NYC_Committee-Report_Hearing_2016.09.30

INTRODUCTIONOn Friday, September 30, 2016, the Committee on Small Business, chaired by CouncilMember Robert Cornegy, jointly with the Subcommittee on Zoning and Franchises, chaired by Co

Small Business Committee StaffJeff Campagna, Committee CounselMichael Kurtz, Policy AnalystEmre Edev, Assistant Deputy Director of Finance

William Kyeremateng, Finance AnalystZoning and Franchises Subcommittee Staff

Dylan Casey, Committee CounselBrian Paul, Project ManagerJon Seltzer, Finance Analyst

THE COUNCIL

BRIEFING PAPER OF THE HUMAN SERVICES AND LAND USE DIVISIONS

Matt Gewolb, Legislative Director Raju Mann, Land Use Director

COMMITTEE ON SMALL BUSINESS Hon William Cornegy, Chair

SUBCOMMITTEE ON ZONING AND FRANCHISES

Hon Donovan Richards, Chair September 30, 2016 OVERSIGHT: ZONING AND INCENTIVES FOR PROMOTING RETAIL DIVERSITY

AND PRESERVING NEIGHBORHOOD CHARACTER

I INTRODUCTION

On Friday, September 30, 2016, the Committee on Small Business, chaired by CouncilMember Robert Cornegy, jointly with the Subcommittee on Zoning and Franchises, chaired by

Council Member Donovan Richards, will hold an oversight hearing titled Zoning and Incentives

for Promoting Retail Diversity and Preserving Neighborhood Character Witnesses invited to

testify include, representatives of the Department of City Planning (DCP), the Department ofSmall Business Services (SBS), the various Borough Presidents, numerous chambers ofcommerce and business groups, the real estate industry, and other interested parties

Small businesses are the backbone of New York City’s economy and account forapproximately two-thirds of the City’s private sector jobs.1 Of the approximately 215,000businesses in New York City, nearly 90 percent have 20 or fewer employees and over 60 percenthave five or fewer employees.2 The diversity of retail businesses contributes to the uniquecharacter and retail of New York City’s iconic neighborhoods However, many successful smallbusinesses have been forced out of their long-time locations as a result of large rent increases andforced evictions.3 Reports indicate that landlords are evicting small businesses in hopes ofattracting deep pocketed banks and chain stores.4 While they wait for tenants willing to pay thehigher rents, landlords are holding retail properties vacant, sometimes for months and years,resulting in a phenomenon in gentrifying neighborhoods that Columbia University Professor Tim

1 S URVEY OF THE C ITIZENS B UDGET C OMMISSION AND THE F EDERAL R ESERVE B ANK OF N EW Y ORK,

E NCOURAGING S MALL B USINESS S UCCESS IN N EW Y ORK C ITY AND N ORTHERN N EW J ERSEY : W HAT F IRMS V ALUE

M OST (Jul 29, 2005)

2 New York City Council, Finance Division

3 P RATT C ENTER FOR C OMMUNITY D EVELOPMENT , S AVING I NDEPENDENT R ETAIL 1 (Aug 2009), available at

http://prattcenter.net/sites/default/files/retail_revise5.pdf

4 Tim Wu, Why Are There So Many Shuttered Storefronts in the West Village?, THE N EW Y ORKER , May 24, 2015,

available at west-village; Tatiana Schlossberg, Manhattan’s Corner Stores, a Neighborhood Staple, Struggling to Survive, N.Y

http://www.newyorker.com/business/currency/why-are-there-so-many-shuttered-storefronts-in-the-T IMES, Aug 4, 2015, at A18, available at manhattan-as-rents-rise-and-chains-grow.html?_r=0

http://www.nytimes.com/2015/08/04/nyregion/bodegas-declining-in-Wu described as “high rent blight.”5 Community leaders and small business owners complainthat high rents and the replacement of small businesses with banks and chain stores is having ahomogenizing effect across neighborhoods, eliminating the character that has long made NewYork unique, while also rendering the city inhospitable to entrepreneurs.6

At the other end of the economic spectrum, many low-income neighborhoods areunderserved by the retail sector and lack essential services Real estate analysts agree that manyareas of the outer boroughs remain comparatively underserved, suffering from “limited retail,few restaurant options, and lack of other essential services needed within an expanding urbancommunity.”7 The lack of retail diversity in such areas has potential economic and healthimpacts that go beyond neighborhood character.8 In examining the distribution of retail in NewYork City, social scientists Rachel Meltzer and Jenny Schuetz found that lower incomeneighborhoods continue to have comparatively poor access to quality retail with stores that aresmaller in both size and employment and less diverse in variety than stores in higher incomeneighborhoods.9 Other researchers looking at a sample of cities across the nation and New YorkCity have found that this shortfall in access to quality retail is particularly acute in predominantly

5 W U, supra note 4.

6 P RATT C ENTER FOR C OMMUNITY D EVELOPMENT, supra note 3; see also Maggie Wrigley, City neighborhoods

losing character to condos, chain stores, N.Y DAILY N EWS, Oct 28, 2007, available at

http://www.nydailynews.com/news/city-neighborhoods-losing-character-condos-chain-stores-article-1.231853

7 D AVID D UBROW & D ARRELL G AY , A RENT F OX LLP, R ETAIL D EVELOPMENT AND F INANCING IN THE O UTER

B OROUGHS OF N EW Y ORK C ITY 3, available at

https://www.queensny.org/qedc/neighborhoods/economy/reports_profiles/Retail_Development_and_Financing_in_t he_OUter_Boroughs.pdf

8 Naa Oyo A Kwate et al., Retail Redlining in New York City: Racialized Access to Day-to-Day Retail Resources,

90 J Urban Health 90, 632-652 (2013), available at http://www.ncbi.nlm.nih.gov/pmc/articles/PMC3732689/#CR27

9 Rachel Meltzer & Jenny Schuetz, Bodegas or Bagel Shops? Neighborhood Differences in Retail and Household

Services (last revised Jul 30, 210), available at paper.pdf

https://www.kansascityfed.org/eventinfo/community/schuetz-Black communities.10 Meltzer and Schuetz surmise that an increased presence of chain retail mayhelp both consumers and potential workers in low-income neighborhoods.11

This hearing will explore various zoning and fiscal policy options that might addressthese problems This briefing paper discusses some commonly discussed policy options thatwitnesses may address The committees look forward to hearing testimony about the advantagesand disadvantages of the policies described herein and other proposals brought to light by thewitnesses who testify

A Size and Frontage Limitations

Municipalities across the country use zoning provisions that restrict the maximum size of retail spaces to preserve and enhance community character and to ensure an adequate supply of spaces for small businesses.12 Specific policies may involve limitations on ground floor retail frontage lengths, prohibitions on combining storefronts, and/or creation of absolute size limits oncertain uses.13 It remains unclear whether or not caps on retail size have a significant effect on affordability and retail diversity or lead to an increase in the number of neighborhood-serving independently owned retail businesses.14

Retail size caps are most often aimed at restricting the as-of-right development of “big box” stores, with maximum sizes set at a fairly high level of 40,000 to 100,000 sqf The most common land use basis for retail size restrictions is the preservation of community character,

10 Mario Luis Small & Monic McDermott, The Presence of Organizational Resources in Poor Urban

Neighborhoods: An Analysis of Average and Contextual Effects, 84 Social Forces 1697 (2006), available at

http://scholar.harvard.edu/files/mariosmall/files/small_mcdermott_sf_2006.pdf

11 Meltzer, supra note 9

12 Dwight H Merriam, Symposium 2005: Breaking Big Boxes: Learning from the Horse Whisperers, 6 Vt J Envtl

often in accordance with a comprehensive plan or other long-range planning policy

Municipalities with overall size caps include Madison, Wisconsin (100,000 sqf),15 Easthampton,

MA (50,000 Easthampton Zoning Ordinance Section 6.10 B)16 and Ashland, Oregon (45,000 sqf)

17among many others

Some municipalities have gone further than setting size caps aimed at preventing big-boxstores For example, in 2007 the Town of Fairfield, Connecticut established “Neighborhood Designed Districts” where stores sizes are capped and uses are limited to a select list of

businesses “who will primarily serve the local neighborhood.” In the Fairfield Neighborhood Designed Districts store sizes are capped at 4,000 sqf and uses are restricted to retailers of antiques, art galleries, art studio, art supplies, books, clothing, driving schools, drugs, dry goods, flowers, fruits, furniture, garden and farm supplies, gifts, groceries, hardware, interior

decorating, meats, periodicals, pets and related supplies, sandwiches, shoe repair, stationery, toilet articles; banks, business and professional offices, laundromats, bakeries, barber

shops/beauty parlors, liquor stores, and restaurants. 18

In the New York City, restrictions on the size of retail spaces, retail frontage, and

combining storefronts all have precedent in the Zoning Resolution.19 The Special Tribeca Mixed Use District establishes limits on the maximum as-of-right retail square footage per zoning lot ranging from 5,000sqf to 20,000sqf depending on the particular block The District also prohibitsthe combination of ground floor storefronts in certain parts of the neighborhood The rationale for establishing the district was to retain “adequate wage, job-producing, stable industries.”20

15 I NSTITUTE FOR S ELF R ELIANCE , S TORE S IZE C AP – M ADISON, WI (Mar 15, 2012), available at

https://ilsr.org/rule/store-size-caps/; see also INSTITUTE FOR S ELF R ELIANCE , C OMMUNITY P ROTECTION P OLICY K IT :

S TORE C AP O RDINANCE, available at http://ilsr.org/wp-content/uploads/2012/03/sizecapkit1.pdf

19 See, e.g Zoning Resolution Art XI, Ch 1.

20 Zoning Resolution Art XI, Ch 1

Since 1974, New York City has capped the size of most retail spaces within

manufacturing zones.21 To protect industrial uses from the perceived threat of large retailers, the City enacted zoning text amendments to require special permits for most types of retail over 10,000 sqf in M1 districts and further restrict retail uses in M2 and M3 districts to “those which benefit the [industrial] firms or their employees.” Part of the justification for the restrictions was that “Commercial users inflate potential land values, since they often can pay more than industry

If manufacturing land is to be protected in the long term the Zoning Resolution must clearly establish that certain areas should be set aside for manufacturing.”22 In 1996, the Giuliani

administration proposed expansion of big-box retail as an economic development strategy and attempted to remove these restrictions.23 The application was defeated at the City Council.24 The

retail restrictions in M zones remain in place to this day.25

Also in 1974, the City imposed a 25 foot frontage limitation for retail establishments on East 86th St as part of the Special Yorkville District The frontage limitation was approved in response to the 1972 opening of a Gimbels department store.26 Until then, most of 86th Street was a stable retail corridor of small shops and family-style restaurants, many owned by and catering to residents of German, Hungarian and Czech descent Intended to protect these small independent neighborhood shops from competition with large retailers, the frontage restriction

21 See Proposed amendments to the Zoning Resolution that would limit the development of major commercial uses

within manufacturing districts, Jul 10, 1974, available at

http://www.nytimes.com/1996/12/12/nyregion/retailers-pledge-to-build-superstores-despite-25 Zoning Resolution Art IV Ch 2.

26 Shawn g Kennedy, A New Cachet for Old East 86th Street, N.Y TIMES, Apr 15, 1990, available at

http://www.nytimes.com/1990/04/15/realestate/a-new-cachet-for-old-east-86th-street.html

on East 86th St was ultimately found to be ineffective in achieving this goal Former CommunityBoard 8 Chair Heidi White was quoted in the New York Times:

We could not keep the neighborhood merchants from going out of business and when they did they were replaced by fast-food places and discount jewelry and electronic stores These are just the kinds

of retail operations that function well in narrow, deep spaces and can pay really high rents They met the 25-foot frontage

requirement and depended on street traffic rather than repeat business from neighborhood residents.27

In 1990, the City and Community Board 8 agreed to remove the restriction.28

In 2012, New York City established frontage restrictions on the retail corridors of the Upper West Side to stop the proliferation of banks and large storefronts in a neighborhood that prizes its small independent retailers.29 According to the report of the City Planning Commission(CPC) on the zoning application, the goals of the Upper West Side’s “Special Enhanced

Commercial Districts” are “to encourage diverse retail and service opportunities, preserve and enhance the multi-store character of Amsterdam and Columbus Avenues, promote a vibrant and active retail environment on Broadway, promote an active streetscape and attractive environmentfor pedestrians, and allow existing businesses’ flexibility to operate and expand considerably.”30

On most of Amsterdam Avenue between 77th and 110th Streets, Columbus Avenue between 72ndand 87th Streets, and Broadway between 72nd and 110th Streets, banks and residential lobbies are limited to 25 feet of ground floor frontage General ground floor commercial uses have a 40 footfrontage limit Lots over 50 feet wide must have two establishments for every 50 feet of

frontage.31 An establishment, other than a bank, may exceed the frontage limits up to 60 feet pursuant to a certification by the Chair of the CPC that: (1) the proposed use cannot be

27 Id.

28 Id.

29 Kate Taylor, City Council Changes Zoning to Limit Sprawl of Big Banks on Upper West Side, N.Y TIMES , June 28,

2012 at A21, available at west-side.html ; Zoning Resolution Art XIII, Ch 2, sec 132-11;?_r=0

http://www.nytimes.com/2012/06/29/nyregion/city-council-limits-size-of-banks-on-upper-30 Report of the CPC in the matter of application C 120145 ZMM, May 9, 2012/Calendar No 3, available at

http://www1.nyc.gov/assets/planning/download/pdf/about/cpc/120145.pdf

31 Zoning Resolution Art XIII, Ch 2

reasonably configured within the permitted frontage; and (2) a high ground floor vacancy rate, resulting from adverse market conditions, exists within a reasonable distance of the proposed use.32 On Broadway between 72nd and 110th Streets, seen as a more appropriate location for large retailers, only the 25 foot limit on banks on lobbies applies.33 Grocery stores of at least 6,000 sqf are exempt from the restrictions.34 Four years after their implementation, the question remains whether the restrictions have been effective in preserving small independent retailers in the neighborhood.

B Formula Retail Use Restrictions

Increasingly, municipalities across the country are using zoning to regulate the ability ofnew “formula businesses” to open.35 Generally speaking, “formula business” is a term used torefer to chain stores that provide goods and services Whether a business constitutes a formularetail use is usually based on the number of stores the business operates and whether the businesshas some combination of criteria such as: a standardized array of merchandise, a standardizedfacade, a standardized decor and color scheme, uniform apparel, standardized signage, and/or atrademark or a service mark.36 Under most definitions, a chain business can avoid the scope ofmost formula business regulations by not conforming to the standardized features of otherbusinesses in the same chain.37

Many jurisdictions that have adopted formula retail zoning regulations have included intheir formula retail definitions banks, food service establishments including restaurants and fast

32 Zoning Resolution §132-51

33 Zoning Resolution Art XIII, Ch 2

34 Zoning Resolution §132-21

35 Patricia E Salkin, Municipal Regulation of Formula Businesses: Creating and Protecting Communities, 58 Cas

W Res L Rev 1251, 1272 (2008), available at: http://scholarlycommons.law.case.edu/caselrev/vol58/iss4/17

36 Id.

37 Id.

food chains, liquor stores, financial services, spas, and gyms, among others.38 Some jurisdictionshave applied regulations to one type of business, while others have applied regulations tovirtually all street level businesses.39 Some jurisdictions expressly exempt certain formulabusinesses that provide vital neighborhood services, such as grocery stores.40

The most typical land use justifications for formula use restrictions are the preservation

of unique neighborhood character or the promotion of a diverse business community As of

2009, there were 15 cities that had formula retail restrictions in place Most municipalities thathave implemented such restrictions have done so to protect historic and distinctive touristdistricts.41 For example Ogunquit, Maine, Fairfield, Connecticut, and Nantucket, Massachusetts,

in New England, Carmel, Arcata, Sausalito, and Solvang, California, and the colonial town ofBristol, Rhode Island, to name a few.42

San Francisco stands out as having the most stringent formula retail restrictions andreview process in the nation.43 When they were first enacted in 2004, San Francisco’s formulabusiness restrictions imposed a prohibition on formula retail in one district and requiringconditional use authorization in another Since 2006, the regulations have required new formularetail businesses in all neighborhood commercial districts to obtain conditional use authorizationfrom the San Francisco City Planning Commission in order to open.44 Despite this reviewprocess, of the 31 applications made between 2006 and 2011, 22 were approved, six were

43 P RATT C ENTER FOR C OMMUNITY D EVELOPMENT , S AVING I NDEPENDENT, supra note 6.

44 San Francisco Planning Code § 303.1, available at

http://library.amlegal.com/nxt/gateway.dll/California/planning/planningcode?

f=templates$fn=default.htm$3.0$vid=amlegal:sanfrancisco_ca$sync=1; see SAN F RANCISCO P LANNING

D EPARTMENT , M EMO TO THE P LANNING C OMMISSION , I NFORMATIONAL P RESENTATION ON THE S TATUS OF

F ORMULA R ETAIL C ONTROLS, Jul 28, 2011, available at

http://commissions.sfplanning.org/cpcpackets/Informational%20Item%20on%20Formula%20Retail.pdf

withdrawn, and only three were rejected.45 San Francisco Supervisor Scott Weiner explained, “Itmakes chains more selective about which locations they approach Many will do outreach to theneighborhood before they apply If they don’t find support, they don’t apply.”46

In evaluating an application for a formula retail business, the San Francisco City PlanningCommission considers the following factors:

• The existing concentrations of formula retail uses within the district and within thevicinity of the proposed project

• The availability of other similar retail uses within the district and within the vicinity ofthe proposed project

• The compatibility of the proposed formula retail use with the existing architectural andaesthetic character of the district

• The existing retail vacancy rates within the district and within the vicinity of the proposedproject

• The existing mix of Citywide-serving retail uses and daily needs-serving retail useswithin the district and within the vicinity of the proposed project

• For formula retail uses of 20,000 gross square feet or more, except for General or

Specialty Grocery stores, the contents of an economic impact study (emphasis added)47

Though San Francisco’s policy has been effective in limiting the proliferation of chain retail

in regulated districts, questions remain about its economic impact and whether it has a significantimpact on small businesses being displaced by other non-formula businesses In 2014, SanFrancisco’s Comptroller issued an economic impact report on the regulations That reportconcluded that, on average, prices were 17% higher at the non-formula retailers than at theformula retailers that were surveyed.48 At the same time, the report also concluded that, at

45 S AN F RANCISCO P LANNING D EPARTMENT, supra note 44.

46 S TACY M ITCHELL , I NSTITUTE FOR L OCAL S ELF -R ELIANCE , H OW S AN F RANCISCO IS D EALING W ITH C HAINS

(Aug 30, 2012), available at https://ilsr.org/san-francisco-dealing-chains/

47 San Francisco Planning Code § 303.1

48 O FFICE OF E CONOMIC A NALYSIS , O FFICE OF THE C ONTROLLER , E XPANDING F ORMULA R ETAIL C ONTROLS :

E CONOMIC I MPACT R EPORT 22 (Aug., 2013); see id at fn 1 (“OEA staff priced 25 different commodities at 11

different formula retailers and 20 different non-formula retailers across San Francisco, gathering 366 prices in all The establishments were chosen at random from the City's database of sales tax payers, and were geographically spread across the city For each of the 25 commodities, each observed price was expressed as a percentage of the minimum price observed for that commodity at any store This approach allowed prices to be standardized across commodities The standardized prices were then weighted according to the weights used by the Bureau of Labor Statistics in calculating the Consumer Price Index, reflecting the fact that some commodities are purchased more frequently than others Average weighted prices at formula and non-formula retailers were then compared The

maximum, a non-formula retailer could spend 24% of every dollar received in ways that benefitthe local economy, while a formula retailer would be likely to spend an average of 14.5% of itsrevenue locally.49 The report found that the policy may be beneficial “when price differencesbetween a proposed formula retailer and existing retailers are low, when local spendingdifferences between them are high, and when residents believe the presence of the formularetailer, or the loss of an existing business, would have a negative impact on the quality of theneighborhood.”50

C Expanding the supply of commercial spaces by expanding commercial overlays

In addition to imposing new controls on commercial spaces to increase the availability ofspace for small independent retails, zoning changes could also lift commercial use restrictions inareas of the City that are underserved by retailers, thereby enabling small businesses to open inmore neighborhoods and promoting the creation of new commercial spaces

New York’s 1961 Zoning Resolution established a hierarchy of separated uses designedfirst and foremost to protect residential uses from nuisances such as pollution, congestion, andnoise.51 Commercial uses are only allowed in designated commercial or manufacturing zones orwithin commercial overlays mapped on the major commercial streets of predominantlyresidential areas.52 As a result, commercial uses including ground floor retail and even low-impact uses like small professional offices are barred from the majority of New York City streets

In addition, most commercial overlays such as the C1-3, C1-4, C2-3, and C2-4 overlays mapped

throughout many Brooklyn and Queens neighborhoods allow, but do not require, the provision of

weighted average price at non-formula retailers was found to be 17% higher Based on the number of observations, the 90% confidence interval is a price premium for non-formula retail between 2% and 32%.’).

49 Id at 23.

50 Id at 27.

51 Zoning Resolution Art II, Ch 1

52 Zoning Resolution Art II, Ch 2, Art III Ch 2, Art IV, Ch 2.