Cities Now Use Taxes to Fight Blight. Is It Working?

Land use experts question whether vacant property taxes are the right way to spur development.
by | May 14, 2018
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It’s a scenario that plays out over and over in cities across the country: A small business in a hip neighborhood closes, the storefront is left empty for months -- maybe years -- and then eventually gets replaced by a national chain.

Whether it’s gentrifying Brooklyn, Greenwich Village in Manhattan or Miami Beach, the coffee shops, boutiques and eateries that drew many residents to those areas are struggling to stay.

But why?

The notion of greedy landlords hiking up rents makes an easy scapegoat for policymakers and residents. But the real picture is much more complicated, with an insistence on long-term leases and major disruptions in retail shopping habits all playing a role in the vacancies, according to commercial real estate analysts.

Still, cities are turning to vacant property taxes to nudge property owners of both retail and residential spaces to lease, develop or sell their properties before a short-term vacancy turns into what some cities see as blight.

Cities opting for this solution are seeing varying degrees of success.

“The idea that if you tax the development, you will force the landlord into renting is complicated,” says Joan Youngman, a senior fellow with the Lincoln Institute of Land Policy. “In a hot market, the landlord might wait for a high-end renter. If the market is soft, the vacant land tax might force the landowner to allow it to fall into disrepair.”

San Francisco, Oakland, Calif., and most recently New York City have all considered levying vacancy taxes on landowners to force them to develop, lease or sell their empty properties. The moves follow similar taxes levied in Washington, D.C., and one aimed at addressing the residential housing crisis in Vancouver, Canada.

The Washington, D.C., model raises the normal commercial property tax rate from between $1.65 and $1.85 for $100 in assessed value to $5 per $100 when the property is vacant. Property considered blighted is taxed at $10 per $100 of assessed value.

In 2016, Washington, D.C., collected $9.4 million in vacancy taxes. Still the effectiveness of the tax remains unclear, according to a 2017 report from Pew Charitable Trusts. When asked, the city could not say how many properties were leased, improved or sold as a result of the tax, according to the Pew report.

It also appears that some owners of vacant property have tried to skirt the law by filing for exemptions, or asking for building permits and then never making improvements. The District's city council eventually tightened the loophole through a bill that regulates how long a property owner can keep filing for exemptions.

Vancouver's vacant house tax went into effect in 2017, despite hard data suggesting the vacancy rate for housing in the city had remained steady for more than a decade. Early indications suggest homeowners might not be declaring their homes empty.

Youngman calls the use of special taxes on vacant property “a blunt instrument” in spurring development. Real estate markets are contextual, she says. Washington, D.C., San Francisco and New York have been hot markets.The empty storefronts in those cities are less often the result of landlords looking to jack up rents and more often those property owners seeking long-term leases, Youngman says.

Levying a tax might drive a landlord to fill a vacancy, but the new tenant may not be the type that made neighborhoods like Greenwich Village, the Mission District in San Francisco or Columbia Heights in Washington, D.C., attractive in the first place.

Youngman points to the common complaint leveled by residents who point to national chains displacing local retailers in neighborhoods.

“They’ll say the neighborhood used to be so interesting and now it's so boring. I am not sure a tax can do anything about that,” she says.

In smaller cities like Hartford, Conn., which has much of its land locked up by tax-exempt landowners, policymakers don’t have nearly as much leverage as their big city counterparts in using vacant property fees to drive down vacancies and spur better use of land.

Hartford flirted with the idea of vacant property tax to spur development. The city has seen a steady migration of employers large and small to surrounding suburbs where property taxes are lower. What has been left are large lots that are filled by the least expensive use of commercial land -- parking lots.

"We see a sea of parking lots in a lot of parts of the city," Councilman Julio Concepcion told the Hartford Courant. "When you're trying to go from point A to point B and all there is is dimly lit surface parking, the perception of the city is that it's unsafe. So we're just trying to fill those gaps in with development -- with housing or retail or whatever the market bears, and trying to make Hartford a more walkable, friendly city."

Hartford Mayor Luke Bronin balked at signing the bill, and the effort fizzled out in 2017.

Ultimately, the decline in local retail may be more a reflection of changing shopping habits than the relationship between retailers and commercial property owners. As more people shop online, commercial real estate markets will remain in flux.

“We are going through such a massive change in retail. The question," Youngman says, "is are we in a phase of trying to readjust to a new steady state in real estate?"