DC as perennially last in small business rankings: the issue should be with the ranking, but how to respond

Dupont Circle image from Life at the Top.

Christopher calls our attention to an opinion piece, "D.C. last again in ‘small biz friendliness’," in the Washington Blade, about the difficulty of DC as a good environment for the development of small business. The author makes an interesting point, that demographically, gays are more entrepreneurial and likely to own small businesses compared to the general population, and so small business policies on the part of local and state governments are particularly relevant.

From the article:

Little suspense precedes the District’s perennial dead last ranking in anticipation of the release of the Small Business Survivability Index: Ranking the Policy Environment for Entrepreneurship Across the Nation issued each year by the Small Business and Entrepreneurship Council. Not surprising, given the propensity for counterproductive policies and profligate spending that treat local businesses like ATMs. ...

Among local jurisdictions, Virginia improved on its 14th place ranking last year to climb to the 10th most favorable position. Maryland, however, fell closer to the bottom at the 38th spot, down from its 2010 ranking at number 36.

As discussed in this column last winter when reporting D.C.’s identically dismal 2010 ranking, a negative small business culture disproportionately affects gays and lesbians due to the significantly higher prevalence of our numbers engaged in entrepreneurial activities, as reported by the National Gay and Lesbian Chamber of Commerce (NGLCC).

The nonpartisan SBE Council this year expanded its comprehensive annual national report to include 44 major government-imposed or government-related costs affecting small businesses and entrepreneurs. ...

As detailed in the report, the District’s income and business taxes and other fees are among the very highest in the nation.

Additional considerations – obstacles such as Washington’s infamous parody of democracy allowing both small and unrepresentative groups as well as random cadres of disgruntled residents to employ an outsized ability to obstruct, delay and deny regulatory licensing and zoning approvals for community businesses, for example – were not included in the rankings. Small mercy, as including such barriers would merely add insult to our ignominious position.

Note that I do think there are some methodological problems with the report, but the results are still relevant when considering DC's culture and regulatory regime and whether or not it supports or hinders business activity.

When it comes to non-retail businesses, I think the issue is a little more complicated. I think that the business environment within DC is unfriendly to innovation generally, because for the most part business here is directed toward the federal government, which is bureaucratic more than it is innovative (cf. the discussion in Planning in the Public Domain by John Friedmann, that I have discussed here, "Government's good at some things and really bad at other things," among other places.)

Second, another problem is that city is basically a place for large institutions, be they federal or local government agencies or real estate developers, and generally, large institutions are more comfortable with dealing with other large organizations, rather than small businesses, despite various contracting initiatives and requirements that are supposed to, if not favor small business, encourage it.

(On this issue I have been influenced by the arguments of James Scott in Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed, which I have extended, along with arguments from Kirkpatrick Sale's Human Scale, to come up with the thesis that big institutions prefer to deal with other big institutions.)

When it comes to retail, a big part of the issue has to do with the lack of capacity development and supporting institutions within the city, including on the part of city provided or supported programs, including business improvement districts and commercial district revitalization initiatives such as the Main Street program.

I wish that the opinion piece in the Blade would have focused a bit more on solutions rather than laments. In that vein, the article below appeared in the InTowner community newspaper in DC, in January 2006 (pages, 3 and 6). But it's still relevant to this discussion.

DISAPPEARING SMALL BUSINESSES HERE & ELSEWHERE

Last month, The InTowner editorialized about whether or not Dupont Circle is “’washed up’ business-wise,” a response to a piece in the Washington Business Journal. [See, “From the Publisher’s Desk,” December 2005, page 2.] The WBJ piece focused on the dwindling number of independently-owned retail and restaurant businesses and their inexorable replacement by the marques of national and international chains, implying this was the fault of the neighborhood’s residents for not responding somehow, by seeking additional zoning protections.

A quick survey of the national press would see that this is an issue across the world, ranging from Los Angeles (see, John Pomfret, “Downtown Los Angeles Gets a $10 Billion Remake,” the Washington Post, January 2, 2006, page A-3) to Madrid (see also, Leslie Crawford, “Urban village changing for good and ill: A former ghetto in Madrid is a victim of its own success as higher rents close the old shops. Resident Leslie Crawford is saddened,” Financial Times [London, UK], January 7, 2006, page 15).

This is the result of three trends that are difficult for a group of ad-hoc citizens in Dupont Circle, or any city neighborhood, to address on their own. More intricate responses, at higher levels than a neighborhood, are required.

Ever since the end of World War II, the dominant trend in the retail industry has been the development of first regional, and then national and now international chains, of a size and specialization [and scale] far beyond that of independently-owned local stores in the downtowns and neighborhood commercial districts of center cities.

Simultaneously, the real estate industry has adopted a similar scale, moving from a very local industry to one that is organized on a national and international scale. A key space in Dupont Circle, the Commerce Bank branch at the corner of Connecticut Avenue and S Street, NW, provides a perfect example that illustrates both trends.

Commerce Bank [since acquired by TD Bank, formerly, Toronto Dominion Bank, one of Canada's six national banks], based in New Jersey, uses chain principles to guide its services and its growth. (The bank’s founder still owns a chain of Burger King restaurants in the mid-Atlantic.)

Commerce’s entry to DC has been facilitated by a real estate investment trust, Starwood, which bought the property on Connecticut Avenue, rid the space of the locally owned retail businesses within, leaving it empty for years, waiting for the right national tenant willing to pay the much higher rents, in comparison to the previous owner, that they were seeking.

Finally, as The InTowner editorial pointed out succinctly and eloquently, the property tax assessment model employed by the District of Columbia for commercial retail properties, often historic buildings with small footprints, appears to set values [at rates] independent of the building’s profitability as a property tenanted by (ideally) locally owned businesses.

If taxes keep going up, so do rents. But if retail sales revenues don’t increase at the same pace, small businesses will be driven out, first by restaurants that tend to generate more revenue per square foot than the average retail business [and therefore can pay higher rents], and then by chain businesses that have national marketing campaigns and economies of scale unmatchable by independents.

That this is happening should be of great concern to DC residents and government officials. One of the primary differentiating factors of center cities is a retail sector defined by independently-owned shops with unique products and identities.

Tourists and business travelers -- not to mention residents -- appreciate this “specialness” and spend (more) money in such stores. As the DC retail environment becomes more similar to the offerings of malls and lifestyle centers, our city becomes less competitive compared to other national and international destinations; and visitors will end up spending less time and money in DC stores.

In addition, we should be concerned about building a local economy that retains in the city more of the money spent within the city. This is called the multiplier effect. Chain businesses spend and send most of their revenues elsewhere. However, studies by the Institute for Local Self-Reliance and others find that as much as “three times as much money stays in the local economy when you buy goods and services from locally owned businesses instead of large chain stores.”

To right these sorry trends, there are two policies that the District of Columbia government should pursue in order to make our city more hospitable to independent retail businesses.

First, the City Council needs to direct the Office of Tax and Revenue to create and implement a more appropriate property tax assessment methodology for small commercial retail properties. There is a bill before the Council providing for a 50 percent tax credit for such properties if

they have been owned by the same owner for at least 20 years. But that focuses on individual properties and length of ownership rather than the needs of the entire commercial district and the small and historic properties within it. (Plus, would a slumlord who owned a commercial building, often empty, for at least 20 years still be able to benefit from this law? I think so, the way it’s written currently.) [this proposed legislation was passed I think, very narrowly, to support a couple businesses, but not to deal structurally with the general problem.]

A “highest and best use” model that doesn’t differentiate between types of buildings will always price out anything other than commercial office, because such high revenue-producing, low-service requirement properties are the absolute best financial deal for any city.

The rule of thumb from the “Main Street” approach to commercial district revitalization is that a retail business pays from four to 10 percent of its annual revenues in rent -- or if the property is owned, mortgage plus property taxes and maintenance. Restaurants have higher revenues

and may pay as rent up to 15 percent of annual revenue.

Tax assessment models for commercial properties must be based on the revenue models for operating businesses located in such commercial districts. A tax assessment methodology focused on some “mythical” building worth independent of the businesses located within and the revenue streams they generate is disconnected from business reality.

This will lead to business displacement, particularly of independent businesses, in favor of chains, or in significant changes in the use, changes which may be incompatible with the needs and desires of residents and/or the retail mix of a thriving commercial district.

The current method of assessment isn’t much different than taxing farmland that is being farmed as if it could be redeveloped into residential tracts. Eventually the farmer will have to sell.

Second, the District government needs to look more carefully at its retail business attraction policies and incentives. Currently, most benefits are skewed to favor chain businesses at the expense of developing local businesses.

Since most independent retail has died on the vine, the infrastructure that supports independent retail has withered as both the various retail sectors (office supplies, clothing, restaurants, etc.) and the commercial real estate industry that develops and leases retail space have become organized as national and international enterprises.

Places like Richmond, Virginia and the State of Illinois have strong retail merchants associations providing a wide variety of services and training opportunities to support the development and maintenance of independent retailers. These organizations provide a great deal of assistance to local and regional businesses, without excluding the membership of national chains. To the best of my knowledge there is no equivalent association in the Washington region.

Cities like Los Angeles and Austin, Texas have created specific initiatives designed to attract, develop, and support independently-owned retail businesses. For example, LA’s Historic Downtown LA Retail Project provides extensive training, incentive, and development resources centered upon the development and strengthening of independently-owned shops and services; art galleries; cafés, restaurants and nightlife. [Also see the 2007 blog entry, "Retail and authenticity: continued.")

Clearly, much more than zoning overlays are required to right the trends that forcefully homogenize the retail districts in our neighborhoods and downtown Washington. And, I hope that The InTowner continues to publish articles about why this is so.