Board of Supervisors Enacts Tighter Chain Store Regulations after Two Years of Debate

December 03, 2014


On November 18, 2014 the San Francisco Board of Supervisors (“BOS”) gave final passage to a much debated ordinance to further restrict chain stores, known as “formula retail” stores. The changes will:  (1) expand the definition of formula retail to those stores with at least eleven locations worldwide, rather that just in the U.S.; (2) include new types of retail (see below); (3) expand geographic areas in which the formula retail rules apply; (4) require 30 days notice to neighbors prior to a formula retail hearing at the Planning Commission; and (5) clarify when the right to a formula retail use is lost from lack of use. The ordinance is expected to become effective in January, and will affect all applications submitted after October 24, 2014.

Formula retailers are defined as retail sales and services, bars, restaurants, liquor stores, financial services and movie theatres maintaining consistency in products and merchandising among its stores. Formula retail use is either approved through a conditional use hearing or is prohibited depending on the district. The ordinance adds to formula retail “personal service” uses (salons, spas, cosmetics, tattoo shops and classes such as art, music, dance), check cashing and other small financial uses, and massage and tobacco paraphernalia stores. Chinatown Mixed Use Districts will now prohibit most formula retail restaurant uses.

All “accessory uses” which fall into the category of a formula retail use will now require conditional use authorization as well. An “accessory use” is one which takes place in the same location and is part of and related to the main use, but much smaller in size and perhaps not allowed in the zoning district. Such a minor or accessory use can take up a quarter or a third of the principal use, depending on the zoning district.

For the first time, the area in which the formula retail restrictions apply will expand beyond Neighborhood Commercial and Mixed Use Districts. It will now include a portion of the downtown commercial zoning district (C-3-G) along Market Street between 6th Street and the intersection with Franklin and 12th Street. 

The City will require an economic impact study for any large scale retail business prior to considering approval. Large scale retail includes any retail business greater than 50,000 square feet (except in C-3 district where the threshold is 90,000 square feet). The ordinance sets the size threshold to 20,000 square feet for formula retail businesses.

The Planning Department will consider whether there is an over concentration of formula retail uses within 300 feet of the proposed new use, or within a quarter mile of it, at the Planning Department discretion. A formula retail use will now be considered abandoned after 18 months of non-use (rather than the typical three years). A site can change to a new formula retailer without a new conditional use approval if the new use is the same type and size as the pre-existing retailer and has no more locations than the pre-existing retailer.

One of the most significant opponents of formula retail, Supervisor Eric Mar, has indicated that he may initiate further amendments to the restrictions which will address the impact on successful local retailers such as Pet Food Express and San Francisco Soup Company. 

Formula retailers will face further restrictions in six months through a pair of ordinances sponsored by Mar and David Chiu that obtained final passage on November 25, 2014. The ordinances create protections for employees of formula retailers with at least 20 San Francisco employees. These new worker protections include (i) requiring 2 weeks' notice of work schedules and compensation for changes to schedules made with less than 7 days notice; (ii) requiring pay for on-call shifts in which an employee is not called in; (iii) providing part-time employees access to the same hourly pay rate, promotion opportunities, and paid and unpaid time off (prorated) as full time employees; (iv) offering additional work to part-time employees before hiring new employees or utilizing a temporary staffing agency; and (v) after a transfer of ownership, requiring that employees be retained for 90 days after the opening of the new business.

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Demand for S.F. commercial property is through the roof

By Andrew S. Ross

Updated 11:17 am, Monday, September 29, 2014

This month New York’s Rockefeller Group that owned One Market Plaza, sold 50 Beale Street, a 660,000-square-foot skyscraper south of Market, to New York’s Paramount Group for $395 million.

In the same week, Columbia Property Trust of Atlanta, which owns 221 Main St., a 16-story high-rise near the Transbay Transit Center, closed on its $309 million acquisition of the Hanford Building, the 33-story, 480,000-square-foot office tower at 650 California Street in the Financial District.

“We have established a significant presence in downtown San Francisco — a market that continues to be one of the best in the U.S.,” Columbia Property CEO Nelson Mills said in a statement. Meanwhile, Boston’s Pembroke Real Estate bought 100 California St. for $182 million.

“We have been looking in San Francisco for our first deal for 18 months,” David Lucey, Pembroke’s senior vice president, toldThe Registry, an online trade publication that keeps track of Bay Area commercial real estate.

Norway’s sovereign wealth fund is already here. Having acquired a 47.5 percent stake in the 38-story, 1 million-square-foot building at Market and Fremont streets, for approximately $200 million in January. The fund, controlled by Norges Bank Investment Management, picked up its second San Francisco property last month — a 49 percent interest in the 500,000-square-foot Foundry Square II complex on Howard and First streets in a joint venture with TIAA-CREF. Total price: $309 million.

“I’ve never seen space get absorbed this fast, rents go up this fast and whole buildings being pre-leased,” said Michael Covarrubias, chairman and CEO of San Francisco’s TMG Partners, whose recent developments include a $20 million, 200,000-square-foot office building under construction at Brannan and Fourth streets South of Market. TMG also has a 2 million-square-foot, mixed-use office, hotel and residential complex on tap at First and Mission streets, in the heart of the nearby Transbay center, some of whose developers ran into some rough waters with the city last week.

However that turns out, much is at stake, literal fortunes in fact, for investors and developers vested in the hottest part of the hottest real estate market in the country.

“It’s a really interesting time for San Francisco, there’s a lot of attention on this market,” said Caroline Rooney, managing director for capital markets and Northern California research at global real estate broker Cushman & Wakefield.

And getting increasingly frantic.

Strong leasing

Leasing activity and building occupancy are at record levels. In its third-quarter San Francisco report last week, Cushman counted “a mere” 13 Class A “Big Block” (minimum 50,000 square feet) office buildings available, compared with 31 at this time last year. Rents per square foot for the upper floors of San Francisco office towers are the highest in the world, having increased by 60 percent since March, according to Knight Frank, a London real estate consultancy. The city’s office rents in general will continue to grow by more than a third over the next five years — again topping the world — in Knight Frank’s estimation based on a survey of 15 major cities (including London and New York).

No guesses as to the chief reason: It’s the the city, says the firm, “with the most tech exposure.” Which means interested parties better move fast, as Cushman & Wakefield, having squired attendees at TechCrunch Disrupt SF on a bus tour of local tech companies this month, well knows.

“The competition for buildings is incredibly strong,” said Rooney. “Well-capitalized investors — foreign buyers, REITs (real estate investment trusts) and pension fund advisers are looking to take advantage of the rising rents and the tightening market and are aggressively buying properties here.”

Among the pension funds looking to take advantage is the California State Teachers' Retirement System, which just invested $200 million with Jamestown Premier Property Fund, an Atlanta real estate investment and management firm, which will focus the system’s money, according to an e-mail it sent to the Registry, “on coastal regions that have strong vibrant job markets.”

Like San Francisco, where Jamestown Premier Property owns Ghirardelli Square, an office office building at 799 Market St., whose tech tenants include Akamai Technologies, Prism Skylabs and, and Waterfront Plaza, a 300,000-square-foot complex on the Embarcadero it acquired for a reported $88 million last month. Two months earlier it sold the Pacific Place mixed-use complex — in which Intuit takes up all 200,000 square feet of office space, and other tenants include Levi’s, Old Navy, the Container Store and the Palomar Hotel — for $415 million to JPMorgan Asset Management.

Paramount, which owns, at last count, 16 other properties in high-priced Manhattan and Washington, is reportedly looking at a $2.7 billion IPO, the biggest ever for a REIT.

With the Rockefeller Group having sold 50 Beale Street to Parmount for $90 million more than it paid for the building just two years ago, the San Francisco will probably look good during Paramount’s road show.

“San Francisco is the best, strongest office market in the country at the moment,” said Robert Gadsden, portfolio manager atAlpine Woods Capital Investors, commenting on the IPO on Bloomberg last month.

Any worries?

With such endorsements, what could possibly go wrong? “Unless there’s some sort of black swan event, we see nothing on the horizon right now — nothing in the stock market or the stock economy — that gives us concern,” said Rooney.

“This is the most intense recovery with sustainability that I’ve ever seen,” said Covarrubias. “That doesn’t mean there won’t be washouts,” he added, referring to previous dot-com crashes and their impact.

“But there’s more long-term leasing, with companies not taking more space than they need, better, more seasoned management, and they’re making money.”

Vladimir Bosanac, co-founder and publisher of The Registry, is more cautious. “The levels of activity seem unprecedented. The feedback we've heard is focusing more on how long this will last instead of how much higher the prices will go. The prices are near or at peak levels,” he said.

“A big test will be if a company of significant size decides to return the real estate it does not need to the market. Some companies will not make it or they will be acquired. So if the market suddenly has half a million square feet of space available, it may send shock waves throughout the community.

Andrew S. Ross is a San Francisco Chronicle staff writer. E-mail: Blog: Twitter: @andrewsross



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