State of California will have to make further cuts to local governments in order to deal with their financial crisis. San Francisco is going to have to be very pro-active in order to survive this crisis without it having a dramatic negative effect on our economy.

First, with current office vacancies at close to 20% and office rents at 1991 levels, building owners are already seeking major reassessments in values that will dramatically lower city property tax revenue. Second, because there is a disorientate level of rent to sales prices in commercial property today, there will be little commercial sale activity until sales prices reflect real rental value. This means that the city will be seeing lower tax revenue transfers from commercial sales. Third, the majority of vacancies in commercial properties are in non-office zones called “service light industrial” and “service light retail”. These properties were renovated during the dot.com boom and are currently out of zoning compliance to allow traditional base businesses that could take advantage of renting these spaces from doing so. Finally, our average size transaction in office space is back to 1986-1998 levels of 3,000 square feet. Most of our vacancies are in spaces larger than 10,000 square feet. With high costs to divide these spaces as well as low rental rates, building owners are simply not in a position to re-tool these spaces to meet the market.

It is not easy to maneuver around San Francisco politics, but given this crisis, progressives and centrists need to join together and look at alternatives that would be acceptable to all sides to address these issues quickly. I would recommend the following:

1) Create a five-year exemption in “service light industrial zones” and allow general office use. This would do a number of positive things. First, it would allow businesses to take advantage of newer infrastructure that was created for the dot.com market. This could attract new businesses into San Francisco. Second, it could save landlords from losing their buildings in foreclosure, as well as save the building tax base for property tax revenue. It could also create an incentive for a future buyer to consider such a property for investment that would lead to transfer tax sales gains for the city.

2) Add other businesses that would be allowed to lease in “service light industrial zones” such as architects, engineers and advertising related businesses. These businesses are probably suffering the worst through this crisis. They are also businesses that typically seek non-traditional open plan spaces that were created for dot.coms.

3) Provide a tax credit or incentive package that would assist building owners in the expense of dividing vacant spaces into small suites to meet current market demands. This will not only potentially save a building from foreclosure, but create needed construction, architectural and engineering jobs as well.

4) The city should also create a “fast track” program at the building department so that permits are expedited as quickly as possible and construction jobs can be created quickly to help jumpstart our economy.

5) A parking tax reduction to encourage businesses that have larger parking requirements to consider San Francisco as an alternative. Today, with parking rates well over $300.00 a month per car downtown, suburban markets with little or no monthly parking charges are winning larger office tenants with both lower rents and free parking. This issue is always a problem for our city fathers that are trying to reduce congestion by forcing people into mass transit. The reality is that today our parking lots are not full, and larger based businesses particularly “sales offices”, need parking for their employees because they need their cars to do business. One possible solution would be to give this credit to legitimate businesses that can prove that their parking needs are directly related to in-out all day parking needs to meet their business requirements.

6) Better promoted state and federal enterprise zones so that businesses better understand subsidies that are currently available and could help businesses compete while promoting businesses to re-locate in our city’s highest vacancy areas.

Mayor Brown recently announced the launch of www.sfprospector.com, a site that will promote the city to outside businesses that may be interested in locating to San Francisco. This is a good first step to being pro-active in courting businesses to San Francisco. The city also needs to develop better lines of communication with firms such as us, that are working with landlords and tenants every day. We know first hand what the problems are and also what solutions would potentially work. The Board of Supervisors and the Mayor should consider the creation of an ‘ad-hoc’ committee of members of the community that will assist only in developing new ideas; and also be used to better monitor the success of these initiatives so that if problems develop in their implementation, changes can be made quickly. If the city does not move now we could be faced with foreclosures, major reductions in social services and new neighborhood decay as empty buildings lead to empty retail stores and then on to further poverty.