On the bricks

Efforts to increase commercial affordability in Boulder and beyond take time and planning

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John Robert Ford

After reaching capacity at the North Boulder location some time ago, BookCliff Vineyards owner Ulla Merz has searched for a new space elsewhere in Boulder County for years, with little success.

“It’s very challenging in Boulder County to find affordable space for what we are doing,” she says. Currently, she leases two industrial condos from two different landlords, paying rent, HOA fees, and other commercial costs like property taxes, insurance, and utilities for each unit.

But there’s little industrial space left in the area, and what is here, Merz says, is quickly leased by marijuana and CBD manufacturers whenever it does become available.

“They snatch them up before we realized we need to expand. And they could out-bid us, we could not afford the spaces at the price they could command,” she says. “I feel like it’s what happened in [the] residential [property market] in 1992, right? There was just not enough inventory available to purchase.”

Ulla Merz has been looking for a larger facility for Bookcliff Vineyards for years, but the high cost of commercial property in Boulder County has created an insurmountable obstacle. (Credit: John Robert Ford)

Around the country, the lack of affordable commercial space is challenging for small, local, and underserved businesses and business owners who either want to stay open or get a foothold in the first place. As is the case with housing, many people find it difficult to start, maintain or grow a business in their own community, leading to overall affordability challenges in many areas. Now, with the economicimpacts of COVID-19, the business landscape of many cities is changing. Businesses have closed or moved to fully remote work, leaving ample room for communities to evaluate how to build back local economies in more sustainable ways. But, the movement to address commercial affordability around the country is nascent. Cities like New York, San Francisco, Seattle, and Portland, Oregon are still in the pilot stage of many programs.  

In Boulder, new development at 30th and Pearl will include some affordable commercial space that the city negotiated with the developer, but the space is yet to be leased. But the city’s effort to more broadly include commercial affordability through zoning failed to meet muster according to a City Council vote in June 2021. At the same time, longtime businesses have closed, others are relocating outside of the city or at least farther afield from downtown. 

While some areas may still be cheaper than others, “the whole city is impacted,” says Karl Guiler, senior planner for the City of Boulder.

“We’ve seen some establishments that are struggling to stay in Boulder because of the increased rent or they’ve had to keep moving around to find more affordable space,” he says. “Sometimes they find it in Boulder and other times they have to leave Boulder or some have gone out of business. So, it’s definitely been noticeable the last several years; certain businesses that have been mainstays in Boulder have had to shut down or move elsewhere.”

In the past, there was a straightforward growth path for retail businesses in Boulder, says Sharon King from the Boulder Small Business Development Council (SBDC). Typically, businesses would start further away, testing the market and growing, until they were able to move into the coveted “on the bricks” space on Pearl Street. It’s like starting off Off Broadway in the theater circles of New York before moving to Off Broadway and eventually making the way to a key marquee on Broadway itself, King says. But that’s all changed.

“What I’ve been hearing is that there really isn’t a path there. It’s quite expensive at all the different levels and all the different locations,” King says. “So what used to be kind of an on-ramp maybe doesn’t exist as much.”

Now, King says commercial lease rates are a barrier to starting businesses in Boulder. As is the initial capital it takes to secure a commercial lease, especially considering potential build-out and triple net costs. Triple net leases are standard practice in Boulder where the tenant pays all the building costs including property taxes, insurance, and maintenance as well as rent and utilities. These types of leases are generally low-risk investments for landlords, providing steady income, without much management responsibility. In some cases, like that of BookCliff, which is housed in industrial condos, the business is also responsible for HOA costs each month.

The increasing price tag of running a commercial space is often a hindrance to maintaining business. For Russel Chandler, owner of Full Cycle, the triple net costs along with rents in his Pearl Street location almost made him close shop in 2020.

Chandler says Full Cycle was paying $12 per square foot of retail space in triple net costs, 80 percent of which was for property taxes. He said in other spaces it could be as much as $20 a square foot. For Full Cycle, with 8,000 square feet of retail space, Chandler says he was paying more than $100,000 a year in triple net costs.

Russel Chandler, owner of Full Cycle bike shop, says the business was paying $12 per square foot of retail space, which totaled to more than $100,000 a year in triple net costs. (Credit: John Robert Ford)

“When the triple nets weren’t so high it wasn’t so bad, but as property values have shot up in Boulder, tax rates have shot up. It’s a large percentage of the burden,” Chandler says. “It used to be, triple nets might be 15 percent of the overall rent burden on the tenant. Now they’re closer to 30 to 40 percent in some cases.”

After several failed attempts to purchase the property downtown, Chandler was able to invest in the old Vitamin Cottage building on 30th Street, moving his decades-old business in 2021.

“We’re not quite sure what we would’ve done if we hadn’t found this building,” he says. Before, he says, Full Cycle was spending about 13 percent of revenue on leasing the building.

“Now, not even considering the fact that some of it comes back to me personally as a part owner of the building, it’s closer to 5 to 7 percent, which is more of an industry norm for our type of business,” he says. “At the end of the day, it just came down to dollars and cents. I mean, that 5 percent difference—the margins in the bike businesses are pretty thin to begin with—that’s the difference between losing money and making money.”

But the issue of commercial affordability is not unique to Boulder.

Rising commercial rents have been distressing for small, local businesses around the country for quite some time, according to a 2016 report from the national organization Institute for Local Self-Reliance (ILSR). The price increase is caused by a variety of factors including speculative real-estate investments, increasing growth of national chains, a declining supply of small commercial spaces better suited to new, local and small businesses, and a lack of financing for such businesses as banks and financial institutions tend to offer better interest rates to national brands.

And it could get worse in the coming months and years, says Kennedy Smith, senior researcher with ILSR, as equity firms, real estate investment trusts, and venture capitalists buy up distressed commercial real estate in the wake of COVID-19.

 “There’s no guarantee, but the odds are good that they will be jacking up prices and turning it into something that could be unaffordable to people who live in the community,” she says.

This combination of factors creates fertile ground for local jurisdictions to intentionally implement policies ILSR has been recommending for years.

Strategies include encouraging local and small business ownership of commercial space, establish tenant rights to address the power imbalance with landlords, offer property tax abatements for landlords who provide affordable leases, change zoning code to subdivide large retail space, and encourage business diversity, prioritize affordable commercial space in new developments and offer affordable leases to local business in publicly owned buildings.

“I think we’re at that sort of inflection point where communities need to sort of act quickly,” Smith says. “For all of the experiments, I think, the window is now. And then I think the danger is that in six months or a year, all the equity firms that have wanted to buy property will have done so; it’s kind of a narrowing window.”

Some local governments have already made a concerted effort to address commercial affordability, although most of the policies and programs are in their infant stages and many of them are too new to have any quantitative proof of success.

Jurisdictions really have no control over the valuation of commercial property or even property taxes, and neither do landlords for that matter. But there are certain costs that city officials and property owners can help businesses with. Building out energy efficient spaces and offering rebate programs for low-carbon energy systems can decrease operating costs. Subdividing units to give smaller business access to brick-and-mortar space at a more affordable rate could also help. Some cities like New York, have just started offering tax abatements for landlords who rent out space below-market rate. Others manage city-owned buildings in an affordable way, and some have even changed zoning codes to require on-site commercial affordability similar to decades-old affordable housing models.  

“The conversation about affordability has been going on for a long time and it continues to evolve,” says Jennifer Pinsonneault, senior program manager for Boulder’s economic vitality department. “And we continue to look at other communities and what they’re doing and see if there’s something we can benefit from based on their experiences.”

The City of Portland, Oregon, for example, has several pilot projects currently underway to address commercial affordability, all developed five or six years ago in conjunction with the city’s efforts on equitable development, focusing specifically on wealth creation for business owners of color.

In one project, Prosper Portland master leases a space from a private development firm and then sub-leases to small businesses. In another, the agency leases from the bureau of transportation for ground-floor commercial space at a major transportation hub. Elsewhere, Prosper Portland, the city’s economic development and redevelopment agency, negotiated the terms of leases based on its affordability priorities with a private developer and subsequently supports the tenants with small grants. Prosper Portland also owns some commercial condos in a mixed-use development.

“They are in different parts of town, which is really helpful, all with different strategies and approaches,” says Amy Nagy development manager with Prosper Portland. “It’s also been really helpful in that we have been working with the community to set priorities around the uses, hours, thinking about the tenant mixing of each of the projects to make sure that it’s reflective of that area that it’s in and they’ll be successful.”

The initial lift to get a business moved in and off the ground can be a challenge, Nagy says, including managing expectations around attracting customers to a new business or new space. But Prosper Portland offers wrap-around services like business development, accounting, and inventory management, as well as helping with marketing, social media campaigns, and video features to build awareness of different businesses in the program. 

Since the program began, it hasn’t had any turnover and all the original tenants are still in their initial locations, even with the economic challenges brought on by the pandemic. (The city has even brought in three new tenants since April 2020). And the agency has found that whatever the agency can do to offer ready-to-go space—reducing build out costs for new business—has also led to the success. As has efforts to keep triple net costs at a minimum and scaling leases over the long-term so tenants aren’t paying full price right off the bat.

Perhaps the largest overhaul for Portland has been its affordable commercial space bonus program which was codified in 2018. It offers developers extra floor area ratio (FAR) or additional height in exchange for at least some affordable commercial space or an in-lieu fee to help administer and grow the city’s program.

To date, Prosper Portland has collected about $500,000 in cash-in-lieu fees but developers have yet to include affordable commercial space in their projects. Sometimes timing is an issue, says Christine Velasquez, who manages the program for Prosper Portland, as writing these requirements into covenants for a new project is done on a case-by-case basis. Other times, participating in the space bonus program may be more costly for the developer.
“We haven’t had a project just yet where they included the affordable commercial space, because we do have a host of requirements:” she says. “Building out the space to reduce the barriers and address things like upfront capital for businesses to build out their spaces. So having these spaces more tenant-ready for businesses to move in is something that would be a requirement through covenant that we would coordinate with that particular developer.”
Still, Velasquez says, developers in Portland have been generally receptive to the program.
“It is something that developers are interested in because I mean, they can add a whole floor,” she says. “And it’s something that we’re continuing to market because we really need our private sector partners to help with this work and help provide these opportunities to businesses.”

(Credit: John Robert Ford)

In Boulder, affordable commercial programs are also in their infancy.

The city tried to institute a Portland-styled bonus space program in the summer of 2021, designating affordable commercial space as a community benefit under the city’s building code.

Starting in 2018, the City of Boulder has had conditions for approving additional housing density that include more affordable housing as a community benefit requirement codified in site plan review criteria. The idea was to create a similar policy to include deed-restricted affordable commercial space in new developments in exchange for increased FAR or even additional floors, up to the city’s height limits depending on zoning district. Developers could also pay an in-lieu fee, contributing to a fund that would help other affordable commercial businesses. And it was looking at reserving these spaces for nonprofit, arts and cultural uses, and specifically defined small businesses, all with a cap on their rent as a certain percentage of the market rate.

“We have a pretty good example in how the affordable housing program works. We wanted to follow that as a precedent. Without deed restrictions, there’s no assurances in how somebody makes someone pay the rent for their property. So that’s one of the only tools we can do to kind of guarantee things,” Senior Planner Guiler says. “There might be other methods, but we thought that was probably the best approach: to follow the paradigm that we’ve been using for housing in Boulder.”

However, in order to make the affordable commercial policy foolproof, without the ability to manipulate requirements, Guiler says the regulations were fairly complicated with a specific, separate review process. In the end the majority of City Council voted to table the discussion, punting the idea to the incoming council.  

“The challenge is that I had not quite realized the resistance we were going to get from the commercial landlords,” says out-going Mayor Sam Weaver. The largest issue, he says, is that the regulations were written in a way that the onus for following the rules was going to fall to the developers, creating what they said was too much confusion and burden.

“It oftentimes can appear to be subject to a simple solution,” says John Tayer, president and CEO of the Boulder Chamber. “But there are downstream implications that may not be as attractive or understood. The commercial affordable benefits [program] fell in line with that. There were just some impracticalities and some basic market understandings that really had not been fully vetted and understood.”

Still, the city is looking at other solutions, outside of zoning, to address commercial affordability. For example, new development in Boulder Junction at the intersection of 30th and Pearl streets will include below-market commercial space, seen by many as a pilot program that could be implemented elsewhere in the city. When the city sold the property to a developer, it included stipulations: about half of the commercial space will be deemed affordable, with leases limited to 75 percent of market rents rising each year no more than the rate of inflation. And ILSR has praised the project as an example of what other cities can do to mitigate rising commercial rents. But, there are still major questions about the project like how to find tenants.

“As that project gets further along, we’re going to see how that works,” Pinsonneault says.

The city also helps manage about a dozen spaces as part of the Central Area General Improvement District (CAGID) that on average lease for about 10-20 percent less than comparable spaces in the area. Pinsonneault says there’s talk of instating eligibility requirements on those spaces, setting them aside for certain classes of businesses like nonprofits or small, local businesses, but that hasn’t happened yet, and the city has no plans to expand the program.

“The other thing that we’re looking at is making sure when these spaces that tend to be a little bit less expensive are available,” she says, “that we do really broad and inclusive outreach to make sure that smaller businesses and businesses that may have had some financial impact will understand and realize that those opportunities are out there.”

Currently, a Latino ice cream shop is exploring the possibility of  leasing one such space from the city, with the help of the Latino Chamber of Commerce.

(Credit: John Robert Ford)

Co-location is also a possibility, and something that’s effective, says King from the SBCD. On the one hand, a business outgrows its current space and wants to relocate and subleases to two different tenants instead of one. Or, businesses that are on a growth path may be willing to take on risk and lease out a larger space than its current needs, so will offer co-location to another business to help off-set costs until growing into the space itself.

“I don’t think co-location is the easy answer, but it could be one piece,” King says.

For Full Cycle, teaming up with Colorado Multi-Sport was a game changer when moving to its new larger space. Catering to a specific triathlete clientele, Colorado Multi-Sport was often turning away customers looking for other bike products at its old location. Now with its partnership with Full Cycle, that business is staying in the building.  

“They were always sending their customers elsewhere. And now all that business that was going elsewhere is coming to us,” Chandler says. At the same time, the brands remain separate.  

Investing in the building also made a huge difference in Chandler’s ability to keep Full Cycle in operation.

“Once you are your own landlord, you made that investment, you get the benefits of selling it,” says Merz, from BookCliff Vineyards. “And it seems for small businesses, it’s almost your bigger asset is your property rather than your business in Boulder County.”

In 2019, BookCliff bought property in the Louisville tech center with the intention of eventually building its own facility. At the same time, Merz pursued leasing larger industrial space in Gunbarrel, negotiating the terms to account for the rather large build-out costs. But then the pandemic hit and Merz focused all her efforts on the current location and production.

Now, however, the cost of building in Boulder County has skyrocketed with increased demand and supply chain challenges, pushing the price of a new build to over $3 million, Merz says—too much for BookCliff, even if the property itself has appreciated significantly. And while the space in Gunbarrel has yet to be leased, she’s really just trying to regroup. After several years of looking for a new place, “we haven’t really achieved anything and we’re not actively out there at the moment,” she says.

At this point, nothing is going to change the fact that the cost of doing business in Boulder is relatively expensive. But there are ways to help support and drive costs down for local businesses. Housing alone doesn’t create the distinct character of Boulder’s neighborhoods—modest commercial space enhances the goal of making Boulder more affordable to live, work, and play for people of all backgrounds. While the city has distinct goals for affordable housing, leaving the local commercial market unchecked could create grave consequences down the road.

“One way or the other, if we want to have mom and pop businesses in downtown Boulder, we have to do something different than what we’re doing right now,” Chandler of Full Cycle says. “I think it comes down to what do we want as a city? What do we want Boulder to be like? Do we want it to be a corporate billboard? Or do we want it to be an inclusive community that is local, buy local, support local sort of thing. And if we want more of that, we have to reform and change the way commercial real estate is purchased or leased in this in this town.”

The out-going city council punted the question of commercial affordability in Boulder to the next city council in hopes they will take it up and run with it. If they do, Boulder could be a leader in piloting more commercial affordability solutions in the years to come. 

“I think It’s an important area to keep focused on because the market and free enterprise typically elevates the most capable and people with the most capital, and so there’s a lot of good reasons I think to try and keep our income inequality from growing and part of that’s business,” outgoing Mayor Weaver says. “I regret that I didn’t . . . take as much time on the details of this as I might have, but I think it’s fertile ground to look at it. And I think it’s a really important component. Land use is one of the main missions of cities and this falls into that: how do we make our ecosystem serve everyone?”

 This is part of a series on affordable housing funded in part by the Solutions Journalism Network.