The Twitter Tax And Zendesk: How Tech Companies Affect The CityNovember 05, 2012
by Tomio Geron
Hot tech startup Zendesk, which recently raised $60 million in new financing, is on the path to an IPO. But it’s not based in a sunny campus in Silicon Valley, or in the hip SoMA district in San Francisco. Instead, Zendesk is on San Francisco’s Market Street, next to a discount clothing shop on one side, and two boarded-up buildings on the other. Across the street are the Warfield music venue and a strip club. Further down the block are check-cashing and pawn broker outfits.
But the area is quickly changing following the April 2011 payroll tax break passed for companies that move into the mid-Market and Tenderloin area. Soon one of the toughest areas of the city could become the most tech focused areas. Can tech companies and a uniquely urban and uniquely San Francisco neighborhood coexist, or even benefit each other? The 2011 deal brokered by Mayor Ed Lee is known as the “Twitter tax break” because it supposedly kept Twitter in San Francisco after the hot company threatened to move out of the city. Under terms of the deal, companies that move to the area do not have to pay the city’s 1.5% payroll tax on any new employees they hire for six years. The deal was estimated to save Twitter $22 million over six years.
Zendesk, which moved to Market Street in August 2011, was the first company to take the tax break and submit a “Community Benefits Agreement” that details how the company will support the local community. Soon other big companies such as Twitter will also submit proposals (which are due by January 31). They will be watched closely not just to see if the tax break works economically for the city, but also to see how the companies affect the local community. Some local groups are worried that companies including Twitter will not work with them as closely as Zendesk did, as discussed below.
What’s at stake is not just the political reputation of politicians such as Mayor Lee and others who championed the deal. There’s also the question of how high-flying technology companies can integrate with urban communities, and what sort of change they inevitably will bring to longstanding neighborhoods. Highly paid engineers with Macbook Airs in tow are a fact of life now in mid-Market. But how will they mesh with the locals living in SRO hotels or with the homeless? Can tech companies bring positive change while keeping the character of the area? Or will they bring a Palo Alto-ization of the city feared by observers like David Talbot? As someone who grew up in San Francisco I am curious to see how the startups and the neighborhood interact.
As part of the tax break, companies must pledge to give a portion of the tax break—30% has been suggested, but is not required by law—to support the local area through the CBA. The CBA is reviewed by a Citizen’s Advisory Committee, then signed and approved by the city. There is no specific dollar amount that companies must give to the program, says City Administrator Naomi Kelly, who oversees the program. But the prior interim city administrator told community residents that 30% of what companies received from the tax break was a goal. The idea is that the companies get financial benefits from moving into the neighborhood so they should give back something to the local community. Zendesk’s early decision to tell the committee how much money it expected to receive from the tax break and how much it was giving back through the CBA program brought praise from local residents, Hilliard says. Zendesk estimates that the tax break it received in its first round for calendar year 2012 to be $36,248, but it estimates it provided “way more” than 30% of that to the local community, perhaps four times that much.
Zendesk submitted its first CBA in January 2012, which covered the 2012 calendar year. Before writing its plan, Zendesk invited CAC members to meet at Zendesk and give their thoughts on what the company should do for its community benefits program. They brainstormed issues, such as security of local residents and employees, job training, and hunger and food access issues. Some members of the CAC were initially skeptical of Zendesk, says Tiffany Apczynski of Zendesk. “The community gets screwed over by big tech companies. I’d be skeptical too,” she says. In the end the company decided to focus on hunger and food justice, as a number of employees and executives cared about the issue.
Zendesk’s food programs include a $5,000 donation to Glide Church for a community garden project. It also sponsored ImproveSF, a contest for people to crowdsource ideas to address Tenderloin food problems. But more than money, Zendesk has hosted events at its offices, invited local groups to be guest lecturers and organized volunteer days at local community groups. It also does about 40% of its catering through local businesses. “It’s making sure companies are not just throwing money at a problem,” Apczynski says. “We want to keep cash donations to a minimum. It keeps companies better connected with the community if you think about it every day. So we’re trying to manage that balance between being there hands on (and donating cash).”
Zendesk is also working with the St. Anthony Foundation’s Tenderloin Technology Lab to create a mobile web portal for local residents to find resources. The idea is to aggregate information such as emergency shelter beds for families or food services, to make them easier to access. Zendesk initially tried to help teach classes at the Tech Lab, but it found that it already provided them. This was one area where Zendesk learned and adjusted its plans—something that the other companies will likely have to do. The first year of the program went well, says the city’s Naomi Kelly, because Zendesk took an active role in getting feedback from the local residents and appointed a person to manage the liaison role with the community.
Zendesk took an enthusiastic approach to the CBA program, according to local residents and city officials. “They were open and welcoming and didn’t come in assuming they knew everything about neighborhood needs,” says Dina Hilliard, executive director of the North of Market/Tenderloin Community Benefit District. “They let the community tell them how they’d best benefit and where their benefits fit in.” Zendesk’s 2013 CBA plan, which was just approved, expands its program and, emphasizes creating jobs for local residents. Zendesk is working with the local Vietnamese Youth Development Center to bring two interns to work at Zendesk this summer. The idea is to help train residents on what they need to know to get tech jobs.
This year, about ten other companies that have recently moved to the area–such as Twitter, One Kings Lane, Zoosk and Yammer–are expected to apply for the tax break and submit CBA proposals. Those four companies said they weren’t ready to talk specifically about their plans yet, as they are working to submit proposals by the January 31 deadline. However, a number of the companies, such as Twitter, do have active volunteer programs.
Some residents are concerned that companies don’t seem willing to disclose how much they save from the tax break and therefore how much they will provide to the community program. While the companies have until Jan. 31 to submit their CBA proposals, a number of the companies have already met with the Citizen’s Advisory Committee. Committee chair Hilliard believes that local residents and groups will trust companies more if they provide hard numbers. ”I told Twitter, it’s better for you to disclose that information. Otherwise the community is going to think (the tax break) is millions of dollars,” says Hilliard.
A group of more than 30 local community groups sent a letter last month to the City and the advisory committee, asking the new companies to do four things through the CBA program: reinvest 30% of the tax break as Zendesk did, commit to hiring local residents, establish a community liaison in senior management and sign a memorandum of understanding with community groups the companies work with. The letter also includes suggestions of issues that are most pressing for companies to support, including homelessness, education and youth programs, bridging the digital divide, supporting the local economy, food justice, neighborhood infrastructure, public health and safety, financial literacy and community arts programs.
Steve Woo of the Tenderloin Neighborhood Development Corporation also is concerned that Twitter will not release the number of its new hires, and therefore how much of a tax break they expect. However, the CBA program has been good in the first year, particularly Zendesk’s open approach to working with community groups, Woo says. Overall the new companies address some problems in the neighborhood, such as vacant storefronts and they bring foot traffic. Still, he’s worried that the area will become gentrified and drive out local residents. That could end up changing the neighborhood for good. ”Gentrification can lead to some negative consequences not being addressed by the city,” Woo says. “That’s what we’re concerned about. We’re trying to push the city to do something about that.”
After Zendesk’s experimental experience with the Twitter tax and community benefits in its first year, Twitter and a new batch of companies will get their turn. For some tech companies this may be an afterthought to their main focus of building the product or company. But for some the interaction with the surrounding environment is a key part of how the company operates. For locals, it will show how well companies can make an impact on the city, and perhaps make a lasting impact larger than their particular companies.