San Francisco’s Gordian Knot: The Formula Retail Question

The great formula retail debate is about to be joined yet again in San Francisco.  The term “formula retail” is shorthand for virtually any national retailer who has more than eleven stores in the country.  That certainly describes a lot of businesses, and in fact, many locally-grown businesses that expand to eleven stores or more unknowingly go from being viewed as a cute mom-and-pop to being thrown into the same bucket as Walmart and McDonalds.  The formula retail question is fundamentally unique in the world of land use in that it is focused not on what the business does, but who owns it.

The Issues

On one side of the aisle are those who argue that formula retailers drive out small businesses, destroy neighborhood character, give nothing back to the local community, and export their profits to corporate headquarters in far off lands, etc.  They also often argue that owners hold their properties off the market and keep them vacant in the hope that they can attract a successful formula retailer.

On the other side of the debate, well, the arguments aren’t quite as passionate, but are no less real.  What if an existing building is too large for a mom-and-pop store to use, or too expensive to retrofit?  What if a store’s front has been vacant for years and the only interest in the space is from formula retailers?  Would neighborhoods rather see a formula retail use or a vacant space that is constantly being attacked by graffiti?  Shouldn’t including more retailers in an NC district encourage competition and benefit everyone?

Unlike many of the hotly contested, case-by-case land use battles we see every day in San Francisco, the formula retail question doesn’t really lend itself to easy answers.  It’s not as simple as saying that a particular building is too tall, an architectural style is ugly, the upper floor setback is too small, etc.  The debate surrounding formula retail involves much more fundamental questions about what rights and responsibilities various stakeholders have – or should have – and what metrics the City should use to decide who gets to do business where. 

The Players

The debate is joined by four basic groups:

  • The first group is comprised of residents, community activists and business owners in our Neighborhood Commercial Districts who have strong feelings one way or the other about what their commercial street should look like, and who should be allowed to do business on it;
  • Second are the national retailers, who of course, are looking for business opportunities and want to be where everybody else is in terms of neighborhood locations;
  • Then come the commercial property owners;
  • And the final group is made up of the decision makers – the Planning Department and Planning Commission and the Board of Supervisors – they have the very difficult job of trying to “referee” this complex dance. 

The three stakeholders with “skin in the game” (the local neighbors, the property owner, and the formula retailer) all have competing interests, although there should be common ground (i.e. it is in everyone’s interest, for example, to have a vibrant, attractive, active, commercial street that offers a variety of goods and services to residents).  But real progress cannot be made unless the parties are willing to come to the table, set aside the emotion, and have a rational discussion.

The Dialogue

The City’s current formula retail process encourages this kind of dialogue by requiring mandatory public outreach meetings and a conditional use authorization process at the Planning Commission that virtually every formula retail store outside of the downtown area must go through.  But despite this established process, there are still heated battles at the Planning Commission over formula retail uses.  Here are some thoughts about how each of these groups could think about this issue going forward in order to engage in a  more productive dialogue.

The Neighbors.  Clearly this is an emotional issue for San Francisco residents across the board.  Neighborhood character is an important touch-stone in the City, and it is a legitimate (if difficult to define) neighborhood asset worthy of careful protection.  In many of the most desirable neighborhoods, residents have been extremely successful in preventing formula retailers from coming in (Hayes Valley, North Beach).  While these neighbors are achieving the specific goal of keeping national retailers out of their neighborhood, their efforts can also have negative consequences, such as a lack of additional services for the residents in the area and continued long-term commercial vacancies that can also invite graffiti, squatting or safety concerns for the community.  We believe interested neighbors have every right to air their concerns about formula retail; at the same time, these neighbors also have a civic duty to come to the table and talk to retailers who are doing outreach and considering locating in their neighborhood.

The Property Owners.  Property owners have a vested interest in keeping their spaces occupied and rents flowing.  There is no question that a “credit tenant” like a national retailer is something that most landlords and property owners love to see.  From a strictly business perspective, owners cannot be blamed for wanting what they believe are high quality tenants who can pay the rent.  That said, owners must realize that their individual properties are a part of the cumulative character of the community.  They should consider tenants (both large retailers and small mom-and-pop stores) who are willing to revitalize existing spaces, invest in the character of the surrounding community, and offer goods and services that are not already readily available.

The National Retailers.  National retailers want to be in the City for obvious reasons.  What some are starting to learn, however, is that they must be much more sensitive to store design, neighborhood concerns, signage, and a whole variety of issues that are extremely important to stakeholders in the surrounding Neighborhood Commercial District.  Many of these companies have a difficult time adjusting to these very fine grain issues and concerns.  These companies are very attached to the comprehensive national branding that they have built and are reluctant to leave that behind in order to put a single store in San Francisco.  However, recent evidence suggests that national retailers must have a productive dialogue with any community they seek to invest in, and they should be ready and willing to design their stores and their signage to account for the unique character.

In the middle of all this you find the Planning Department and Planning Commission trying to make case-by-case decisions about whether a national retailer should be allowed to go into a specific neighborhood.  This puts them in an extremely difficult position.  Planning and zoning rules generally do a good job of separating incompatible uses.  We are not sure that the same regulatory framework makes sense when choosing between businesses.  Is zoning process really the best way to decide if a specific business owner (not a use) is right for a neighborhood?  We believe we may have reached a tipping point, where zoning laws are simply no longer effective in resolving these conflicts.  We are frankly not sure what the answer is, but at a minimum a more civil, organized and thoughtful approach on the part of all the parties is in order.


RERT:  More Formula Retail Talk…Join Us

Next week at noon on June 13, our regular monthly installment of the Real Estate Roundtable will feature Evette Davis of BergDavis Public Affairs who will be giving what should be an interesting and informative talk – Survival Stories: What National Retailers Need to Know About San Francisco’s Formula Retail Policies.  If you are interested in attending, please contact Lenore Elkarou at our office (415-567-9000) to make a reservation and grab one of the remaining seats.


The issues discussed in this update are not intended to be legal advice and no attorney-client relationship is established with the recipient. Readers should consult with legal counsel before relying on any of the information contained herein. Reuben, Junius & Rose, LLP is a full service real estate law firm.  We specialize in land use, development and entitlement law.  We also provide a wide range of transactional services, including leasing, acquisitions and sales, formation of limited liability companies and other entities, lending/workout assistance, subdivision and condominium work.