Planning Approval is Just the Beginning
Shopping center redevelopment is a very strenuous process that ensures the proper work is complete. Many believe that once planning approval is obtained, the hard work is done. However, building, fire, safety, and health department approvals are also required, and each department has its own stringent rules and timelines. Additionally, these departments can contradict each other, denying plans that other departments previously approved.
Example: If a trash enclosure is located more than 200 feet from a restaurant OR within 30 feet of a neighboring residential property:
- Planning: Approves the trash enclosure for meeting zoning and aesthetic requirements
- Building, Fire, and Safety: Sign off on the structure’s compliance with code
- Health Department: Denies the enclosure after construction is completed, citing health code violations for distance and proximity to residences or on site food operators
This denial would force a relocation of the trash enclosure, reopening the review process with all the other departments. In California, known for its complex regulations, this scenario is common and costly.
General Contractor Estimates Only Cover Part of the Cost
A general contractor’s estimate may only reflect hard construction costs, which are about 65% of the total development cost. Soft costs like architectural fees, civil engineering, permits, and financing add up quickly.Example: A GC provides a bid of $1.3 million for renovating a shopping center. However, after adding:
- Architectural and engineering fees: $200,000
- Permit and entitlement costs: $150,000
- Interest and carrying costs: $100,000
The total project cost rises to $2 million, well above the original estimate. Many developers underestimate these additional expenses.
NOI Requires Proven Rentable Space
New ideas like kiosks or pop-ups sound promising, but NOI (Net Operating Income) cannot include speculative additions. Only income from leased and proven rentable spaces can be included.Example: A landlord wants to add three kiosks in the parking lot, estimating an additional $60,000 in annual rent. However:
- If no leases exist or if the city hasn’t approved the kiosks, the NOI cannot include this projection
- The property’s value will remain based on its current NOI until the kiosks are completed, leased, and generating income
Stormwater Regulations Are Often Overlooked
Disturbing 5,000 square feet or more of a site triggers DWQMP (Drinking Water Quality Management Plan) stormwater compliance, which requires stormwater drainage systems and environmental reviews.
Example: Shopping center redevelopment plans to repave its parking lot and install landscaping, disturbing 5,200 square feet. This minor upgrade triggers:- The need for a stormwater pollution prevention plan
- Added costs for retention basins or bioswales: $50,000-$100,000
- These hidden costs often catch developers off guard
ADA Compliance Is Mandatory and Evolving
ADA compliance cannot be grandfathered in, meaning even older properties must meet the latest standards.
Example: A property owner assumes their 1980s-built shopping center is exempt from new ADA standards. However:
- A lawsuit for non-compliant parking stalls forces a $200,000 retrofit of parking, ramps, and doorways
- Non-compliance with evolving standards leads to costly delays and legal risks
Local Tenants Impact Cap Rates
Properties with local tenants achieve lower cap rates than those with national tenants due to perceived risk.
Example: A shopping center leases 80% of its space to local tenants, generating $500,000 in NOI. With a cap rate of 7%, the property value is:
- $7.1 million (local tenants)
- The cap rate drops to 5%, increasing the property value to $10 million
Avoid Submitting Building and Site Plans Together
Submitting both plans simultaneously may appear efficient but leads to delays if one plan is revised.
Example: A shopping center redevelopment submits building and site plans together. Mid-review, the city requires parking layout changes, affecting:
- Building setbacks
- Fire lanes
This triggers a restart of the building plan review, delaying the project by months.
Entitlement by Right Is Conditional
Entitlement by right is possible if uses aren’t changing and no major site work is planned. However, assumptions can lead to complications.
Example: A property zoned for retail is redeveloped with a minor restaurant addition. Although “by right” uses apply:
- Adding a drive-thru triggers traffic studies and public hearings, delaying the project
Deferred Maintenance Impacts MEP Systems
Deferred maintenance of 20+ years often requires mechanical, electrical, and plumbing (MEP) overhauls, even if the systems seem operational. Shopping center redevelopment plans should have this in mind.
Example: A shopping center with 25 years of deferred maintenance attempts to replace only the HVAC units. During inspections:
- Faulty electrical wiring and outdated plumbing require a $500,000 upgrade, doubling the initial budget
Approval Timelines in California Are Longer Than Expected
Developers often underestimate the time required for approval. In California, even straightforward projects take 18-24 months.
Example: A developer plans to complete shopping center redevelopments within a year. However:
- The city requires a traffic study (6 months), public hearings (3 months), and fire approvals (4 months)
- Total timeline: 22 months before construction begins
