When it comes to helping small businesses find and develop commercial space in which they can succeed and thrive, affordability, accessibility, and supporting collaboration are key.
By Patricia Voltolini, Melissa Kim, David M. Greenberg, Julia Duranti-Martinez, and Michelle Harati in Next City, March 14, 2022
The following is an excerpt from “Equitable Pathways to Small Business Recovery: An All-Hands Approach,” a playbook that offers a framework for paving equitable pathways to small business success, and concrete strategies for supporting capital access, small business capacity, and commercial real estate. This project is a collaboration between Local Initiatives Support Corporation (LISC) and Next City, supported by the Bill and Melinda Gates Foundation. Download a complete copy of the playbook to read more.
Even prior to the pandemic, finding affordable commercial space posed significant challenges to small businesses. The Institute for Local Self-Reliance found that average commercial rent increases can range from 7 percent to 26 percent annually, with higher increases in dense, walkable neighborhoods. Among the reasons for skyrocketing commercial rents is the preference among many real estate developers and lenders for a single large tenant — often national chains. In this environment, small business revenues frequently cannot keep pace with rising rents, and purchasing commercial buildings — which can help protect tenants from sudden rent increases — is also often prohibitively expensive for small businesses.
Many small businesses that managed to remain open through the pandemic are struggling to pay rent. The Federal Reserve found that 43 percent of small employer firms experienced challenges paying rent in 2020, with BIPOC-owned firms more likely to report difficulties than white-owned firms. Though no national estimate of commercial rent arrears exists, recent research suggests that 46 percent of businesses with annual revenues under $100,000 are one or more months behind on rent, compared to 36 percent of larger firms. Commercial rent arrears have the potential to set off a wave of evictions of BIPOC tenants, with devastating effects on the finances of individual entrepreneurs and the communities that depend on their services.
The pandemic has also rapidly accelerated a decade-long rise in commercial vacancies propelled by online retail and shifts to online and home-based work in some industries. In addition to these challenges, hot-market cities such as New York and San Francisco already struggled with high storefront vacancies resulting from property warehousing, where building owners hold properties empty in the hope of eventually securing high-paying tenants. In the wake of COVID-19 closures, retail vacancies nationwide are projected to rise, with significant implications for commercial corridors and business districts. Pervasive vacancies are linked with decreased property values, trash accumulation, pests, and fire risks. Particularly along commercial corridors, high rates of vacancies can reduce foot traffic and sales for remaining businesses, contributing to more closures.
In contrast, practitioners noted that in many rural areas, commercial space is often scarce, and the few available buildings often require substantial rehabilitation and environmental remediation — costs that are out of reach for entrepreneurs with limited capital. These challenges are further compounded for tribal nations, where centuries of federal policy depriving Native communities of their lands have both limited development and created complexities in land tenure and permitting requirements that make it difficult for entrepreneurs to secure commercial leases or use land as collateral for loans.
With federal CARES Act and American Rescue Plan Act funds, as well as potential new investments in physical and human infrastructure outlined in the $1 trillion Infrastructure Investment and Jobs Act and $3.5 trillion Congressional budget proposal, local governments have an opportunity to advance transformative policies that fight commercial displacement, preserve existing spaces, and develop new affordable spaces and community ownership opportunities for BIPOC-owned small businesses.
ADDRESS COMMERCIAL RENT BURDEN FOR SMALL BUSINESSES
To stave off commercial evictions, some cities provided commercial rent relief as part of their emergency small business assistance during the pandemic. For example, the City of Pittsburgh provided grants of up to $3,000 to landlords who agreed to reduce rents for 3-6 months for commercial tenants. The State of Oregon used a portion of its federal CARES Act allocation and state general funds to commit $100 million for small business support statewide, including commercial rent relief. Property owners were eligible to receive up to $100,000 per commercial tenant, conditioned on forgiving all back rent and fees and not evicting commercial tenants after receiving funds. In northwestern Ohio, the Greater Toledo Small Business Stabilization Fund leveraged public, private, and philanthropic dollars to provide emergency grants of up to $10,000 for small businesses to pay operating costs incurred during the pandemic, including rent.
Some cities are considering longer-term solutions to curb high commercial rents and vacant property warehousing. The New York City Council passed legislation in 2019 to create a vacant storefront registry and recently held a hearing on commercial rent regulation, a longtime priority for advocates fighting small business displacement. Just before the pandemic, San Francisco voters approved a ballot measure to impose a tax on commercial properties kept vacant for more than six months, while Washington, D.C., has had a similar law in place for nearly a decade that applies to both commercial and residential properties.
Along with commercial rent relief and anti-vacancy measures, cohort members noted many opportunities for local governments to support the wide spectrum of space needs small businesses have throughout their life cycles, from providing free temporary access to public space to facilitating permanent ownership of commercial buildings, as described below.
PROVIDE ACCESS TO FREE SPACES AND POP-UP MARKETS FOR BIPOC-OWNED MICRO-ENTERPRISES
Temporary space can help entrepreneurs build an initial client base and grow their business as they transition to a longer-term lease or permanent space. To support this early-stage entrepreneurship, local governments can work with community partners to identify and access free spaces, and provide grants to coordinating organizations. For example, Duluth’s American Indian Community Housing Organization hosts the Indigenous Food & Art Market in the One Roof Community Housing parking lot. As one cohort member described, “Our Indigenous entrepreneurs started with a winter market, and from there, we have seen those businesses really start to grow and to develop.” A similar initiative in Portland, Oregon, the Portland Indigenous Marketplace, has supported Indigenous artists and entrepreneurs with a collaborative, culturally respectful environment and free vendor space at local nonprofit parking lots. After a year of successful events, the organization received a grant from the county government and incorporated as a nonprofit, and transitioned to hosting virtual marketplaces during the pandemic.
SUPPORT COMMERCIAL BUILDING ACQUISITION BY COMMUNITY-SERVING, BIPOC SMALL BUSINESSES AND NONPROFIT PARTNERS, INCLUDING SMALL BUSINESS INCUBATORS AND COLLABORATIVES
Cohort members described opportunities to support nonprofit partners and small businesses in purchasing commercial spaces as a long-term solution to commercial displacement. The Mission Economic Development Agency (MEDA) in San Francisco, for example, has used funding from the City of San Francisco Small Sites program to support both affordable housing and commercial and cultural preservation efforts in the Mission District, a historically Latinx neighborhood experiencing rapid gentrification. So far, MEDA has preserved 100,000 square feet of commercial space in the District, which it rents out at below-market rates to neighborhood businesses and organizations. The organization is now exploring ways to help small businesses directly acquire their own spaces, as part of a community ownership and wealth-building strategy.
Local governments can also support the development of small business incubators that provide below-market rents, shared common spaces, and access to support services. The Beaver Street Enterprise Center in Jacksonville provides offices to 48 small businesses at below-market rents, including access to free event and meeting spaces. As a nonprofit, Beaver Street offers flexibility to small businesses experiencing cash-flow problems and did not evict any tenants during the pandemic. The organization also provides free coaching, trainings, and networking events to its tenants as well as a broader network of entrepreneurs. Change Labs, a Native-led nonprofit based in the Navajo and Hopi nations, leads a small business incubator that supports Native entrepreneurs on tribal lands. The program creates annual cohorts of 20 entrepreneurs that receive intensive coaching, mentoring, and peer support, along with co-working and meeting spaces. Entrepreneurs who complete the program are also eligible for a $10,000 loan to seed their business.
INVEST IN COMMUNITY OWNERSHIP MODELS SUCH AS COOPERATIVES AND COMMERCIAL COMMUNITY LAND TRUSTS
Community ownership models balance anti-displacement goals with wealth-building strategies, and foster meaningful community decision-making over development. Often used for permanently affordable housing, community land trusts (CLTs) can also steward commercial properties and lease spaces at below-market rents to small businesses. The Rondo Commercial Land Trust Project in St. Paul, Minnesota, offers over 9,000 square feet of affordable commercial space, and seeks to retain, stabilize, and promote small, BIPOC- owned businesses along a major commercial corridor in the historically Black Rondo neighborhood. The CLT currently has six commercial tenants, includes affordable housing in its portfolio, and shoulders a larger share of costs than typical commercial property owners.
Commercial real estate or investment cooperatives can also offer affordable space to small businesses while providing wealth-building and leadership opportunities to BIPOC community members. The East Bay Permanent Real Estate Cooperative (EBPREC) is piloting a mixed-use development with 6,000 square feet of commercial space at below-market rents for BIPOC-owned startups, with a focus on arts and cultural spaces, as part of a community-led effort to revitalize a historically Black cultural and economic corridor in West Oakland, California. As the EBPREC’s first commercial acquisition, the project will be cooperatively owned and financially supported by community shareholders. The Community Investment Trust (CIT) in Portland, Oregon, is pursuing a similar model by providing opportunities for low- to moderate-income residents to own commercial real estate collectively in their neighborhoods. The CIT’s first project was an underutilized commercial retail mall in southeast Portland that was only 66 percent occupied. Since the CIT’s acquisition, the mall is now 95 percent leased and houses over 25 mostly BIPOC-owned small businesses and nonprofits.
HOW DO WE GET THERE?
The following principles apply to all of the strategies listed here for promoting affordable commercial space in cities.
Practitioners emphasized that commercial rent relief should be targeted to small, locally owned businesses in sectors hardest hit by the pandemic. Pittsburgh limited its commercial rental assistance grants to locally owned commercial tenants with 15 or fewer employees, while Oregon’s program focused on businesses with fewer than 100 employees. The Greater Toledo Small Business Stabilization Fund focused its grantmaking on hard-hit industries like retail, food and drink, and child care, as well as BIPOC-, women-, and veteran-owned businesses and those located in low- and moderate-income Census Tracts.
Local governments can also work with community partners to map available commercial spaces that suit a variety of small business needs, including underutilized city-owned sites, and develop criteria for development and disposition that prioritize BIPOC-owned small businesses and commercial corridors in BIPOC neighborhoods. For example, the Mission Economic Development Agency (MEDA) rents its commercial space in San Francisco’s Mission District to small businesses based on four criteria: social impact, commitment to local hiring, offering affordable products/services, and local ownership. MEDA’s business development team and CDFI work with each prospective commercial tenant to develop business models and occupancy agreements that suit their needs.
Be inclusive in strategy development and implementation
Local governments can collaborate with BIPOC entrepreneurs and community-based organizations that know their neighborhoods to identify potential spaces, assess the range of small business tenancy needs, and work with partners to support commercial development models that are responsive to the community’s needs. MEDA convenes a 20-organization collaborative that partners with the City of San Francisco to develop comprehensive community development initiatives in the Mission District that prioritize anti-displacement and cultural placekeeping of longtime Latinx residents, small businesses, and community-serving organizations.
Practitioners also emphasized that these collective efforts are most impactful when they provide meaningful leadership and community ownership opportunities for BIPOC entrepreneurs and community stakeholders. For example, the Community Investment Trust in Portland, Oregon, began by surveying low and moderate-income residents in East Portland about their financial preferences, which identified real estate investment as a priority. The coordinating organization, Mercy Corps, then convened a larger team of volunteers and pro bono technical assistance providers to work with residents on building out the investment trust model and to identify a suitable site for the trust’s first acquisition. Shareholders build equity through investing $10-$100 per month in the CIT, and must reside in the project’s neighboring zip codes, which helps keep wealth and decision-making power in the community.
Ensure program accessibility
Noting the challenges that BIPOC-owned small businesses experienced in accessing PPP funds, practitioners emphasized that local governments should prioritize getting commercial rental assistance and other emergency small business funding out the door quickly. Developing application questions and requirements that are not overly burdensome, having enough staff who are trained in analyzing applications efficiently and can support applicants throughout the process, and using accessible technology are all critical components of infrastructure for disbursing funds. Partnerships can help provide this infrastructure. The Greater Toledo Small Business Stabilization Fund pooled resources from KeyBank and Jumpstart, CARES Act Emergency Block Grant funds via the City of Toledo, the Toledo-Lucas County Port Authority, and ProMedica, while LISC Toledo managed the application and grant distribution process. LISC Toledo offered the short grant application in 14 languages, and did not require any documentation from applicants unless they were selected for awards.
Even when local governments commit resources to small businesses for commercial acquisition and space improvements, practitioners noted that BIPOC- owned small businesses rarely have the capital to front the costs for this work and wait for local governments to reimburse them. Providing up-front financing and having dedicated, knowledgeable staff who can accompany small businesses through the acquisition or rehabilitation process are critical for ensuring access.
Level the playing field by addressing capacity needs for deployment
Practitioners identified a need for more public funding to support acquisition and rehabilitation, and to subsidize below-market rents for commercial spaces. Said one cohort member:
So many banks and funders are interested in funding programs, which is good—programs are important. But space is important too. We have space that we need to build out; we could make more space. It’s a matter of getting the funding for that.
Acquisition and rehabilitation financing is just as important in rural areas and smaller towns as it is in hot-market cities. Practitioners shared that many rural areas do not have much available commercial space, and existing structures may require significant rehabilitation and environmental remediation in order to be usable. Practitioners recommended that local governments combine federal SBA funding, New Markets and other tax credits, and American Rescue Plan funds, as well as create their own acquisition funds for nonprofit partners. In smaller towns, practitioners suggested a pooled fund at the county or multi-county level. In addition to providing financing and technical assistance, local governments could consider opportunity-to-purchase policies for commercial properties, similar to residential opportunity-to-purchase policies in place in Washington, D.C. and San Francisco, which give tenants a first shot at buying their building when landlords sell.
Practitioners also emphasized the importance of resources for staff and support services alongside funding for space. The value that community partners can offer goes beyond affordable rents to providing a supportive environment for entrepreneurs to stabilize and grow their businesses. As one practitioner illustrates:
The incubator setting is one where you have access to space, support, and safety under the same roof. And it’s really important as it allows entrepreneurs to automatically access the ongoing resources that are provided in the space and learn continuously while also allowing the TA [technical assistance] provider to remain on top of what the small businesses’ needs are so it can respond appropriately.
Set up a monitoring process with accountability mechanisms
In addition to tracking indicators that capture the extent to which commercial rent relief and affordable commercial space are actually reaching hardest-hit BIPOC-owned small businesses, practitioners recommended including criteria that evaluate broader community benefit, community ownership, and wealth-building opportunities.
This article was originally published in Next City, March 14, 2022. Republished with permission.
The authors work at Local Initiatives Support Corporation (LISC). They are Patricia Voltolini, a Senior Research Associate; Melissa Kim, the Senior Program Officer for Capacity Building; David M. Greenberg, Vice President of Knowlege Management and Strategy; Julia Duranti-Martinez, Program Officer for Capacity and Research; and Michelle Harati, Senior Program Officer, LISC Policy.