San Francisco has one of the toughest formula retail laws in the country. If you have more than 11 stores anywhere in the world, you could classify as a formula retail. Formula retail uses are commonly referred to as “chain stores.”
In San Francisco, formula retailers must go through an extensive public review process that is costly, timely and which creates uncertainty in your ultimate ability to open a store or business in neighborhoods throughout San Francisco.
BEST INTENTIONS FALL SHORT
The original purpose of formula retail was to support small business merchants throughout The City and protect independent businesses from larger ones that could pay more rent and look more attractive to landlords. At the time, there was, in fact, an expansion of regional, national and international businesses that were permeating The City’s neighborhoods. It came to a point where they pushed out a significant number of smaller businesses from the competition entirely.
However, both independent and giant retailers are navigating the challenges evoked by online retail today. The threat of an independent retailer is no longer the formula retail restrictions as much as it is the loss of foot traffic. Without foot traffic, buyers are less likely to walk into stores. With formula retail restrictions taking away larger businesses, the smaller retailers actually lose traffic to the surrounding neighborhood.
MORE TIME = MORE MONEY
Our city leaders need to look at the broader scope to see the repercussions of formula retail restrictions and their impact on our neighborhoods. Coupled with more regulations and requirements from the Planning Department, The City has made it extremely difficult, costly and unprofitable for smaller businesses to even want to open their doors at all. From permits and construction costs, to new labor requirements and the high-cost of living, the risk to open or even stay in business is simply too high to take in San Francisco.
In addition to the extended time it takes for a new business to get confirmation that their store was approved — estimated between 9 months and 14 months — there are additional costs that make opening any retail business in The City extremely costly and hard to do.
First, to meet new Title 24 requirements for energy conservation, you must provide with your drawing energy calculations drawn by an engineer. This process could take weeks to complete.
Next, many buildings, particularly those in the neighborhoods that do not meet current Americans with Disabilities Act requirements, are not permitted work, plus there’s a high risk of lawsuits. This adds tremendous costs to an initial project. Furthermore, buildout costs in general are up 20 to 25 percent on average over the last two years alone.
Finally, the landlord will not wait an extended period of time to go through formula retail without some rent or prepaid security deposit. So, a business owner would have to pay that fee to hold the property and risks the chance of not getting the permit to proceed. There’s a lot of money risked by the business owner’s expense.
WE MUST ACT NOW
We are now on the brink of seeing massive amounts of vacant retail space throughout our city if our leaders do nothing to fix the formula retail issue. Already, we are seeing larger new residential projects in Potrero Hill and along Market street with retail spaces still empty, regardless of the incentives landlords are providing to attract new tenants. The few tenants that do open are struggling because it takes the larger, anchor retailers to generate traffic for surrounding businesses. Rarely can any single retailer attract enough traffic to support their business.
I invite The City first to consider ways to streamline the current formula retail requirements so that instead of a retailer facing up to one or more years to find out if they’ve been accepted by a neighborhood. Currently, once a retailer files as a formula retailer, the public is then given 30 days to register a protest to that use of space. If the retailer doesn’t receive objections, then the retailer should be allowed to proceed with permits. If protests are filed, then the entire process should take no more than 90 days.
This would still help protect the integrity of our neighborhoods, while giving independent businesses some say and also give formula retailers a reason to invest in the area. If we don’t consider these kinds of changes, we will see our neighborhoods deteriorate quickly.
Hans Hansson is president, principal and founding partner at Starboard Commercial Real Estate.