Cutting Through the Retail Approval Logjam

SAN FRANCISCO—Property owners and retailers are struggling with the conundrum of creating or continuing successful street-level retail in San Francisco.  It’s emblematic of other Bay Area retail environments and other US cities as well.

“In our work advising both landlords and commercial tenants, we see the issues they face in bringing stores to opening day,” Santino DeRose, managing broker/partner, Maven Retail, tells GlobeSt.com in this exclusive. “It costs too much and takes too long before selling one item or serving one meal.”

The evolution of retail has changed how store owners operate in most every way, but the process for permitting and opening a new store hasn’t kept up. While retailers continue to evolve in an effort to meet consumers’ changing tastes and experiment with formats and offerings, the process for leasing a space basically penalizes innovation, DeRose says.

“Although our intricate zoning laws have an overabundance of zoning categories, a commercial tenant looking to lease a space will find their use either to be principally permitted, principally permitted with neighborhood notification, pursuant to Section 311 of the zoning ordinance, or conditionally permitted,” DeRose tells GlobeSt.com. “A principally permitted business is one in which the space has a history of prior use for the exact same kind of business or the city’s planning code has deemed it a non-controversial use. This is the easiest process, which generally fetches a quick planning department signature.”

A second category, principally permitted with neighborhood notice, happens when a change in the use of the space will be occurring, even though the new business category is still legally zoned for that space, he points out. Neighborhood notice means mailing and posting a notice of intent within 30 days of signing a lease, thereby giving the public an opportunity to weigh in.

“This type of change in use permit takes months, however, since there’s no control over how fast things move for a particular case at the planning department, and because it is the planning department that provides the neighbors with such notice,” DeRose tells GlobeSt.com. “If there’s opposition to the project and a subsequent hearing, add even more months to the timeframe.”

Finally, there’s the conditional use permit/CUP, which can be an eight to 10-month process even before the physical design and improvements get underway, meaning the time to grand opening may take years. A CUP is required for most formula retail except for downtown C-3 districts and certain other non-formula retail uses based on the zoning district. Formula retail is defined as any chain that has more than 11 retail outlets worldwide, including home-grown operations that have simply been successful. A public hearing is required before even applying for a CUP permit, DeRose explains.

With the retail and restaurant world always pushing change, the permit process obviously needs updating. For example, dozens of CUP applications alone are pending at any given time and the planning commission can only hear two to six applications on a regular weekly schedule. A retailer active on the West Coast said compared to other cities, “the level of bureaucracy is just unprecedented”.

“Retailers usually bear the burden of the months, if not years-long process, paying rent for vacant space,” DeRose tells GlobeSt.com. “We advise potential business owners who will require a change in use permit/CUP and a custom build-out to keep available between $350,000 to $500,000 in liquid capital for full rent on the space while waiting for permitting and other delays. But the lease burden is lease dependent. At one property with available space, the landlord is willing to provide the time needed to obtain permits.”

Landlords can help in other ways to get retail tenants up and operating faster. Some landlords go beyond the norm to work with tenants and help navigate the process, bringing in advisors and consultants along the way.

Experts in neighborhood-level retail can be helpful in arranging lease terms that optimize success and in selecting types of businesses that are suitable for the space and complementary to nearby shops, which are more likely to be supported by neighbors and shoppers.

For example, a formula retail pet supply shop might seem like a secure, solid tenant—but if an independent pet store is nearby, neighbors might complain and planning might deny a CUP. On the other hand, well-placed formula retail can add synergy. A high-end clothing store integrated on a street with local boutiques, for example, will add to neighborhood vitality and crossover foot traffic between businesses.

Landlords also need to time the tenancy for transition. Property owners should ideally begin the process of seeking a new tenant as soon as a vacancy is known. Doing all the hidden due diligence to assess the space can speed things up and minimize costly surprises for all parties in the approvals process. Some relevant questions are what’s the building’s use history? What’s the status of ADA compliance, seismic, utility loads, egress, ingress, fire alarms, sprinklers, proximity to schools, transformers and the like?

“An idea gaining support is parallel processing across different types, such as usage permits and building permits. It can help reduce startup costs to both landlord and tenant, and reduce bureaucracy and frustration,” DeRose tells GlobeSt.com. “CUP applications, bringing new retailers and concepts to market, should be expedited to the front of the planning commission’s hearing queue. And adding city staff can speed things up and bring more revenue to the city too. A multi-sector working group could bring forward best practices and new ideas.”