Twitter IPO highlights big money friction in San Francisco

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By Sarah McBride and Alexei Oreskovic

SAN FRANCISCO (Reuters) - Twitter Inc's (TWTR.N) initial public offering marks something of a coming out party for San Francisco as a technology capital, giving the city a home-grown success story to rival those of Silicon Valley to the south.

But there is little celebration among community activists and a growing cadre of middle class residents who resent what they view as a tech-driven, big-money takeover of the city.

Earlier this week, San Francisco voters overwhelmingly rejected a ballot measure that would have cleared the way for luxury condos by the waterfront. The measure, championed by one the tech industry's biggest supporters, Mayor Ed Lee, epitomized what many see as the city's skewed priorities.

"He's made it his priority to give tax breaks to Twitter, to encourage growth at all costs, to encourage developers to build luxury condos," said Julien Ball, a community organizer who is part of the Alliance of Californians for Community Empowerment. Benefits flow to just a small group of the population, he said.

Protesting outside Twitter headquarters on Thursday morning, as Twitter shares soared in their market debut, social worker James Chionsini bemoaned what he called the "bland, sterile, teflon-ification" of the city.

Twitter did not respond to requests for comment. A spokesman for Mayor Lee said he was not immediately available for comment.

Grumbling about gentrification are nothing new in San Francisco, a city of 826,000 known for its picturesque Victorian houses, steep hills and long tradition of counter-culture creativity. The dot-com boom in the late 1990s also caused tensions.

And many cities would love to have San Francisco's problems. It has never been more prosperous: streets are lively with bustling shops and restaurants, and per capita income has soared to $74,349, according to the Milken Institute, far above the state average of $43,647.

Many residents routinely forgo crowding onto buses in favor of summoning rides in town cars using the Uber transportation service. Cranes are building a dozen new office and residential skyscrapers, according to Colin Yasukochi, director of research and analysis for commercial real estate firm CBRE.

But public advocates say those markers of prosperity hide the struggles of those who have been left behind by the technology boom. While earnings for professional and technical services - which includes most technology jobs - grew 17 percent last year, according to the Bay Area Council, they grew just 1 percent in areas such as retail, stayed flat in health and education, and shrank 9 percent for nonprofits.

Meanwhile, the median rent on a two-bedroom apartment rose 10 percent over the last year to $3,250, more than any other city in the country, according to online real-estate company Trulia. Rents in greater New York rose just 2.8 percent.

The total number of evictions jumped 25 percent to 1,716 in the twelve months ending in February 2013, according to a report by San Francisco's budget and legislative analyst, despite strong tenant-protection laws.

Frustrations over the perceived link between the rising cost of housing and the booming technology sector may have played into the rejection of the luxury waterfront condos, said Corey Cook, an associate professor of public affairs at the University of San Francisco.

"The presumption, it's tech executives who were going to buy them," he said.

TAX BREAK DEBATE

A sore point for some is a tax break granted to Twitter before it moved into its current headquarters in a then-derelict area of Market Street, not far from City Hall.

Twitter won the exemption on the city's 1.5 percent payroll tax, a benefit that also extended to other companies in the neighborhood, after it threatened to leave San Francisco. The city would lose an estimated $22 million, a report for the Board of Supervisors estimated at the time, based purely on salaries.

The figures did not take into account stock-based compensation, which could add tens of millions of dollars to the cost of the tax break, depending on the price of the shares when employees sell them, said San Francisco accountant Jim McHale.

Last year, voters decided to phase out the payroll tax, which many economists believe creates incentives to relocate for companies, particularly those in industries including technology where the emphasis is on labor rather than capital investments such as factories.

Enrico Moretti, a labor economist at the University of California, Berkeley, believes Twitter might have hired fewer employees in San Francisco without the tax break.

"My best estimate is that the overall effect of the tax break to Twitter on city revenue has been positive, not negative," Moretti said. For every job at a San Francisco technology company like Twitter, he said, five more are created, including three nonprofessional jobs such as dog waker or security agent and two professional jobs such as teacher.

Given Twitter's current employee base in San Francisco of about 2,000 employees, that makes 10,000 additional jobs, Moretti calculated.

But the job-creation argument rings false to those who are having trouble scraping by, even with paychecks.

Chionsini, the social worker, said his and his wife's combined income of just under $70,000 just does not cut it in San Francisco. "Anywhere else, we'd be living well," he said about his family of four. Here, he qualifies for affordable housing.

ECHOES OF 1999

The current situation evokes the late 1990s, when a slew of small Web start-ups popped up throughout the city, causing tensions over rising rents and traffic. At that time, though, big technology companies, as well as the venture capitalists and other professionals who support them, were mostly based in suburban Silicon Valley.

That center of gravity has now shifted, with Twitter giving San Francisco a hometown technology juggernaut. The social network, with 230 million users, raised $1.8 billion in its IPO, making it one of the largest Internet IPOs on record. Other marquee start-ups, including Uber, Airbnb and Square, are also based in San Francisco.

Even executives of companies based outside of the city are planting stakes in town. Yahoo (NSQ:YHOO) Chief Executive Marissa Mayer lives in a penthouse in San Francisco's Four Seasons, a residence and hotel. Last year, Facebook (FB.O) CEO Mark Zuckerberg bought a $10 million home in San Francisco's Mission Dolores district.

Big technology companies such as Google (NSQ:GOOG), Facebook, Apple (NSQ:AAPL) and LinkedIn (NYS:LNKD) operate their own buses which cross-cross the city, making stops to pick up packs of their employees and ferry them down the freeway to offices in Silicon Valley. Many young tech workers prefer to live in the city.

But signs of tension are starting to appear. Graffiti on the glass paneling of one public bus stop shelter exhorts the technocrati to "stay in Mountain View," the Silicon Valley town 39 miles to the south that is home to Web search giant Google.

"There's a feeling of us and them," said Matt Gonzalez, a former San Francisco mayoral candidate who is currently chief attorney for the San Francisco Public Defender's office. "They don't necessarily engage in some of the civic activity. They're not tuned into some of the neighborhood groups."

When many residents see the technology boom, said USF's Cook, they ask themselves, "When is this going to result in improvement in the schools? Why isn't there more investment in civic spaces?"

The same week as Twitter's IPO, the San Francisco Chronicle detailed how elevators at some of the city's public housing regularly broke down for days at a time, leaving elderly and disabled residents stranded in the high-rise buildings. There are no plans to replace all the aging elevators, as the city's housing authority lacks the money, according to the report.

Technology companies could do much to improve their image, Cook said, by supporting more affordable housing, renter protections, and making donations to civic institutions, as Salesforce Chief Executive Mark Benioff did with his $100 million gift three years ago for a children's hospital. (Reporting by Sarah McBride and Alexei Oreskovic; Editing by Tim Dobbyn)

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