San Francisco Landlords Challenge New Law That Taxes Them For Not Renting Their Units

San Francisco voters approved a law that would tax property owners who have units that are vacant for more than 182 days per year. 

Proposition M was approved by 54% of San Francisco voters and applies to any property with three or more units inside city limits. It will take effect in 2024 — but not if area landlords have anything to say about it.  

A large group of property owners and interested parties, which include the San Francisco Apartment Owners Association and the San Francisco Association of Realtors, are suing the city to keep Proposition M from taking effect. The main thrust of their argument is that Proposition M would strip them of their rights as landowners.

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The Property Owner's Bundle Of Rights

Whenever anyone purchases a property in the United States, they get what is generally known as a bundle of rights along with the physical property itself. The bundle of rights allows property owners to do the following:

• Occupy the property
• Do nothing with the property
• Encumber the property, such as rent it out or take out loans against its value
• Sell the property
• Improve upon the property by building on it or renovating existing structures

San Francisco landlords argue that by taxing them for keeping units vacant, the city is effectively stripping them of their right to "do nothing" with their property. Historically, there has been no requirement for landlords to rent out their multifamily units, but most were financially incentivized to do so, and excessive vacancies were not a problem.

That was before the advent of Airbnb Inc. and other short-term property rental platforms. In popular cities like San Francisco, many landlords can make more money doing short-term rentals for the tourist season than they can by renting the units out all year long. This is especially true for rent-controlled buildings, where once a tenant is in, landlords are restricted in how much they can raise the rent on existing tenants.

Landlords Profit From Short-Term Rentals While Renters Suffer And Prices Soar

The downside of the equation, when landlords make big money by holding their rentals for short-term stays instead of long-term leases, is that it reduces the city's housing stock. It also makes the available apartments more expensive, and both these factors are putting a major squeeze on local tenants. It's a major contributing factor to San Francisco's homelessness and housing affordability problem, both of which have been at or near crisis levels for years.

At the height of San Francisco's affordability crisis, the government conducted a study and found that nearly 10% of San Francisco's housing units were unoccupied. A significant percentage of the unoccupied units never hit the traditional rental market. This led the city to take drastic measures, and Proposition M is one of them.

A Stiff Penalty Per Vacant Unit May Not Be Enough

Proposition M would require landlords to pay an annual tax between $2,500 and $5,000 per vacant unit per year for the first two years of vacancy. By the third year, the tax can progress as high as $10,000 per unit. It's a stiff penalty, but if landlords can make $10,000 to $15,000 monthly or more on short-term rentals, many of them may opt to pay the tax and write it off.

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But property owners are not going down without a fight. They are suing to stop Proposition M from taking effect. If they lose, the tax revenue collected would go into a housing activation fund that would seek to buy new buildings and offer financial assistance to elderly or special needs tenants.

Nothing is set in stone, and regardless of the initial verdict, there will be appeals at both the state and federal levels. If the law is allowed to stand, cities across the country may adopt similar measures to help stem the tide of short-term rentals and increase available housing stock. In the meantime, both landlords and tenant rights advocates will be anxiously awaiting the first ruling on Proposition M.

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