San Francisco Voters Will Have a Chance To Undo Regulations Strangling Small Businesses

Prop H will make it easier for businesses to set up shop or readapt their space, all while preventing nosey neighbors from bringing everything to a halt.

San Francisco is famous for the miles of red tape and regulation that make it difficult to launch a business. Come November, voters will get a chance to take an ax to those innovation-killing restrictions

On the city ballot this year is Prop H, a 100-page update of San Francisco's commercial zoning and permitting regime that will make it easier and faster for entrepreneurs to get city permission slips to set up shop or readapt their space, all while preventing nosey neighbors from bringing everything to a halt.

"In an environment where we are on track to lose over half of our restaurants pre-COVID, we need to make it as easy as possible to start a new business and get it off the ground," says Sharky Laguana, president of the San Francisco Small Business Commission and a backer of Prop H. "San Francisco is the hardest place, or one of the hardest places, to start a business in America. We need to become the easiest place."

Small business owners in the city, he says, face a lot of headwinds, including high labor costs, high rents, and competition from e-commerce. Making everything worse is the lengthy amount of time it takes to get city approval for the most basic things.

One city government report from March 2019 found that it took an average of 260 days for businesses to get permits for making alterations or repairs to their space in the city's Upper Market/Castro commercial district. More involved permits for conditional uses not automatically allowed by the city's zoning code took almost a year on average, according to the same report.

Those delays cost time and money that many new businesses cannot afford. Worse still, business owners need permits for everything. Business owners have spent months trying to get permits to convert their business from one permitted use to another; including changing a clothing store to a falafel shop, and an arcade machine repair shop to an arcade bar.

San Francisco Chronicle columnist Heather Knight recently profiled the struggles of John Yu, who's spent $150,000 and 16 months trying to get permission to set up an ice cream business in a long-vacant storefront already zoned for restaurant use. He's been tripped up by permitting delays and the objections of a competing ice cream store down the road.

Prop H contains a number of reforms to help business owners like Yu.

For starters, city departments would have to issue permits within 30 days of a business in a commercial corridor filing a completed application, provided the business is seeking permission for something already principally permitted by the zoning code.

City departments will also have to perform concurrent reviews of permits so that business owners aren't forced to wait for the Fire Department to sign off on their plans before the Health Department can take a look.

These same departments will also have to perform inspections within two weeks where feasible. In an interesting example of privatization, Prop H would also allow businesses to hire a certified private entity to perform inspections on behalf of the city.

"The idea here is a simple one. If your rent is $10,000 a month and it's going to be ten months to get an inspector out, wouldn't you rather just pay $2,000 or $3,000 to get the inspector out this week?" says Laguana.

Prop H also tries to cut down on abuses of the city's notorious discretionary review process.

In San Francisco, every permit is technically issued at the discretion of its seven-member Planning Commission. Third parties, through the discretionary review process, can ask the commission to use that discretion to review a permit application. Even if an application complies with all the regulations on the books, the commission can condition its approval or even squelch it all together.

Because the costs of filing a discretionary review are pretty low (normally a few hundred dollars) and the costs they visit on permit applicants (in terms of delays and lost income) are so high, they've become a favored tool of crony businesses and busybody neighbors.

The competitor who was not too thrilled by Yu opening up his ice cream shop was able to use a discretionary review to delay his would-be rival by a few months.

Similarly, anti-gentrification activists were able to delay business owner Joey Mucha from opening his aforementioned arcade bar by months through the same process. In that case, Mucha was forced to rally community support and win over political allies just to get permission to earn a living.

"I had to become a politician to make this thing a reality. I don't like politics, I don't like everything that I had to engage in just to open my business," Mucha told Reason back in November 2019.

"Instead of an opportunity for community input, it's become an opportunity for one or two people who are just haters, for lack of a better word, to strangle a business in the crib," says Laguana of the discretionary review process.

Prop H wouldn't eliminate discretionary review. Instead, it would exempt business owners in commercial corridors from the requirement that they notify nearby property owners and neighborhood groups whenever they try to pull a permit.

That, hopefully, will cut down on opportunistic cronies and gadflies waylaying folks trying to get their business off the ground.

Prop H would also make it easier for restaurants and retail businesses to set up operations on sidewalks or in parking spaces. That adds a crucial bit of flexibility during the pandemic when so much indoor commercial activity is still prohibited or restricted.

In addition, the initiative would permit restaurants to dedicate parts of their storefronts to co-working spaces.

So far, the prospects for Prop H look pretty good. It's attracted a wide range of supporters, including San Francisco Mayor London Breed (who helped craft the legislation and was responsible for putting it on the ballot), California Sen. Scot Weiner (D–San Francisco), and six of 11 members of the city's Board of Supervisors.

The city's Democratic, Republican, and Libertarian parties are all on board. San Francisco's Green Party remains opposed.

Prop H isn't a total free market fantasy. It leaves a lot of regulations untouched. It also expires in three years, setting the stage for another pitched political battle down the road.

It's nevertheless a remarkably deregulatory initiative that could help a lot of the city's small businesses weather the pandemic and thrive after it's over.