Small Business

Saving Main Street With Zoning

Cities restrict chain stores to give local businesses a chance.
Corrected
Photographer: Getty Images

Like many elected officials, Jersey City Mayor Steven Fulop talks a lot about the need to support small businesses. Unlike many, he’s put policies in place to help owners survive rent hikes, secure low-interest loans, and get expedited business permits. More than 600 small businesses have opened since Fulop became mayor of New Jersey’s second-biggest city in 2013. “We’re seeing a renaissance,” he says.

The mayor’s best-known effort is a zoning ordinance that prevents formula businesses—city planner jargon for chains with standardized stores such as Starbucks Corp. and Target Corp.—from occupying more than 30 percent of the ground floor of commercial areas of buildings. The city council enacted the rule in 2015 to preserve the “distinctive sense of place and unique neighborhood character” of downtown, the ordinance states. “You don’t want small business owners who’ve stuck with the city through the bad and the good to get squeezed out,” Fulop says. “There’s a real risk to the long-term health of the city when you look at where retail is going.”

At least 30 cities and towns across the country, from San Francisco to McCall, Idaho, have enacted similar rules. Some ban all chain stores from certain neighborhoods; others cap how many such businesses can move into an area; still others require approval on a case-by-case basis. Stacy Mitchell, co-director of the Institute for Local Self-Reliance (ILSR), an advocacy nonprofit for sustainable community development, says the ordinances are “one of the most powerful tools that local governments have to shape the mix of businesses in their cities.” A 2016 ILSR report noted that “as recently as the 1980s, independent retailers supplied about half of the goods Americans bought in stores; today their share is down to about one-quarter.”

The biggest U.S. city with a formula ordinance is San Francisco. ILSR advised the city on the rule, which was enacted in 2004. San Francisco considers chain stores—defined as businesses with 11 or more identical outlets—for most of its commercial districts on a case-by-case basis, weighing factors including how many big retailers operate within a certain neighborhood and whether the goods and services the business offers are already available in the area. The city revised its restrictions in 2014, requiring large-scale chains, those over 20,000 square feet, to undergo an economic impact analysis that the planning commission also takes into account. Multiple districts, including in Chinatown and North Beach, prohibit formula retail entirely.

Thanks to the rules, ILSR says San Francisco has more independent businesses and fewer chains per capita than other big cities. “There’s a strong anecdotal case that these policies contribute to the creation of new independent businesses,” Mitchell says. “There’s significant churn in retail, so if you look at a place like San Francisco or another community that’s had a policy in place for years, lots of the businesses there opened under the policy, and it would be fair to say that these local entrepreneurs had more opportunity to secure locations because of the policy.”

Jersey City Mayor Steven Fulop speaks at a rally in support of a strike by Newark Airport workers in March 2016.
Photographer: Kena Betancur/Getty Images

Since last spring, Fulop has been working to revise Jersey City’s business restriction. He wants the city council—which last June declined to repeal the current rule, given strong community support—to meet with planners by the spring to discuss a version that he says would be better able to withstand legal challenges. “There’s a lack of clarity over who it applies to and what those restrictions mean,” Fulop says. As written, he says, the ordinance doesn’t clearly define how the city judges square footage, leasable space, and restricted entities.

Fulop’s interest in revising the rule comes in part from a lease signed by CVS Health Corp. last January for 20,000 square feet of space in the city’s waterfront district. CVS hasn’t opened its store, and company spokeswoman Erin Pensa would only say that it’s reviewing the city council’s moves and evaluating its options.

“It’s not only CVS,” says Fulop. Similar situations have surfaced in the last couple of months, creating a standoff with some developers who’ve chosen to leave a space vacant and then “complained again and again,” he says. A spokesperson for the mayor declined to comment on whether CVS has complained about the restriction.

Only one formula-business restriction has been overturned in court, according to ILSR. That happened a decade ago in Islamorada, a vacation destination in the Florida Keys. A federal appeals court found its ordinance failed to demonstrate it would help the town preserve its character, noting that Islamorada “has not demonstrated that it has any small town character to preserve.”

“The purpose of a formula zoning regulation cannot be to protect existing businesses from competitors, but to protect and support legitimate land-use plans and goals,” says Peggy McGehee, a director and land-use lawyer at law firm Perkins Thompson.

The Florida case is an anomaly, says Mitchell: “Courts have concluded that if a city defines a public-interest purpose to its policy and enacts the policy through a fair and open process, then the measure is valid.” But the threat of lawsuits can have a chilling effect, she says.

Ariel Zaurov, who owns a 3,000-square-foot pharmacy that he opened in 2005 a few blocks from the would-be CVS, says Jersey City has been “assaulted by chain stores” over the past year. Without the formula rule, he worries, chains will drive small shops out of business and then abandon the city if there’s a downturn.

Steve Kalcanides has mixed feelings about the restrictions. As the second-generation owner of Helen’s Pizza, a 50-year-old neighborhood fixture in Jersey City’s historic downtown, he says the rules are working. As the owner of several properties in the area, he’d like to see the city’s rule revised so chain tenants could occupy more space. He admits the current restriction has helped the local economy and given small businesses facing rent and other overhead increases “a little more equal footing.”

Says Fulop: “I do understand the landlord’s standpoint. They view chains as the best, most stable long-term renter, but from a city standpoint, that’s not creating the best urban environment to live in.” 

(Corrects details about businesses covered by San Francisco’s formula ordinance in the fourth paragraph.)
    BOTTOM LINE - Governments from San Francisco to Jersey City are using special zoning restrictions to limit chain stores. Some officials worry big businesses and property owners could challenge the rules in court.
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