How Zoning and Use can Hurt or Create Value

Suppose you own an 8,000 square foot retail store, which includes your own building in downtown area of one of the 29 Palm Beach County cities in Florida. The property is in great condition, and currently zoned for general commercial use. The City where your store is located has issued to your company a business license for the retail use of your property over and over again for many, many years.

All of a sudden, you begin to see a disturbing change in your business. You notice that fewer and fewer customers are coming into your store, and when you begin asking some of the individuals, coming in less and less, why they are not patronizing your store anymore, the honest ones sheepishly tell you that they have found the same items in your store at a cheaper price online. They also tell you that they have found online shopping much more convenient. To purchase some of the same inventory items you have in your store, they tell you that they do not have to get into their car, and they don't have to drive to your store's location. Everything they order online is a simple click, and it just shows up on their front doorstep.

Since you have some 45 parking spaces in your parking lot, the issue of parking is not the problem. In fact, your most loyal customers tell you that one of the reasons they like coming into your store is because they never have a problem finding a parking space!

You decide to do some more research online, looking at some of your competitor's retail store websites, and realize that your store's sales are probably dropping because many of your competitors are offering the same inventory of widgets you sell in your store at a much cheaper price. You become depressed by what you see, but then you decide to counter this disturbing trend by making three policy changes in your business: a) you lower the prices of the widgets in your store to match the same price as you see online, and you offer free delivery to your customers for sales of over $ 50.00; b) you set up a website and start your own online store, where you compete with other online sellers by offering your inventory of widgets to customers, but you offer your sales with free shipping. Your competitors do not offer the same free shipping benefit; so you are now beating them with your price and with your new shipping policy; and c) you begin looking for and buying a new kind of widget to add to your widget inventory. These new widgets you buy are unique, so you are going to have something new and unavailable anywhere else, to sell in your store and online. Thus, some of your widget products are not available in any other store in Palm Beach County, and no one in the US sells the same kinds of widget inventory you have.

All three of these strategies are common methods, utilized by most modern retailers, to overcome competition and to drive traffic to their stores. These methods do work for a while to thwart the online retail trends. But there are consequences and problems. First, as a result of your competitive efforts, you are now making far less profit than you ever made before, and your costs for the new widgets and for the free shipping are rising. The other problem is that eventually, your competition is going to see what measures you have taken to counter their prices and react to what you have done, by going even lower in their prices for their widgets, and by offering free shipping to all of their customers too. This reaction is what many economists speak of as a kind of deflationary market. A deflationary spiral down in prices is a phenomenon in an economic market where all of the suppliers enter into a contest to see how much money they can lose in order to take market share from their competitors. The thought is that by taking the lower road in terms of price, and offering the same products other competitors have on hand at a lower price, they can put their competitors out of business.

As a result of what you see online, you realize that you are going to lose a lot of money by trying to match every competitor who lowers their prices below yours. So you decide to get out of the retail business. But in order to get out of business, you are going to have to take two major steps. First, you are going to have to sell all of your inventory of widgets, and unfortunately, the most likely buyers of your entire inventory is going to be either one or two of your competitors in the online retail business, or you are going to have to have a mega sale online and in this liquidation process all of those customers out there in the online world who love to wait to buy and relish price wars with ever lower prices, are going to be bidding on your inventory. Sadly, as a result of all the competition, you are forced to take a loss on what you paid for your widgets in order to liquidate everything you own in your inventory.

After selling all of your widgets, you finally have left an empty 8,000 square foot retail building with 45 parking spaces. Now the next step to getting out of the retail business is going to start: you need to sell your building.

Of course, at this point, there is one other option you might consider: you might decide that you want to keep your retail building and go into the real estate business as a landlord. In this scenario, you might even hire me, an experienced commercial real estate broker with a long track record of finding good tenants, or maybe some other local commercial broker, to assist you in your search for a well qualified tenant. Or, you might just decide to save yourself a real estate commission payment, put a "For Lease" sign up outside your building, and just rent your building out yourself.

Since your building is currently designated for retail use, and on the planning and zoning books in Palm Beach County as a "retail building," you might suppose that by setting a rent rate equal to what other retailers are paying to your nearby fellow landlords, you will be able to find a tenant who wants to use your space just as it is. The problem with that kind of thinking and strategy is that as a landlord you are basically looking for tenants from of pool of folks who have been at one time or another competitors - all of whom are currently feeling the same deflationary effects from a powerful set of online retail downward price trends for all retail goods. As a result, almost all of those folks out there in the retail business are desperately wanting to downsize their costs, so they need to cut their expenses in every way possible, including cutting their rent costs they pay, so they are going to be looking to you as their new landlord to provide them with the lowest possible rent they can negotiate from you.

But wait, here is another bright idea. Rent your building to another type of business user. Forget retail and rent to someone other than any business affected by deflationary trends.

But guess what? To lease your building and its space to some other kind of tenant or business owner who is NOT in retail, there are going to be some surprising and ominous problems. Every tenant who comes to you, who sees the sign on your building and says that they want to sign a lease with you, is going to have to have a business license from the city in which your building is located. And so each candidate interested in leasing your space will be forced to go down to Planning and Zoning in the city in which you reside in Palm Beach County and ask the Planning and Zoning city officials if your property qualifies for their use for their business!!!!! Yes, it is true. Even though your building has been designated and zoned for general commercial use since it was originally built, IT IS NOT THE CASE THAT AN AUTOMATIC APPROVAL FOR A NEW USE WILL BE GRANTED TO ANY NEW USER!

One of your potential tenants calls you, and asks you to come down to Planning and Zoning to talk to the officials there. While you are there, speaking to city planners and other officials, seeking some kind of assurance from the city that your building will conform to the designated use for your new prospective tenant's type of business, one city official tells you:

"Unfortunately, your business location has always been designated as a retail location. And now, you want us to allow your prospective tenant to lease your building, but her business is NOT retail. We are going to have to have an internal planning and zoning review to see if your prospective tenant will qualify for use of your building's space."

When you ask how long this "review" should take, the official tells you they are not sure, but most of the reviews usually last six to eight months!

Believe it or not, many cities in South Florida often say no to all kinds of prospective tenants and their particular uses, especially when they consider the proposed tenant to be requesting a "new" use for an existing property - even when the overall zoning should clearly comply and be compatible with a business of another prospective tenant.

Shocked and angry, you complain to the officials at Planning and Zoning, but they respond by telling you that their planners want to shape the kinds of businesses that enter the city's economic market place. So, while your former use of retail was acceptable to them, especially as long as YOU and YOUR BUSINESS occupied your building, it may be now the case that other uses for your property are completely unacceptable to your city planners.

Angry and frustrated, you call me, and ask me to help you sell your building. I listen to your story and your complaints regarding the city, as you tell me how government is getting in way of business too much these days.

After you calm down, I tell you this, "If you want the best price for your building, I want to make a suggestion. Let's hire a really good, well qualified local land planner, someone who knows the city Planning and Zoning department very well, and let's ask our land planner to seek a usage change to medical use for your building. Medical use requires five parking spaces per 1,000 square feet of building space for any building in your city. You actually have 8,000 square feet of space and 45 parking spaces on your building site. So you have more than enough parking spaces to satisfy the requirement for medical use."

At first, you tell me that you are angry. You say, "Why the Hell should I pay some freaking land planner to go before those idiots down there at Planning and Zoning to get some new zoning use to sell my building?"

I respond to you like this," Well, if you going to sell your building as a usable retail space, I can get you an approximate sale's price of $ 90 dollars per square foot. That is the going rate for the sale of retail property right now in your neighborhood, and, as you know, prices are dropping because of online retailing and its effect on businesses like yours. But if our land planner obtains a medical use designation and approval from city Planning and Zoning officials for your building, the going rate for property with medical use is $ 240.00 per square foot! That would make your building's sale price nearer to approximately 2 million dollars!"

Your response is this: "I see what you mean. Let's call a good land planner right away!"

Commercial real estate values are always determined by zoning and use. If you want to make a lot of money in commercial real estate, find properties for sale that can be rezoned or designated for other uses with stronger market demand. Its a quick way to get rich, but you need a great land planner to help you create this kind of new value.

John K Brackett, Ph.D.

Broker, John K Brackett Real Estate

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