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Staff Report MEETING DATE: 03/15/16 ITEM NO: COUNCIL AGENDA REPORT DATE: March 8, 2016 TO: MAYOR AND TOWN COUNCIL FROM: LAUREL PREVETTI, TOWN MANAGER SUBJECT: DISCUSS AND CONSIDER THE POLICY COMMITTEE’S RECOMMENDATION TO ADOPT TWO RESOLUTIONS SUSPENDING THE REQUIREMENT FOR FORMULA RETAILERS TO OBTAIN A CONDITIONAL USE PERMIT, AND SECTION I OF ORDINANCE 2021 DISCOURAGING THE REPLACEMENT OF RETAIL USES WITH RESTAURANT USES, FOR AN EIGHTEEN MONTH TRIAL PERIOD. RECOMMENDATION: Discuss and consider the Policy Committee’s recommendation to adopt two resolutions suspending the requirement for formula retailers to obtain a Conditional Use Permit (CUP), and Section I of Ordinance 2021 discouraging the replacement of retail uses with restaurant uses, for an eighteen month trial period. BACKGROUND: In September 2015 at the request of the Town Council Policy Committee, the Town Council began discussing a variety of issues that relate to businesses in Los Gatos. One of the issues was the Town’s regulation of formula retail businesses. The Town defines formula retail businesses in Chapter 29 of the Town Code (Section 29.10.020) as: Formula retail business means a retail business which, along with seven (7) or more business locations, is required by contractual or other arrangement to maintain any of the following: standardized merchandise, services décor, uniforms, architecture, colors, signs or other similar features. (29.10.020) Staff benchmarked other jurisdictions and provided a recommendation for definition amendments for the Town Council to consider including the number and location of existing business locations as well as qualifying factors to more easily identify formula retailers. At the October 6, 2015 meeting, the Council continued their discussion of formula retail businesses, and recommended that the Planning Commission consider and make a recommendation on the proposed Code amendments to redefine and clarify formula retail. PREPARED BY: MONICA RENN Economic Vitality Manager Reviewed by: Assistant Town Manager Town Attorney Finance N:\MGR\Adminworkfiles\2016 Council Reports\03-15-16\08 Policy Committee On Formula Retail\Staff_Report_- _Formula_Retail_And_Ord_2021.FINAL.Doc PAGE 2 MAYOR AND TOWN COUNCIL SUBJECT: FORMULA RETAIL DEFINITION MARCH 9, 2016 The draft Code amendments were discussed by the Planning Commission at their January 13, 2016 meeting. The Planning Commission had a considerable discussion around the establishment of a ratio of formula and independent retailers, and that the “idea of formula retail” needed further discussion at the Council level. After the deliberation, the Planning Commission recommended the adoption of the proposed Code amendments. When the item returned to the Council on February 2, 2016, the Council discussed the Planning Commission’s recommendations and further discussed the intent and overall need for such provisions. A motion was made to remove the definition entirely from the Town Code and no longer require CUPs for formula retail businesses. That motion failed 2-3, and a new motion was passed asking the Policy Committee to review and discuss formula retail. DISCUSSION: Formula Retail As the discussions around various economic vitality issues have evolved since September of 2015, the Council expressed interest in providing greater and more fluid opportunities for businesses to thrive in Los Gatos, enhancing desirable amenities for the community, encouraging local shopping and dining, and preventing leakage to other communities. All of these items are consistent with General Plan goals, and are in line with the Council’s adopted strategic priority of developing an Economic Strategic Plan to enhance and evaluate opportunities that allow the Town to enhance vibrancy and attract residents and visitors to shop, dine, and stay. Additionally, there has been discussion since the adoption of the North 40 Specific Plan that consideration should be given to making amendments to the requirements affecting downtown to level the playing field between the two shopping districts. The North 40 Specific Plan allows all formula retail businesses to operate without a CUP. For commercial zones outside of downtown and North 40, formula retail businesses over 6,000 square feet are required to obtain a CUP. On February 25, 2016, at the request of the Town Council, the Policy Committee discussed the current role formula retailers play in the Town’s mix of retail businesses and considered several options that may provide greater opportunities for businesses to locate within Los Gatos. The Policy Committee continued its consideration on March 7, 2016. Of those options considered, the Policy Committee agreed that a more nimble policy is its recommended approach and recommended that the Council adopt a resolution that suspends the provisions requiring formula retailers to obtain a CUP for eighteen months (Attachment 1). The motion included an articulation of the reasons for the temporary suspension in the “whereas” statements in the draft resolution, an evaluation of metrics of success, the collection of data on business changes, and a survey of businesses, shoppers, and visitors. The temporary suspension would enable a pilot in light of the changing retail climate and allow the Town to monitor its effects on the business mix of Los Gatos. From the language included in ordinance 2107 (Attachment 2), the intent of creating the formula retail ordinance was to regulate the location and operation of formula retail establishments to maintain the unique character, diversity, and economic vitality of Los Gatos. The proposed PAGE 3 MAYOR AND TOWN COUNCIL SUBJECT: FORMULA RETAIL DEFINITION MARCH 9, 2016 suspension would help the Town determine if a CUP requirement is needed to protect the Town’s unique mix of businesses. Public comment at the Policy Committee meeting included information that most buildings have long term leases (three to five years) making it difficult for many new tenants to immediately move in. In addition, the configuration of the buildings in the downtown (including floor plate shape, and size), and individual building owner preferences for their properties are not ideal for many formula retailers. It was through this public testimony and discussion that the trial period of eighteen months was determined to be an appropriate length of time to review and assess the impacts of the suspension. For the benefit of the entire Town Council, this report contains additional information that supports the proposed “whereas” statements in the draft resolution. As the ease and availability of online shopping increases, retailers are finding it more difficult to keep their brick and mortar locations running successfully. This leads to less demand for retail space for independent stores that only offer retail. With less demand, come greater vacancy levels. As businesses approach the Town for information on starting their concept in Los Gatos, staff has experienced a high demand for commercial retailers that also provide an experience for their customers. These requests have included adding a blow dry chair to a clothing shop, live entertainment such as an acoustic musical performer or cultural dancers, food and beverage tastings, and the addition of amenities or placemaking in the form of child play areas, parklets, and roof top seating. These extra amenities and activities attempt to create a unique experience to attract customers and sales. All retailers large and small are looking to make adjustments to respond to the changing shopping behaviors of customers. International brands have also retooled their approach on opening new locations, because just having a specific well known store name on a location does not meet market demand. Starbucks and Safeway are two examples of this. Starbucks for many years has been known for one look and feel, one menu, and one experience. Given the fluid markets and mixed customer demands, they have created more than five business models all with different target consumers, experiences, and products. As reported by their Regional Vice President, Safeway has turned their corporate headquarters inside out. Responsibility for products and the store’s look and feel fall back on local managers so that each store may create an experience that fits the specific location and its community. Over the last several quarters, the Town has experienced a decrease in sales tax associated with general retail, and have had business owners report that their in store sales are declining. Given the evolution of retail and creation of a shopping experience it is appropriate for the Town to evaluate if its policies and permit processes continue to meet these changing needs. While formula retail businesses have received mixed reviews from residents, visitors, and neighboring businesses, based on reviews, industry professional feedback, and sales information, PAGE 4 MAYOR AND TOWN COUNCIL SUBJECT: FORMULA RETAIL DEFINITION MARCH 9, 2016 staff has learned that many independent retailers prefer a location close to a well performing formula retail business. Several independent business owners have made requests to know when specific spaces will be vacant because of the foot traffic that is generated by many of the Town’s highly visited formula retailers. Additionally, in economic downturns and during the holiday shopping season, it is many of the Town’s formula retail stores that drive shoppers to Los Gatos, and then those shoppers stay and discover the other shopping, dining, and other commercial amenities offered in Los Gatos. This is particularly true in the downtown, as this commercial zone lends itself well to patrons parking once and experiencing several businesses. Specifically regarding downtown, feedback is often given that the allowance of formula retail businesses by right would turn downtown Los Gatos into an outdoor mall or shopping center, similar to those that exist in neighboring jurisdictions. Ordinance 2107 spells out that this ordinance prevents the Town from becoming “homogenous” with neighboring jurisdictions. One important consideration that is often not a part of these comments is that malls and outdoor shopping centers typically have one owner that controls the land and makes the tenant decisions. Downtown Los Gatos has over 175 property owners with varying expectations, tenant desires, and rental rates, making it difficult for Downtown Los Gatos to take on the look and feel of any individually owned private mall. Feedback received from property and business owners during the Policy Committee meeting further highlighted the unique leases that property owners have with the tenants. Many range from three to five years with several options for renewal. Because of this, the Town is not likely to experience a large influx of formula retailers at any given time. Through this testimony and the discussion of the Policy Committee, the Committee recommended adopting a resolution that suspends the need for any formula retailer to obtain a CUP for a period of eighteen months. Ordinance 2021 The Town currently has an ordinance with a standalone section (Section I of Attachment 3) that was adopted in 1996 to preserve commercial space in the Downtown C-2 zone for retailers and discourage the spaces from becoming restaurants. Within this ordinance, there is an implied statement that the retailers are the major draw of daytime visitors to downtown. Given the vastly different retail climate of 2016, and the availability of online shopping, customers tend to visit all commercial uses for the experience and services provided. Discouraging the replacement of retail uses with restaurant uses may no longer be relevant or supportive of a vibrant shopping district and could lead to increased commercial vacancies. While the sales tax of general retail has declined across Silicon Valley, the region has experienced a gain in the food and beverage category further supporting the desire of the current shopper to gather in community spaces and share an experience rather than spend resources within a more traditional retail location. This regional trend has also been experienced in Los Gatos specifically. Additionally, there have been instances where a use is desired by the Planning Commission and public, however, due to Section I of Ordinance 2021, staff recommended denial to the Planning PAGE 5 MAYOR AND TOWN COUNCIL SUBJECT: FORMULA RETAIL DEFINITION MARCH 9, 2016 Commission, and the Planning Commission has felt bound to deny the application while publicly declaring their support for the use. If the applicant chooses to move forward they must invest more capital and time to receive a CUP through the appeal process. The remaining sections of this ordinance have been codified and at the request of the Policy Committee, staff has drafted a resolution to suspend Section I of Ordinance 2021 for eighteen months (Attachment 4). CONCLUSION: It is recommended that the Town Council discuss and consider the Policy Committee’s recommendation to adopt two resolutions suspending the provisions for formula retailers to obtain a Conditional Use Permit, and Section I of Ordinance 2021 discouraging the replacement of retail uses with restaurant uses, for an eighteen month trial period. ALTERNATIVES: As an alternative, the Policy Committee discussed that the deciding body for formula retail CUPs could be modified through a Code amendment from the Planning Commission to the Development Review Committee (DRC). This could reduce the processing time by about 50% and the cost of the CUP from $6,735.09 to $4,098.34. The fees cover the costs of evaluating the application, working with the applicant to obtain additional information and/or review of any application revision, noticing the public, and meeting other processing requirements. The Planning Commission fee is higher due to the need to write a staff report and attend an evening public hearing as well as preparing the supporting documentation and completing other tasks. If the proposal is appealed or if additional review is required, then the cost to the applicant increases to ensure cost recovery for the Town. These fees are collected at the time the application is filed and are non-refundable regardless of the outcome of the hearing. Businesses have a difficult time with this level of uncertainty and investment, and thus find more comfort locating in a neighboring jurisdiction that may not include a discretionary approval. If the Council decided that the formula retail provisions shall remain, staff would recommend amending the definition of formula retail to include details to more clearly define those attributes that make a retailer formula. The Council could also consider a desired ratio as discussed by the Planning Commission. The current formula retail businesses that occupy a space in Downtown account for approximately 10% of the total number of retailers. All of these ideas are included in alternative 2 below. PAGE 6 MAYOR AND TOWN COUNCIL SUBJECT: FORMULA RETAIL DEFINITION MARCH 9, 2016 Alternatively, the Council may: 1.Accept the Policy Committee’s recommendation to adopt a resolution to suspend one or both of the ordinances discussed in this report with modifications; or, 2.Reject the Policy Committee’s recommendation on the suspension of formula retail and direct staff to bring forward a Code amendment to have the DRC as the deciding body for formula retail CUPs, amend the definition of a formula retailer to provide qualifying criteria, and/or include a ratio of formula to independent retailers; or, 3.Reject the Policy Committee’s recommendation on the suspension of formula retail and/or the suspension of Ordinance 2021 and make no change; or, 4.Consider a combination of the recommendation and alternatives. COORDINATION: This report was coordinated with the Town Manager’s Office, Town Attorney’s Office, and Community Development Department. ENVIRONMENTAL ASSESSMENT: The project is exempt from environmental review pursuant to CEQA Guidelines under the General Rule [Section 15061 (b) (3)] because it can be seen with certainty that the proposed Town Code amendments will have no significant negative effect on the environment. Attachments: 1.Draft resolution suspending the provisions regarding formula retail 2.Ordinance 2107, adopted in 2002, pertaining to formula retail 3.Ordinance 2021, adopted in 1996, pertaining to change of use from retail to restaurant in the C- 2 zone 4.Draft resolution suspending Section I of Ordinance 2021 as it pertains to the discouragement of the change of use from retail to restaurant uses in the C-2 zone 5.Public comment