Set-Asides for Local Businesses

In many cities, the commercial space in older buildings is small, varied, and well-suited in both character and cost to a range of independent businesses. The commercial space in new developments, however, is often large, uniform, and designed for national chains. This latter development pattern is created by factors that are unrelated to the merits or viability of independent businesses, including commercial real estate financing that favors chains, and national developers and banks that have existing relationships with the national chains that they work with from city to city.

Public policy has an important role to play in placing a check on these forces that are shaping new development, and ensuring that an environment designed for small businesses or a mix of businesses isn’t replaced with one designed for formula businesses. Many cities have already begun to take steps to ensure that new development is contributing to an environment that’s mixed-use and walkable. Cities can take that further with additional provisions specific to businesses that are locally owned.

Set-asides offer cities an effective way to do this. This tool works by requiring developers to reserve, or “set aside,” commercial space that supports local businesses in new developments that are above a certain size or located in particular neighborhoods.

Cities can require developers to dedicate a certain portion of ground-floor retail to spaces that are small, or to spaces that are commercial condominiums. This first option increases the supply of the smaller spaces that tend to be hospitable to local businesses, and contributes to a diverse and varied streetscape. The second option is tied to increasing small business property ownership, and is more likely to appeal to locally owned businesses than to national chains, which generally have a standard business model that’s built around leasing; Cities could also take steps such as offering a tax abatement for selling the condo to a business that’s locally owned.

Cities can also — particularly in projects that involve city land or subsidies — require developers to reserve a portion of a project’s overall commercial space for locally owned businesses, or to do so at below-market rate rents.

Set-Asides in Particular Projects

Set-asides are often used in development projects on a case-by-case basis. One example comes from Austin, Texas, where, in 2004, the city took action to develop five city-owned blocks with a mix of housing, offices, and retail through a series of public-private partnerships. The city worked with development partners to set a goal of having at least 30 percent of the project’s retail space lease to locally owned businesses. In turn, the development partners then worked with a local broker who knew the community and was able to secure agreements with both start-up businesses and merchants looking to open second locations.

By 2005, before the project — named the Second Street District — was even completed, 17 of 24 retail spaces were occupied by locally owned businesses. Their leases were structured to gradually increase the rent to market rate, giving the merchants an opportunity to establish a customer base downtown, which had been something of a retail dead-zone for years. (The above section on the Second Street District is largely drawn from ILSR Co-Director Stacy Mitchell’s 2009 book, Big-Box Swindle).

As of 2018, the Second Street District has grown into a vibrant shopping and dining destination. It’s governed by more than a dozen legal agreements that work in coordination: The city of Austin still owns the retail spaces on the ground floor of two of the buildings, and contracts with the real estate company AMLI Austin Retail to manage those spaces and the storefronts on two of the other blocks. (A separate city department manages the spaces that are at City Hall).

Under the city’s agreements, AMLI is required to use good faith efforts to lease 30 percent of the retail spaces to locally owned businesses. AMLI consistently exceeds this goal, and many of the local businesses are also owned by people of color and women. As of the 2017 year-end report, locally owned businesses occupied 30 of the about 50 shopping and dining spaces in the district. These are businesses like Royal Blue Grocery, Austin MacWorks, and the jeweler Eliza Page, which has occupied space in the Second Street District since 2005.

Elsewhere in the district, the city has brokered different agreements that seek similar outcomes. For the historic Schneider Building, for instance, the city has an agreement that requires the developer (an affiliate of the company Urban Partners) to lease to a “unique tenant.” This is defined as a business with a name that isn’t used at other locations, and if a national business, then one that was founded in Austin or is headquartered there. The original and current tenant for this space is Lambert’s Downtown Barbecue, a barbecue and live music venue, which has been operating since 2007.

The Second Street District has been so successful that the city has since used this model in its agreements for other city-led redevelopment projects. These include a project to redevelop the site of the former Robert Mueller Municipal Airport, as well as a project to redevelop the district that was formerly home to the Seaholm Municipal Power Plant; one of the projects there that includes a local business requirement is the Independent, which upon completion, will be the tallest residential building in Austin.

Another example comes from New York City, where in 2015, the city released a Request for Proposals (RFP) for a major mixed-use development in the East Harlem neighborhood. The RFP included the specification that, of up to 700,000 square feet of commercial space, a modest portion — 50,000 square feet — would be reserved for local retailers.

Community groups can also take the lead in seeking set-asides for locally owned businesses in new developments. One way to do this is by negotiating a Community Benefits Agreement (CBA) with the developer that outlines how much of a project’s retail space must be set aside for local businesses.

A CBA is a legally enforceable contract signed by a community group and a developer that provides specific outcomes for the development in return for the community group’s support of the project. The benefits achieved with a CBA often range from broad goals to very specific targets. A CBA might, for example, specify that the development create a certain number of jobs with a certain level of pay and benefits, or that the developer reserve a certain amount of retail space for locally owned, independent businesses. The versatile nature of these contracts makes them useful avenues for citizens to ensure projects meet neighborhood standards and needs.

It is common for CBAs to be negotiated for projects that receive public subsidies, such as tax abatements or tax increment financing, but this does not have to be the case.  A developer may be willing to enter into a CBA in order to secure a neighborhood group’s support for a special permit or zoning change necessary for the project to proceed, or to avoid a lengthy and uncertain approval process by reaching a compromise with opponents.

A Broader Approach to Set-Asides

Now, cities are looking for ways to build broader programs around set-asides. Three cities — New York City, Portland, Ore., and Boulder, Colo. — are developing programs that reserve spaces for local businesses in new developments on sites that the city owns or is investing in. Because the cities are larger players in these developments, all three programs also include provisions about below-market rate rents.

For more information about these programs, see our March 2018 article, “In Cities Around the Country, New Action on Commercial Affordability.”

Cities could also explore automatically including set-asides in any new development or redevelopment that meets certain size or location thresholds. One idea from the Pratt Center for Community Development, for instance, incorporates set-asides for both local entrepreneurs and for smaller square footages, which can be particularly good spaces for local businesses. “For any commercial development over 50,000 square feet in New York City, owners should be required to include businesses at a range of sizes, going down to 250 square feet, with targets for locally owned small businesses,” the proposal reads.


See Also:

More Information on Community Benefits Agreements:


Set-Asides for Local Retail – Longfellow CBA in Minneapolis

In March of 2008, members of the Longfellow Community Council (LCC), a South Minneapolis neighborhood, signed a Community Benefits Agreement with a developer looking to redevelop an old feed mill.  The site comprises four blocks next to a city light rail station.… Read More

Set-Asides for Local Retail — E125 Development in East Harlem, New York

In Dec. 2015, New York City released a Request for Proposals (RFP) for a major mixed-use development in the East Harlem neighborhood. The RFP included the specification that, of up to 700,000-square-feet of commercial space, a modest portion—50,000-square-feet—would be reserved for local retailers.… Read More
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Olivia LaVecchia

Olivia LaVecchia is a former senior researcher with ILSR’s Independent Business Initiative. Her work focused on building awareness and support for public policy tools that strengthen locally owned businesses and check concentrated economic power.

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Stacy Mitchell

Stacy Mitchell is co-director of the Institute for Local Self-Reliance and directs its Independent Business Initiative, which produces research and designs policy to counter concentrated corporate power and strengthen local economies.