Everybody wants to see
neighborhoods thrive, including
our elected officials. So why is it so
challenging to occupy commercial
space in San Francisco?
Commercial districts are essential in defining a neighborhood’s character and appeal. A vibrant and thriving retail sector is like an ecosystem, with businesses generating foot traffic and crossover for one another.
Recent studies by the San Francisco Office of Economic and Workforce Development, North Beach Neighbors, and a crowdsourced initiative in the Richmond District have aimed to ascertain how many commercial vacancies are currently in the city, as well as better understand why some storefronts remain empty even as our local economy thrives. These studies have noted the changing nature of brick-and-mortar businesses in the internet age, the increased cost of living for employees, and city-specific issues—such as seismic and ADA compliance—as all playing their part in vacancies.
As commercial brokers, we see something else happening daily. Landlords and potential commercial tenants are struggling amid a complex web of city bureaucracy and permitting as they try to gain successful tenancies and open new businesses. City officials have made recent changes for the better; however, further changes to streamline the permitting process are still needed, so we can secure and engage successful businesses in our neighborhoods.
No one likes a “retail desert”—but is the city looking in the right direction?
In March, the San Francisco Board of Supervisors (SFBOS) passed a law tightening mandated reporting of vacant commercial units, and the payment of registration fees on such. A unit is considered vacant if it has been unoccupied for more than 30 days; please note that exempt from the “vacant” designation are units under construction or repair, properties actively showing for new tenancies, and properties that are for sale.
Vacant units are subject to a $711 annual fee (refundable up to 50% once occupied)—but there used to be a 270-day grace period to pay. Now, payment is due immediately after 30 days of vacancy (as defined above). If an owner doesn’t pay the fee, a warning is issued; if the warning is not heeded, a $2,844 non-registration fine is levied by the city. Additionally, owners of vacant units need to send an annual inspection report conducted by a licensed professional to the Department of Building Inspection (DBI), proving that both the interior and exterior of the vacant unit have been maintained. Further fines can accrue if such reports are not submitted.
A commercial “vacancy tax” has also been proposed, which would fine owners of spaces that have been vacant for more than six months $250/day. If approved by the SFBOS, this legislation will be on the March 2020 ballot, where it would need a two-thirds majority to pass.
While the Supervisors’ goal is to get an accurate count of commercial vacancies in the city, to curb blight, and to prevent landlords from intentionally keeping spaces empty—and while the revenue from the proposed vacancy tax would benefit residential and commercial tenants who are displaced during seismic retrofits—we believe their arrow isn’t quite pointing where it needs to be. Some “bad faith actors” do exist in the form of overseas or absentee property owners who keep their units vacant, landlords who don’t maintain their spaces, or those who hold out for higher rents—but innumerably more “good faith” landlords are just waiting on hold as their tenants try to move through the city’s approvals process.
Permits, Permits Everywhere
Although our intricate zoning laws have an overabundance of categories, a commercial tenant looking to lease 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. A “principally permitted” business means that the space has a history of prior use for the exact same kind of business, or that the city’s Planning Code has deemed it a non-controversial use. This is the easiest process, generally fetching a quick Planning Department signature. Once Planning approves use, then the tenant can begin the process of Building, Fire and other Department review of plans to create the space as desired (which is a several-months-long process in and of itself).
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. “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). If there’s opposition to the project and a subsequent hearing, add even more months to the timeframe. Again, this is just to approve the space for its desired use, and the entire months-long building permit process—which includes all aspects of architectural design, DBI and DPW approvals, PG&E, seismic compliance, mechanical issues, fire and Health Department code, and possible historic compliance—is still downriver.
Finally, the most complex and time-consuming process is the Conditional Use Permit (CUP). 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; if the new space will be the 12th or more of that chain, San Francisco requires a CUP. Before a formula retail business owner can even submit for a conditional use permit, they need to hold a public meeting (see http://forms.sfplanning.org/PreAppMeeting_Application.pdf).
Remember too that when we talk about change in use, the internet age has affected what’s viable for brick-and-mortar commercial properties. “Even formerly stalwart tenants such as banks are reducing their physical footprints,” said David Marlatt, founder and architect at DNM Architecture. “But to switch a former bank to an office, it triggers accessibility, fire code compliance, and beyond. In one such space we’ve worked with, the city insists on retail over office (when that’s no longer realistic), and a prime space has just sat vacant for over three years. Meanwhile, that doesn’t do anyone any good—denying office use is a lost opportunity to have people in the neighborhood who are buying lunch; spending money.”
As of this writing, 78 CUP applications have been submitted in 2019. Given that the Planning Commission hears only two to six applications on their regular weekly schedule, our experts tell us that the average CUP process timeframe is eight to ten months, and sometimes even longer. “The level of bureaucracy is just unprecedented,” said one formula retail tenant, who has been waiting over a year and a half for a CUP hearing—with another four months build-out time awaiting if and when zoning permits are finally issued. “We’ve opened in multiple municipalities in California and this is at least three to four times as hard. Had we known at the beginning how much time and effort it would’ve taken, we might not have even pursued San Francisco. It’s a discouragement to do business in this city.”
Currently, it’s not possible to combine the usage permit and building permit timelines. If a tenant could submit building permit applications at the same time as the conditional use process—with all building approvals pending the okaying of the CUP, of course—months could be shaved off of non-operational time. “For new residential housing construction that’s large enough, you can parallel process,” said John Kevlin, a land use attorney at Reuben, Junius & Rose, LLP. “That was a big deal and took a lot of effort to change, but it became possible because housing is the most pressing issue in the city right now.”
Practices for Permitting Processes
If you’re still confused, you’re not alone. Tenants often retain independent, private-sector expeditors who know the ins and outs of permitting to “fast-track” the process. Though hiring an expeditor can be a five-figure cost for a business owner, the rationale is that even though more capital is invested up front, the potential for saving months of time and thousands of dollars down the line is greater. The city doesn’t provide any kind of user-friendly roadmap or flowchart for what’s needed, so these expeditors have valuable niche expertise. Janet Crane, principal architect at Freebairn-Smith & Crane, a firm specializing in planning, urban design, and architecture, created a piece of writing mapping out the process and timeline so she could present it to all her new clients. Since architects assemble CUP applications (if needed) and create plans to submit for building permits, it’s imperative (and inevitable!) that they become familiar with all that is required. “Smart permitting strategies and good designs are part of solving problems for new businesses, of making it possible for them to get approvals,” Crane said.
Whose Responsibility Is it Anyway?
Since the city’s approvals process causes elongated non-operational timeframes, who is financially covering all that time? The answer is lease-dependent. For example, the same formula retail client mentioned above, who is in the process of opening multiple San Francisco locations (each with lengthy and expensive permitting delays), has encountered different scenarios depending on the landlord. On at least one site, the landlord is willing to provide the time needed to obtain permits. On the aforementioned property, however, with the long wait for the planning commission hearing—paying rent has been the tenant’s responsibility since the beginning.
While we advise potential business owners who will require a change in use permit and a custom build-out not to try to open a new business in San Francisco unless they have at least $350,000 to $500,000 in liquid capital, these kinds of permitting delays—most of which are out of a business owner’s control—can really drain a tenant’s bank account if they’re paying full rent on the space while waiting to simply open. These delays are also happening even in cases where an independent expeditor has been retained.
As a landlord, your goal is to co-create a long-term, viable, thriving tenancy that will benefit everyone; yourself included. You don’t want to exhaust a tenant’s resources while they’re on hold with the city, and then have to go through the process in rapid order again with someone else, knowing those same delays are inevitable. At the same time, you may not have the resources to be holding the ball on an empty space yourself for months or even years. This is where working with experts who have knowledge of the retail sector in your neighborhood can be helpful as you decide on lease terms. Experts can also help you figure out which types of businesses are suitable for your space: What is less likely to trigger a negative response from neighbors or from Planning? What will contribute to the positive, well-curated, interconnected neighborhood ecosystem mentioned above? 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.
It’s important to negotiate compliance division responsibility in your lease. Timing your tenancy transition is also crucial—it’s of much greater benefit to you as a property owner to begin the process of seeking a new tenant as soon as you know a vacancy is coming. Doing all the hidden due diligence to assess your space before even seeking tenants is extremely important, so there are no costly surprises for either of you when you go through the building approvals process. Do you know the history of uses in your building? Do you know all the details of your ADA compliance, seismic, utility loads, egress, ingress, fire alarms, sprinklers, proximity to schools, transformers, and beyond?
Changes for the Better
In December 2018, Mayor London Breed’s “Citywide Storefront Vacancy Strategy” earmarked $1 million to reduce bureaucratic delays and encourage new types of zoning. Districts 1, 4, 5, 10 and 11 (Sunset, Richmond, Western Addition, Bayview and Ingleside) now allow 60-day permits for pop-ups to test the commercial waters. Mixed-use spaces with two business owners under the same roof are also allowed under the “flexible retail use ordinance,” which is applicable to arts activities, limited restaurant, general retail, personal service, retail professional service, trade shop usages. A coffee shop/apparel combo, for instance, falls under this type of flexible use.
Additionally, Districts 4 (Sunset) and 11 (Excelsior/OMI) have passed laws combining the first two levels of zoning we mentioned above, making not only “principally permitted” businesses but also any business already zoned for that district an over-the-counter process (without the dragged-out neighborhood notification process). We are hopeful that the experiment will go well and will be recreated in other districts in the future.
Advocating for “parallel processing” of usage and building permits seems like the surest way to reduce startup costs to both landlord and tenant, and to reduce bureaucracy and frustration. Making sure that any CUP that encourages a new tenancy is moved to the front of the Planning Commission’s hearing queue (versus hearings for additions, roof decks, etc.) would be a smart move for our local economy. Additionally, while we highly value the knowledge and expertise of private-sector consultants who work as permit expeditors, we wonder why the city doesn’t instead hire more in-house expeditors in Planning. If they were to do so, revenue from expedited processes would go directly to the city itself.
Finally, a multi-sector working group comprised of Planning Department members, property owners (both mom-and-pop and large firm), retail tenants of various natures, land-use attorneys, brokers, and architects could go a long way toward brainstorming solutions that will indeed make our neighborhoods thrive.
Santino DeRose and Pamela Mendelsohn are partner brokers at Maven Commercial, where they specialize in commercial and mixed-use leasing and sales and neighborhood curation. Combined, they have over 50 years of experience in the San Francisco market. Reach Santino at 415-404-7337 or email@example.com, and Pam at 415-518-0893 or firstname.lastname@example.org.