Terranado Insider

L we discussed the importance of site selection during project feasibility.  Regulatory considerations are another important topic of discussion – zoning approvals and public approvals required to develop a site must be studied carefully before a retail site is purchased.  In areas where slower growth is a priority, procuring permits are difficult and rezoning is a protracted process. A project’s feasibility is greatly affected by current zoning regulations as well as by time and expenses that will be required for approval or rezoning.  Examples of regulatory issues that a real estate developer may encounter include the following:

When a developer purchases a retail site and has to go through the process to obtain the necessary approvals prior to being allowed to build on the site, the process is also known as procuring

entitlements.  If you want to learn more, read this book.  Theoretically, when a developer obtains entitlements, the value of the site increases accordingly (but not necessarily).  Much time, effort, and money is often spent procuring the necessary approvals. For a beginning developer interested in his first retail site, I would suggest that you identify and purchase a site that is already zoned accordingly to permit retail use and would only require minimal approval. I have encountered cases where a developer purchases a terrific retail site, but after five years of fighting a city to procure approvals for a proposed shopping center, he is unsuccessful.  To understand the difficulty of the approval process, read this article about the Mid-Market project in San Francisco.  After spending thousands of dollars, the developer not only has incurred a “sunk cost” of time and money, but also is forced to sell the property and deal with his irate investors.

As regulatory considerations relates specifically to retail developments, the approval bodies (city, county, state, etc.) pay close attention to the impact the proposed retail project has on traffic, compatibility with surrounding uses, environmental effects of stormwater runoff, and local retailing.  Consulting with local planning and building department staff enables the developer to better understand the community’s attitude towards the proposed project and to better understand the time and effort that may be involved in procuring the necessary approvals. Obtaining positive support from the community and also city staff increase the chances that the project will be approved. Negative sentiment will only hurt the project.  Approval time and costs are expensive considerations for the developer and he must seek to minimize the risks.  To make the approval process even more difficult, the process varies from jurisdiction to jurisdiction and even sometimes based upon the type, size, and nature of the project itself.  For example, in San Francisco, approvals often take five years or more and the city often discourages retailers from entering the market unless you are a local, non-chain, non-franchised Mom & Pop retailer. Whereas in a more rural area, procuring approvals may only take three months.  Again, it is hard to give an exact time for procuring approvals for it varies based upon a number of factors: size of project, type of project, location, community support, political climate, approval procedures, etc.  An example of the building permit process for San Francisco is attached below (procured from the San Francisco website):

An Overview of the Approval Process

The approval process involves submitting proposals and negotiating with planning and building staff of whether the retail project should be approved or denied.  During the process, numerous agencies review the project and public hearings are held.  When reviewing plans, various departments have to sign off depending on the size and nature of the project that may include: fire department (building conforming to fire code requirements), police department, city engineer (i.e. storm and sewer improvements, etc.), park staff (green requirements), etc.  During the approval process, it is the real estate developer’s responsibility to oversee the process of procuring approvals.  Whether he does it himself, hire a local attorney, enlist an architect, enlist an environmental consultant, hire a construction manager amongst others, he is ultimately responsible for ensuring that the approvals are obtained on schedule at minimal cost.  Ultimately, the community’s attidudes towards the quality of the proposed development and the jurisdiction’s receptivity governs the success of procuring approvals.  An example of the convoluted approval process in South San Francisco, California is attached below (obtained from the South San Francisco website):

Rezoning Process and the Possibility

If the real estate developer’s real estate falls within the city’s general plan, rezoning is often not necessary. However, over 50% of the time, the proposal retail project often requires some sort of rezoning unless the proposed location of the project is already in an existing commercial use area.  Rezoning involves petitioning city staff or governmental agencies to bend the rules slightly to allow the proposed retail project.  If at all possible, a real estate developer should avoid going through the rezoning process which can be time consuming and expensive.  The process involves filing an application, undergoing a review process that involves appearing before an appeals board or planning commission at a public hearing.  Planning commission staff often grant final approvals.  Various avenues to achieve rezoning include:

Rezoning enables local authorities to confirm and confer that the real estate developer’s real estate project falls within the community’s comprehensive plan.  If the developer does not agree with the proposed decision by the planning commission staff or the local authorities, he can first appeal the zoning board. The last avenue of resort would be to go through the local judicial system then eventually to the supreme court, if necessary.  Hence, a developer who understands the regulatory considerations (whether the project conforms to existing zoning and permitted uses) involved to procure necessary entitlements for the site is in a better position to determine whether the project is feasible at an earlier stage of the game. Next time, we will finish off project feasibility with a discussion on Financial Feasibility.

Articles for further reference include:

Related posts:

1. Part I: Project Feasibility – Market Analysis
2. Part II: Project Feasibility – Site Selection