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11/29/2021

Four Tips to Cope With Today’s Permitting Nightmare

Jon Graub
Principal at A&G Real Estate Partners
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Building and opening stores is taking longer than ever due to challenges that are beyond the control of American retailers — especially permitting backlogs that threaten to overwhelm some municipalities, as well as the labor and materials crunch in construction.

States such as Florida and Texas have always been a little slower on the permitting front. But now retailers in such markets are seeing the entire process — from submitting the plans, to receiving the building permits, to constructing the store, getting it inspected and obtaining the certificate of occupancy — take six or even nine months to complete. That compares to an average of anywhere from three to six months before the pandemic.

For retailers seeking to position for the future by rolling out stores, these delays and uncertainties are causing major headaches.

Here are four tips for adapting to this difficult situation.

No. 1: Change Your Model to Account for Delays
When the build-out process was more stable, retailers could use tried-and-true averages to come up with reliable timetables on the back of a cocktail napkin.

In today’s marketplace, you need to be more cautious about the schedule. If that store would have taken eight weeks to build in 2018 or 2019, it is now safer to expect a 12-week process. In your negotiations with landlords, be sure to build in that additional flexibility.

Retailers are powerless to eliminate backlogs at ports or permitting departments, but some (especially those with ample resources) may be able to work with their internal and external teams to get plans drawn and submitted faster.

Options here include starting plans well before leases are executed and accelerating the internal approval process at the level of the real estate committee. Getting more efficient in this way can help retailers compensate for any construction or permitting delays that occur later.

No. 2: Ramp Up Your Communication with Landlords
If the pandemic has taught retailers and landlords anything, it is the value of partnering with each other to deal with a crisis. Communication is integral to that process. Now that the opening date is more likely to be a moving target, it is important for retailers to communicate with their landlords about any delays and obstacles that arise.

If an inspector reschedules that visit for the third time in a row (or fails to show up at all), let the landlord know what has happened. The landlord needs to understand that while you want to get your store open as soon as possible, the delays are beyond your control.

To further maintain that spirit of partnership and demonstrate good faith, retailers could consider informing their landlords of any new actions they are taking to stay on schedule. Due to the logjams at U.S. ports, for example, one national apparel retailer recently switched from international to domestic suppliers of certain materials. While those materials may cost more, they arrive faster.

Each time you touch base with the landlord in this way, it is an opportunity to shore up the relationship and possibly even receive unanticipated help—the landlord could put in a call to a close contact at City Hall, for example, or give you the email address of a more reliable GC or subcontractor.

No. 3: Protect Yourself in the Lease
But while the partnership mentality is important, so, too, is protecting yourself from the repercussions associated with unforeseen delays.

In recent months, we have encouraged some of our expanding retail clients to negotiate a different approach to buildout deadlines in the lease. Prior to the pandemic, these clients’ leases simply included target dates for store openings, after which their landlords would enjoy certain rights of redress. In today’s environment, it is safer to build a provision into the lease that starts the clock ticking on the buildout only after the permits are in hand.

In this approach, the lease may contain deadlines for submitting plans to the city, but otherwise it is all about when that permit is in hand. While this substantial concession by the landlord would not have been possible before, it is now a reasonable request on the part of the retailer.

No. 4: Run Due Diligence on Delays
To plan for and adapt to today’s permitting and construction delays, it is important to understand the specifics that are in play for your own company, as well as the markets in which you aim to open new stores.

Some retailers may be able and willing to take a like-kind user’s second-generation space that will require relatively minor construction activity. As a result, any delays in that store opening are more likely to be associated with backend permitting/approvals. For other operators, new store buildouts are always a major undertaking, with higher associated risks.

Likewise, permitting bottlenecks are worse in some states and municipalities than others. In rethinking your buildout schedule, ask hard questions and think like a data-driven risk manager. Look to the specific dynamics in play with respect to your chain’s store prototypes and target markets.

Real estate has always been about “location, location, location,” and this is every bit as true when it comes to planning for today’s onerous permitting backlogs.

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