One of the most visible scourges of the COVID-19 pandemic is the vacant storefronts in downtown business districts throughout the United States. Our downtowns had suffered from commercial vacancies long before the pandemic, but COVID-19 expanded the problem dramatically. As the nation emerges from the pandemic, it’s time to focus on revitalizing our downtowns by filling those debilitating vacancies.
Filling empty storefronts is a challenge for urban areas ranging from small towns to big cities — and they have good reason to prioritize the issue. Vacancies have a major negative impact on our downtowns and neighborhood centers, depressing surrounding property values, encouraging more neglect and suppressing the growth of small businesses.
Fortunately, we know a lot about how to grow local businesses, especially small-scale manufacturers, and prepare them to make the transition from home-based or shared space enterprises to brick-and-mortar stores. The challenge is to match their needs with those of the owners of vacant storefronts. Meeting that challenge involves understanding both why those properties are empty and how to better address the interests of both parties.
Storefronts are remaining empty for a variety of reasons. Some are purely economic — if the space has been neglected, the cost of renovation may outweigh the lease rate that the property owner can get for the space. If a property owner has other income from the property, the owner may receive a tax benefit from taking a loss on the storefront. A large investment company or trust may not be willing to rent a space for less than the advertised rate for fear of jeopardizing the underwriting by devaluing the space. In some cases, a guaranteed lease from a major national chain may cause the rent to be paid, even though the store is closed and the property is vacant. It may even prevent a competitor from opening there.
Other reasons have to do with mismatches between the needs of owners or their representatives and interested small businesses. The available space may be much larger than what small businesses need, and property owners may not be willing to subdivide the space or allow multiple tenants to share it. Property owners may also expect tenants to pay for the buildout of the space, which small businesses often cannot afford. If a commercial space is small, needs considerable work or the total lease value is low, brokers may not give the space much attention, preferring to spend their time filling spaces with better (more lucrative) prospects. A distant neglectful owner may wish to hang onto a property in hopes of better days ahead, especially if local officials do not enforce code violations or have no financial penalty for long-term vacant properties.
Against this backdrop, innovative approaches are needed. One option is to increase the adoption of vacant property ordinances, which typically impose added fees on properties left vacant long-term. San Francisco’s commercial vacancy tax ordinance took effect on January 1. The vacancy tax applies to ground floor, street-facing, commercial properties in certain neighborhood commercial districts including the primary commercial corridors. Washington, D.C., likewise charges a significant fee based on the property tax rate to vacant or blighted properties.
Among smaller cities, Mansfield, Texas, has a vacant property ordinance that charges a high daily fee based on code violations and vacancy. Raton, New Mexico, recently passed a vacant building ordinance, requiring owners of abandoned homes and buildings to register their property with the city and pay a fee that increases annually if the property remains vacant.
Another option is to use tax increment financing or other local funding vehicles to provide matching grants to property owners for storefront buildout with signed tenants, as does Longmont, Colorado’s Downtown Development Authority. It provides up to 50% of the cost of renovating a ground floor space and changing it from a service business use to a retail storefront again. This option can be applied in markets where the cost of construction isn’t justified by current lease rates, and it can make storefront space affordable to small businesses.
A third option is to pursue ways to get commercial property into local hands. The Urban Redevelopment Authority of Pittsburgh has created the Avenues of Hope Commercial Real Estate (ACRE) Program. It provides long-term financing at 1% interest — with no payments due for 20 years and no prepayment penalty. The funding can be used for site acquisition and prep, building costs and construction, and soft costs associated with real estate development.
Yet another option is to invest in residential and commercial land trusts for downtown properties. The residential floors can be preserved as affordable or locally attainable housing, while a subsidy to ground-floor commercial storefronts — in the form of a discounted land trust rent — can provide space for locally owned businesses while preventing gentrification from driving these businesses out of the neighborhood. This approach is especially applicable to high-cost, very distressed markets where control of multiple buildings near each other can be secured.
Options exist for revitalizing vacant downtown storefronts. Taking advantage of those options will bring our downtowns fully back to life — and show that America is truly ready to move forward from the pandemic.
Ilana Preuss is Founder and CEO of Recast City and author of Recast Your City: How to Save Your Downtown with Small-Scale Manufacturing (Island Press, 2021).
Comment posted on June 1, 2022 at 3:52 p.m.
Addressing vacant properties is very important. Unfortunately, the traditional property tax rewards owners of vacant and boarded-up properties with lower taxes than their more responsible neighbors, even though it costs the same to maintain streets, sidewalks, sewers, etc in front of properties regardless of whether they are occupied or vacant.
<span initial; font-family: Arial, sans-serif; font-size: 14px;”>Fortunately, some communities have remedied this problem. They reduce the property tax rate applied to privately-created building values while increasing the tax rate applied to publicly-created land values. The lower tax rate on buildings makes them cheaper to construct, improve and maintain. (This is good for residents and businesses alike.) Surprisingly, the higher rate applied to land value helps moderate land prices by reducing the profit from land speculation. As a bonus, this approach encourages development of high-value land—which tends to be infill sites near existing infrastructure amenities. This reduces sprawl, benefiting both the environment and taxpayers because compact development requires less infrastructure per capita.</span>
For more info, see https://www.shareable.net/land-value-return-and-building-a-more-equitable-economy/