Ending Long-Term Storefront Vacancies: Positive or Negative Reinforcement?

There’s no debate that online shopping offers time saving and convenience, which has diminished the need for physical stores. At the end of 2017, vacancy rates on Boston’s high street of shopping, Newbury Street, were around 10%. According to brokers, a retail vacancy rate of 5% is generally accepted as the industry standard for a healthy, happy market. But could empty storefronts be due to more than just the popularity of online retailers?

Studies have shown that the increase in storefront vacancies is at least in part due to landlords who are purposefully keeping their properties empty in hopes of landing a deep pocket, high paying tenant. Not to mention, if a landlord has a large enough real estate portfolio, the tax advantages of keeping certain properties vacant to claim write-offs of passive income can well outweigh the benefits of receiving monthly rent.

While this might be strategic for the landlord, it certainly isn’t what is best for communities. Empty storefronts can make the entire neighborhood less attractive to visit and can have a concrete impact on sales at the remaining businesses. When multiple stores on a strip of land are vacant, it can make “everything” look as though it is vacant. People tend to avoid these areas and in turn are less inclined to stop by other stores in the same general vicinity. In addition, cities see storefront vacancies as missed opportunities to generate sales tax, which fund city services.

Arlington, Massachusetts took action on this issue in early 2017, when it passed a bylaw requiring landlords to register with the city and pay an annual fee of $400 for each vacant storefront. A “vacancy” was defined as any property either: (i) not reasonably occupied, (ii) abandoned, (iii) not used for a period of at least 90 consecutive days or longer, or (iv) intermittently occupied but, in the opinion of the Building Inspector, exhibiting dilapidated walls, roofs or doors which would fail to prevent trespassers from entering the property for more than 7 days.

When the fees were first levied, there were 17 empty storefronts in Arlington Center. By the end of the year, only 6 of these vacancies remained. Lowell and New Bedford have both opted to create a vacancy registry, and the idea has also popped up elsewhere in the country. City Councilor Matt O’Malley is pursuing vacancy penalties in Boston, inspired by Arlington, hoping to incentivize landlords to fill empty spaces or work with their tenants so they don’t leave in the first place.

While levying a tax might drive a landlord to fill a vacancy more quickly, the new tenant may not be the type of tenant that made the neighborhood attractive in the first place. It also appears that some owners of vacant property have tried to skirt these laws by filing for exemptions or asking for building permits and then never making improvements. In addition, and not surprisingly, landlords and developers don’t see these “penalty fees” as the best solution. They suggest that more market-driven solutions might be better for the long-term support of a retail community, such as pop-up retailers or different leasing agreements, and attribute some of the blame for these storefront vacancies to the city’s zoning process, proposing that it be amended or changed to attract new uses.

Recognizing that it might be time to propose positive incentives in connection with filling empty storefronts, last month, a state council approved a proposal to bestow tax breaks on businesses that move into vacant storefronts. Businesses could receive up to $10,000.00 in tax credits from the state’s Economic Development Incentive Program if the municipality agrees to give its own award. According to the final guidelines, businesses are eligible for the tax break for ground-floor properties vacant for at least a 1-year period prior to occupancy. These credits are refundable, which means that business can take some or all of the credits in cash depending on their tax liability. A roll-out plan for the program is now in development with Governor Baker’s administration.

It will be interesting to see how the state’s plan to award tax credits plays out and whether it will result in less vacancies than those achieved by implementing penalties.

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