Tenderloin Heights

by Jim Forbes

Much has changed in San Francisco since my last article. We now have a young new mayor. Filled with ideas and ambition, he could, with a
little luck, make a couple of good things happen here. The state also has a new governor who seems to be trying extra hard to get everything right—
possibly due, in part, to the less than conventional way he got into office. Nationally, our economy is springing back to life, partially due to the president’s latest round of tax cuts. However, this new economy is different in many ways from the past—it is one that is based in large part on the supply of goods and services. San Francisco, a “supply center” of ideas and money, could well benefit from this economic recovery.

First, let’s look at the arrival of a new mayor to lead our city. Despite a close call caused by a rebellious faction of new voters who embraced the more liberal ideas of Newsom’s Green Party opponent, the mayor and the city now have a great opportunity to make improvements that might serve as models for the region, if not the nation. The homeless issue is the first one to deserve attention.

The Homeless
While some San Franciscans may be content with an out-of-sight, out-of-mind approach to the homeless, I do not believe Mayor Newsom is, nor San Franciscans are, partial to this strategy. To make it so onerous for the homeless to live here will not help solve the problem of homelessness and certainly will do little to help Newsom’s political career. Adopting a blended approach that lessens the misery of those on the street who are dysfunctional and, at the same time, disciplines those who are not will earn the city kudos from all interested parties. This framework could be adopted by other Bay Area jurisdictions, a requirement if we are going to get the problem under control here.

The impact on residential rents depends on just how far the mayor is willing to go. In the 1980s under Mayor Agnos, rents stabilized in the Tenderloin. Vacancies were absorbed by nonprofits that purchased older dilapidated apartment houses and renovated them to more than livable standards for low-income or no-income tenants. There were also newly constructed buildings that did much to change the appearance of the Tenderloin. If Mayor Newsom delivers on his promise to secure enough beds for all who are living on the street and who want a bed, then this could mean a reduction of two or three thousand units from the for-profit market, putting some pressure on the rents for the remaining units.

On the flip side, if new beds come from newly constructed buildings (a much slower solution), then there should be no effect on overall rent levels. However, this would probably be the preferred approach for the clients. The buildings could be built according to their needs, with smaller apartments (SRO size) and sufficient common space to offer services such as AA meetings and counseling. The latter are important additions if the homeless are to transition out of the way they currently live their lives.

In the big picture, if the homeless are successfully housed versus sleeping in the doorway of your building or business, the quality of life will improve overall in your neighborhood. This will yield higher rents. There is a reason Pacific Heights rents are greater than the rents in the Tenderloin, and it is not just about unit size and view.

The cost of the solution is another concern, as is the timing. While in the past, state and federal funds and tax credits could have carried most of the cost of subsidized housing, now the City has to step up even more to bridge the gap. Housing bonds need to be passed by the voters, the interest cost of which falls on property owners. Mayor Newsom has proposed a $150 million housing bond, which he hopes to leverage with remaining state and new federal funds. The urgency of its passage has been increased because the last attempt to gain voter approval for such a bond was defeated, and the 1996 funds from then Proposition A are exhausted, causing the whole operation of identifying sites and building units to grind slowly to a halt. Even if the mayor’s bond proposal is to pass in November, it will be at least two years before we will actually see new units.

If other changes are also made in our approach to their care, such as not kicking them out of shelters at 8 a.m. and providing daily health services, the quality of life for every San Franciscan will improve sufficiently so that this investment will be worth making.

(A quick word to the Board of Supervisors, especially to Supervisor Gonzalez. Gavin Newsom no doubt has a political future beyond this local job, and the quicker he becomes electable to those other jobs [governor, senator?], the faster he may leave his post. Our Supervisors can create a very coveted job opening for themselves by being part of the solution—in other words contributing to Newsom’s success.)

California’s Woes
Governor Schwarzenegger’s job, unfortunately, seems monumental when compared to Newsom’s, and its impact on the city finances equally severe. By reducing the license fee, the governor shoveled several tons of additional dirt out of the hole he was already in. While an improving economy will increase tax revenues, his hands—despite all those muscles—are tied tightly behind his back when it comes to spending cuts, especially with respect to the state’s schools.

The solution to California’s deficit problems will require a combination of raising revenues and reducing waste, not borrowing or cutting expenditures that will only have to be picked up by local governments. The governor may also discover that when a proposal made to labor unions includes measures to increase revenues, labor will not feel like it is being unfairly persecuted. Revenue increases can come from several sources, some of which I identify below, although you may not like these suggestions.

Income Tax Rates
First, let’s look at the top income tax rate. Over $2.6 billion in tax revenues per year on ordinary income alone could be raised if the tax rate on incomes over $200,000 were returned to 11 percent. Every Republican governor since Reagan, who initiated the 11 percent top rate, has agreed this is what it takes to run this state. Both Deukmejian and Wilson had to return to it after temporary tax cuts.

Capital Gains
Second, the capital gains rate needs to be reduced for long-held assets. In commercial real estate sales alone, I estimate as much as $400 million per year could be generated by reducing the capital gains rate from 9.3 percent to 5 percent for assets held at least five years. This assumes an average twenty-year holding period for real property and adds no revenue for the recapture of depreciation, which I would also tax at the lower rate.

As Schwarzenegger should know, the sale of a capital asset is a much more discretionary decision than the generation of ordinary income. The governor needs rules to entice those reluctant holders of capital assets to sell.

Proposition 13
I believe in a modification to Prop 13. In exactly the same way that rent control is unfair, taxing one building at a different rate than another of similar value is inherently prejudicial and creates an unlevel playing field, although one could argue the benefits of stability.

I believe, at a minimum, we should have a split roll for commercial property by taxing it on its fair market value, and possibly also on homes assessed at over a million dollars. Studies done by the California Board of Equalization show at least $3 billion in additional revenue from a split roll that taxes commercial property at a fair market assessment. I also figure there are another several hundred million dollars a year in tax revenues from high-end homes.

Eliminating one of the chief benefits of owning real estate long term, combined with the reduced capital gains rate, will generate an immediate increase in tax revenues for the state, schools and local jurisdictions, as well in the form of transfer taxes. These actions may also increase income tax revenues from all those additional fees real estate brokers will make. Further, it should make unnecessary an attempt currently underway by the California Teachers Association to increase the property tax rate to 1.55 but keep the assessment inconsistencies the way they are. This initiative is headed for the November ballot.

Worker’s Compensation
Last, the state can offset the negative impact that the above measures may have on businesses by just doing something about the cost of Worker’s Compensation. I think the solution is easy—require a patient co-pay. Even more powerful than a cap on benefits (Arizona and other states have this, and it could also work here), a co-pay that is meaningful, such as $10 per visit, will deter much of the abuse in the system, which is the root cause of the spiraling costs. For many businesses, Worker’s Compensation insurance exceeds their income taxes. No wonder employers are upset.

The New Economy
Until this November’s presidential election, the Bush Administration will do everything it can to continue stimulating the economy. Many of the effects of this stimulus are already visible. San Francisco is well poised to take advantage of many of the opportunities a fast growing economy offers, especially in our agile service-oriented environment.

As one of the gateways to Asia where nearly all the global economic growth is currently generated, San Francisco investment banking firms, trading companies and corporate headquarters will continue to see growth by engaging deeper in Asia than ever before. We would also be wise to start developing products that not only are made by the increasingly adept labor of China, India and others, but also sold to them as well.

Teaching Mandarin Chinese and Hindi to MBAs will produce American workers who will be more recession- proof, as well as create long-term bridges that will help ease the ebb and flow of the Bay Area’s high-tech dependent economy. Besides management, training is a huge business sector that Americans, especially the monolinguals, have totally missed. Even during the latest downturn, those willing to travel, armed with the knowledge of an emerging-market language, stayed well employed.

This year has the potential to be a time of real possibilities if our political leaders at all governmental levels are willing to make the tough choices. The benefits may not be obvious today, but many, including those derived from education, will be seen for years to come. But some, especially local ones, have a real chance of becoming obvious before the year is out. On the flip side, if the wrong choices are made, such as borrowing instead of bettering the budget, the ramifications of failing to face up to our problems will also be felt for years to come. As concerned citizens, we can help influence the direction our society takes by making our voices heard. If we do, it should be a Happy New Year indeed.

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The opinions expressed in this article are those of the author and do not necessarily reflect the viewpoint of the SFAA or the San Francisco Apartment Magazine. Jim Forbes is president of Urban Properties, a real estate investment and brokerage firm. He can be reached at 415-922-8998 or at his Web site . Copyright © 2004.