May 5, 2025
By: Craig Cartwright, Kevin Lytle, and Daniel Dow
A bill recently introduced in the California State Senate would have imposed a tax on commercial buildings that have prolonged vacancies, but has been rewritten after facing strong opposition. Authored by California State Senator Caroline Menjivar, SB 789 was intended to discourage prolonged vacancies while generating revenue for the California Dream for All Program that provides down payment assistance for first-time homebuyers. However, opponents of the bill said it ignores market realities and would pose serious unintended consequences for property owners, small businesses, and local governments. As a result, the bill was rewritten to simply require commercial property owners to report certain information about vacancies at their properties and removed the tax entirely.
As originally written, SB 789 would have imposed an annual tax of $5.00 per square foot on commercial properties with parcels that have been vacant for 182 days or more, whether consecutive or nonconsecutive, within a calendar year. The tax would have applied to all commercial buildings, including office, retail, industrial and warehouse/distribution facilities, but would not have applied to residential spaces within multi-use commercial properties.
The proposed tax also would not have applied in the following situations: (1) the vacant portion of the property is being actively renovated by the owner, including obtaining building permits, with work ongoing for at least 90 consecutive days; (2) legal or regulatory barriers, including litigation, environmental reviews, or permitting delays, are preventing occupancy of the vacant portion of the property; or (3) the property has been affected by a natural disaster that prevents occupancy, including properties deemed uninhabitable by state or local authorities.
In addition to opposition from commercial property owner associations, taxpayer advocates, mortgage bankers, and chambers of commerce throughout California, SB 789 could have faced legal challenges if it had been passed as originally written. A vacancy tax passed at the local level in San Francisco was found by a trial court to violate the Takings Clause of the U.S. Constitution, a ruling that the City of San Francisco is currently appealing.
However, the version of the bill that was presented to the Senate Revenue and Taxation Committee on April 23, 2025 was drastically different than the original version proposed by Senator Menjivar. SB 789 was completely rewritten in the days leading up to the committee hearing by removing the proposed tax altogether and instead focusing on collecting information on vacant properties. As amended, the bill would require owners of commercial buildings to file an annual information return with the California Department of Tax and Fee Administration that discloses information related to any vacancies at their properties. Failure to file the return would subject the owner to a fine of an amount that is not yet determined.
Although the revised version of SB 789 passed the Senate Revenue and Taxation Committee on a 3-1 vote, the committee requested that the bill be further revised prior to referring the bill to the Appropriations Committee. While this bill weaves its way through the committee process, it remains to be seen if it will reach the governor’s desk and, if so, what shape it will finally take.
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