doing things they would have done anyway. to the extent possible, the policy should be tailored to minimize that and insure that it does not happen. one way is to focus it onone wae there is a clear market area, blighted area or other conditions outside of the real estate market telling businesses and commercial tenants not to locate in an area. there are parts of the tenderloin area that fit the bill. the third thing is enterprise zones are criticized because you give tax cuts to create an incentive for businesses to go in the area. the tax cuts expire and the business has no reason to be in the area and you really accomplish nothing. the trick to tax cuts and a more comprehensive approach is how do you do the tax cut in such a way to kickstart a sustained process

of economic development? one of the key ways to do that is used tax cuts to get companies that will be routed to the area and will attract other companies, employees and investment to the area. so when the tax cuts expire, there is something left. there is a reason to be in central market tenderloin after this legislation expires. this is the most important of the criteria to keep in mind -- twitter limbs or large because twitter potentially coming to this area as an extremely fast growing, extremely well known and valuable technology company has already created a clustering affect in the south market area and will migrate that cluster of technology companies to this area which, as i started off saying, is basing an enormous amount of vacant space coming on

the market in the near future. the first question to understand the impact of this legislation is will this affect twitter's decision? will twitter come if you pass the legislation? will they leave if you do not pass of the legislation? it is a fair point that business taxes and local business taxes particularly are not the biggest cost factor businesses face. businesses have to pay rent and labor costs. workers have to worry about getting to work and they're out of pocket commuting costs. all of those things work together with taxes to present a net cost of different locations a business basis. what we did in this analysis was compare what the listed rents are in the current commercial market reports for

the location. one of the locations twitter has said to be considering in san mateo county -- the other is not listing reds and i don't know what that is, but my suspicion is it makes it more disadvantageous to the city. focusing on a property in south san francisco, we looked at twitter's expected growth in terms of what they need, what their rents are at what the relative tax burden would be in the two jurisdictions. hear, the particularities of the tax comes to the for particularly as they relate to twitter. san francisco has a payroll expense task of 1.5% of employee compensation. that refers to any consideration granted to an employee. their wages and salaries, stock options they're granted, or anything else the business gives the employee in exchange for the

services the employee provides. because the payroll expense tax includes stock options, for a valuable technology company like twitter -- for a point of context, twitter had a round of outside investment funding to years ago where it was valued at $250 million. it had another round of funding in december of last year where it was valued at $3.7 billion. there was a website or stock options owned by employees in twitter can be traded in other companies. for the price of those stock options, you can get an empress it -- get an implicit price of twitter, which is roughly double what it was three months ago. for a company like twitter and many technology companies, twitter grants stock options to its employees. they will very likely result in what would be considered compensation for our payroll tax purposes.

that particular aspect of compensation would not apply to another company that is the same size as twitter and has the same salary as twitter but did not grant stock options. our analysis suggests it is reasonably close between san mateo county and san francisco county if you do not consider stock options. we don't know what the payroll tax liability they're facing for tax options. it could easily be in the tens of millions of dollars and that would create editor incentive to leave san francisco than anything else we have been able to analyze. our analysis proceeded -- and we don't have any information on what twitter is thinking or even their version of the numbers we have been using, but as far as we can tell, where would stand to save a significant amount of money by moving out of san francisco because of the stock option issue. they would be relieved of that

if their stock options were realized as compensation within the next six years and this legislation were and out -- were enacted. our analysis proceeds of the notion that water would come or remain in san francisco had come to the area if this policy was enacted and it would not be in its financial interest to stay in san francisco if it was not enacted. the second key question is what difference does make to the area that twitter comes as opposed to leaving? our analysis focused on the areas i have identified as blue because that is the ball of the vacant commercial property within the district in the next six years. these green properties along market street are for the most part very high vacancy properties, chronically high vacancy properties. they would benefit from including twitter, but the size

of those properties is not a hugely significant on a city- wide basis. there are potentially between 10,000 at 12,000 jobs that could go into these properties if the economic development is successful in the next few years. similarly, the tenderloin areas are primarily composed of small businesses to are not subject to the payroll tax. public sector employers who are not subject to the payroll tax. there is less commercial vacancy -- there is a risk of net new payroll filling up in the yellow area than in the blue area. some of the fiscal risk is that as those properties fill up naturally and go from 0% occupancy to whatever level they find, much of that would be net new payroll from the

perspective of the legislation, but much of that would occur anyway. that's a potential cost of the policy. our analysis suggests that it twitter comes, you are going to see a very different evolution of this area, the blue and red properties of the next 20 years than if twitter stays. i will briefly review some of the assumptions we used to assess that. we believe it twitter does not come, you are left with these properties -- this is an area of the city that has been losing tenants for a long time. the demand for public sector tenants is stagnating. there's our risk it will take quite a long time for the market in this part of the city to reset and as buildings to be occupied. we project maybe it takes 10 years from the point they're all vacant to the point you are at

75% occupancy. if the future looks like the fat -- looks like the past, there is no reason to think it would change. the bulk of the tenants would not be subject to the payroll tax. they would be public sector and nonprofit. we would not be getting a lot of payroll tax revenue from them. the average wage in the city is significantly less than the age of -- than what twitter is paying and that ties into the payroll tax revenue. if twitter comes, we are projecting a faster preoccupation of these buildings. instead of 10 years, we project five years. that would be because twitter is acting as a magnet for other companies. we have one of the largest technology companies in town coming to area companies have avoided, basically making the move and we believe -- there is

reason to believe that would create a clustering effect in that area. the occupancy would be more dense and a high percentage would be subject to the payroll tax. their average salary would be higher, such that even if you are writing off the first six years as most of this is happening, over 20 years -- and discounting future revenue, over 20 years, the advantage of long- term sustained economic development in the area pays for itself and the terms of the first six years of foregone payroll growth. not only is that exceed, you have a positive payroll tax effect from this. it significantly exceed on an annual basis what we would expect to happen in terms of the payroll tax if twitter does not come to the area because of the limited prospects of other private sector drop -- private sector job growth engines.

that's the second main conclusion of our report. first, this legislation does seem to be important to the financial considerations twitter would have decided to stay in san francisco. second, having twitter come to the area would be more advantageous not just in terms of jobs and tax revenues that flow from increased jobs that the staff talked about, but even payroll tax over 20 years in comparison to what could be expected to happen in the area without water. having said that, we -- without twitter. having said that, we have two recommendations about the policy to make it more efficient and targeted. two other considerations on related matters that address some of the same concerns this policy is trying to address. i think this is just a technical issue. the way legislation is

originally written, it allows any payroll tax paying business that opened the premises in the area to basically deduct -- to get net new payroll free. -- tax-free. it does not say net new payroll in the area, so it creates the incentive for a company to open a branch office and get city- wide net new payroll to be tax- free and i don't think that's the intent of the policy. second, our analysis suggests pretty strongly that twitter is the decisive element in making this advantageous from a fiscal and economic point of view. nevertheless, the exclusion applies to a wider set of area than the one twitter is considering going into. for the green areas i highlighted before, i think a tax cut is reasonable. those are areas i have suggested before. that is for the market failure is and, in combination with the other efforts going on there,

that could very much help and have a relatively low cost for the city for those few small properties on market street. similarly, with the tender land properties, there is very little payroll tax thereby including those properties in the district. however, the large properties, the ones i indicated in blue would likely reoccupy without this. that creates a situation where the city would be getting a tax break for job growth that would happen anyway. yet those properties will still benefit from having twitter in the neighborhood. if those properties were blighted or have high vacancies, that would be another matter. but those are properties that have been occupied recently and there's no reason to think they could not be occupied in the future. we have made a recommendation that the large commercial

properties with the exception of the sf mart be excluded from the zone. the other recommendations we have our future policy recommendations. part of the economic concern for this area going forward is what happens to these large vacant commercial properties. there is a history in this part of san francisco and the city wide of commercial property being left vacant for long periods of time. the property owned the property in hand and is not forcing tenants to pay rent to make payments, it there is not a market force driving the property owner to ensure the property is occupied. there are certain incentives that would make a property owner keep a property of the market in hopes of an area turning around so they could get a higher and tenet later in the future.

the city might wish to consider whether that behavior is in its economic interests or its more in its economic interests to ensure a continued occupation of its commercial property and continual occupation of the infrastructure that serve up property. one way to do that is to impose a parcel tax on commercial properties that are vacant. without speaking to the legal issues involved, i believe that's something that could be done. >my last point -- it does appear in twitter's potential consideration of this policy measure that the issue of twitter stock options, it's a decisive issue because twitter is a valuable company and its stock will likely be very valuable at some point in the future, it would have a nice

payroll tax liability. the city may wish to consider a modification to the payroll tax that could reduce the incentive for a company like twitter or any other company that issues stock options that becomes successful from having that incentive to leave san francisco. the city does have a track record of being good at incubating technology companies but not as great as keeping them in a town where they grow. investing in ways to do that would be good in the future. i'd be happy to take any questions you have. supervisor chu: i know a number of people have put their names on the roster. would you like to wait until after the budget analyst are asked questions now? i think there is a general idea

to enter -- to ask questions now. supervisor kim: thank you for your report. i know you spent an immense amount of time putting this together and we appreciate it. my goal in putting this forward is achieve outcomes of want to see as efficiently as possible. how much real-estate -- how much of the real estate in the aaa building? >> i remember adding up all of the buildings and totaling about 3 million square feet. supervisor kim: is this all property that is vacant or will soon be vacant over the next 18 months or two years? >> that's my understanding. supervisor kim: how many employers we have to attract to fill this space? >> i estimate between 10,012 thousand. supervisor kim: what is the

demand for as being able to meet that supply? >> the first bonus you have is on the property owner to find tenants. the function of the commercial rent is to find equilibrium between how much supply there is and what the demand is. the reason we did that analysis of what does it look like with twitter and what does a look like without twitter and how long does it take to fill up? we do not see great reasons to think that property will fill up quickly without a private sector engine like twitter in that area. we are projecting that without twitter, in 10 years, that area to get to 75% full. there is no math behind that number. that's a gut feeling. supervisor kim: how much commercial real estate do you estimate in the uptown area? >> that hard to estimate and i

do not have a commercial reports on that. but i don't think it's anything on the order of the areas i have been highlighting. certainly not as much vacant properties as the areas i have been highlighting. >> there are concerns with incentives coming into this area that commercial rent prices are going to drive out potential nonprofits in that area. i want to get a sense of what you think based on the supply of space and demand for companies coming in to small businesses. >> i think the near-term dynamics with some much vacant space coming on is going to suppress rents for the foreseeable future. i think the concern you raise is more valid in the long term. if we are roughly right in a twitter, scenario, in five years, you filled out the series with technology companies and it's going to exert rent pressures on some small businesses. it will also create a lot of

potential retail business there. the challenge is going to be for those small businesses who are able to capture that business, they will be ahead of the rent and those who are not connected to the retail business that comes into the area, they will be behind. anytime there is a major economic change the area, a can ripple through all the sectors in the neighborhood. with respect to nonprofits, this is a discussion i had with the comptroller what we were working with this report. to the extent of the city is funding some of these nonprofits, the city made windup observing some of their rent costs as well if there are increases. supervisor mirkarimi: thank you. i was going to wait to ask questions until we heard from everybody but since we have delved into it, if you don't mind, i want to deal with some of the larger assumptions because there is a lot of chatter out there in the public

and people are unclear about the concrete benefits and ramifications of a particular transaction such as this. just from the basic point as to why this is being suggested, in trying to magnetized, tracts, recruit twitter, do we know with clarity that will absolutely that we will -- that we will absolutely land twitter? >> i don't know that absolutely. we think it would take away a lot of the financial incentive for twitter to leave. all it does is put you in a situation where it is not clear immediately what twitter will do. that is my answer. supervisor mirkarimi: it reflects on previous policies

like enterprise zones. this is not apples to apples, but i have read as much as i composite lead within the city documents from the comptroller's office and others, there seems to be real ambivalence about enterprise zones as established by the comptroller's analysis. i want to understand how it is we walk a fine line by not replicating the down sides of an enterprise zone as in the comptroller -- disk controller and previous controllers have articulated are problematic for a city like ours and not make sure we are entrapped by those particular consequences. >> in my view, there are risks and benefits to any tax-based economic development incentives. the benefit this and maybe some companies to change their behavior in the way you would like them to because of the tax change. the cost is all of the businesses who would have

changed their behavior would have done what you wanted to do anyway that you are paying for with a tax break. that's why when you are using tax policy and economic development, it is important to tailor it as carefully as you can to only cover those businesses you think will most affected by the legislation and to exclude those who you think even if they are doing what you want them to do and would do it anyway that you don't cover them by the legislation. supervisor mirkarimi: it makes sense in theory, but based on what has been tested in this theory, want to appreciate how you arrive at conclusions because in certain examples in the past, as stated by the comptroller's reports, enterprise zones have created ambivalence, if not concerned. walk me through the difference. >> i think the way you get at

that question in the context of a specific proposal is to say is there something like twitter in the mix? with the legislation affect twitter? if so, would twitter make a difference? those three conditions are filled in this case. if twitter was not in the mix, we would have a very different report about the fiscal and economic impact. >> it is the company itself, the character and strength of that particular company. >> if it twitter was not moving, it would be very different. what the potential impact of that company is. supervisor mirkarimi: in that case, help me understand why the expansion of the boundaries if ground zero is for the strengthening of mid market so that we are able to in essence try to send in the calvary for trying to do things we have not been able to do in mid market

area. how do you know the radius of putting twitter there actually has that wave effect in that expanded boundary? this is also what is simmering out there. i'm not sure what the policy science is in deciding what the borders are that began to speak to the impact of twitter's satellite effect outside of the market itself. it does not show any direct correlation in the materials i reading. >> there are two things that you analyze. is impacting companies to change their behavior in a certain way. in the analysis of twitter, i think it does. the other side of the equation is, is it minimizing the cost of the city for paying for behavior

that would have happened anyway? as written, it does not. that's the basis for our amendment about large commercial properties. frankly, the other properties on market street and tenderloin properties i doubt have a significant city-wide in terms of the payroll at risk. but i think the same goes for them. i think there's a point where it applies to property on market street in conjunction with what the city is doing, it could help. that's a situation where there is a market failure. the city does not have a lot of tools and it is about catalyzing something. what -- one of the major sources of impact, it is not the green and yellow on the map, is the red and the blue. it is our belief the policy would be best targeted by going after the property that would bring you twitter and let twitter do the work but would

make the area attractive and not the payroll cut. supervisor mirkarimi: structuring the credit is amended to six years if i am not mistaken. that has the option of being renewed when sense that comes before the board, correct? >> i'm not aware of that. i believe would require additional approval. supervisor mirkarimi: maybe when we come back to it, we will get that answer. again on the stock options, rumors afloat about the potential buyout of twitter by google, potentially -- i'm not sure based on reading the financial journals what is real and what is not, but there are strong rumors. how do we position ourselves based on -- since it is your job on forecasting, on those possibilities? >> based on my knowledge of how

stock options work in the technology industry, if google or facebook were to purchase twitter, there would be an issue of how stock options that are currently twitter would convert into stock of the company being purchased. for example, i used to work for a technology company that was purchased by a public technology co. and my options were converted to stock in the publicly traded company. i believe that that point, and i don't want to speak as a tax attorney what i am not one. i believe at that point, the payroll tax issue from the city's point of view is the same. whether or not in the next six years twitter has an event like it goes public or acquired by a company for which its options convert into stock and their employees can exercise it, when employees exercise those stock options, it becomes

compensation and therefore a payroll tax issue for the company. twitter, looking forward to whether they get acquired or not, that's an issue for them going forward. there is an issue, and it is hard to forecast, of what happens if say google buys twitter to the san francisco location? do they say we have a great big campus in mountain view that we want everyone to go to mountain view? your guess is as good as mine on that. i would say this city compete well certainly with san mateo county and santa clara county in terms of rent and taxes and is really the tax issue in the next six years when something will almost certainly happen to the stock options where they will, optional. that's the huge challenge. supervisor