Big Box on the Run
 
March 1, 2000
 

"Big Box" retailers are facing increased challenges in entering their marketplaces of choice. Several recent developments in California and Nevada illustrate this growing phenomenon. We are also witnessing restrictions on big boxes in the Washington, D.C., area suburbs. The following are examples of the application of zoning ordinances and the adoption of development moratoria that pose a present or potential threat to retailers such as Wal-Mart, Sam's, Costco, Kmart, Target, Home Depot and Super K.

In September 1999, the California Legislature passed Assembly Bill 84 (AB 84), which limits big box retailers to 15,000 square feet for the sale of nontaxable items, such as groceries. AB 84 identifies legislative findings that retail stores over 100,000 square feet present a "unique challenge" for local government. These challenges include a greater commitment of police, fire, and public safety resources, increased traffic congestion and the need to generate higher tax revenues to offset the added costs to local government. The bill concludes that in order to finance the burden of retail stores over 100,000 square feet, not more than 10% of the store sales should be nontaxable.

Governor Davis vetoed AB 84, stating: "Not only is this bill anticompetition and anticonsumer, it represents the worst kind of end-of-session maneuvering by special interests. As a general principle, consumers should not be limited in their choices simply through questionable government fiat, and that is exactly what this bill seeks to do." (Office of the Governor, Press Release, September 22, 1999).

Despite the Governor's veto, the history between Wal-Mart and one of the major proponents of AB 84, the United Food and Commercial Workers International Union (UFCW), seems to suggest that this battle is far from over.

UFCW members have rallied to protest Wal-Mart's wages in the U.S. and overseas. The UFCW links Wal-Mart to sweatshops and claims that Wal-Mart undercuts union jobs and has forced U.S. manufacturers to cut jobs or close doors when Wal-Mart replaces products with imports. (UFCW Press Release, November 30, 1999, at 29). Wal-Mart and the UFCW also have had battles over the UFCW's attempts to organize Wal-Mart employees. The UFCW viewed AB 84 as essential to preserving the neighborhood grocery stores and a broad tax base in California. (UFCW Press Release, Sept. 24, 1999, at 30).

In Nevada, big boxes fared worse. In July 1999, Wal-Mart announced that it would build three stores in the Las Vegas Valley. Wal-Mart's new proto-typical stores often contain up to 200,000 square feet and offer a full line of groceries.

In October 1999, local commissioners in the Las Vegas area voted in favor of a zoning ordinance that provides:

[I]f any business exceeds 110,000 square feet of retail space then no more than two (2) percent may be used for the sale or display of food. For these purposes, "business" shall be defined not only as a single store, but also two or more stores within the same shopping center which share check stands, management, controlling ownership interest or warehouse or distribution facilities. No business over 110,000 square feet devoting more than two percent (2%) to food at the time this restriction was enacted shall be required to reduce the amount of space devoted to food, but it may not expand the square footage so devoted. (Clark County Zoning Ordinance to amend Title 29, Chapter 29.02, Section 29.02.030)

The State's Attorney General issued an unofficial opinion on October 5, 1999 (the Opinion), upholding the constitutionality of the ordinance. The Opinion addresses the following issues:

1. Does the county have the authority to regulate and restrict the amount of grocery store use within stores of a certain size?

The Opinion states that the county government holds a general police power to protect the health, safety and welfare of the public and that Nevada law provides that county governments may enact zoning ordinances to regulate and restrict the erection, construction and other repairs and uses of buildings and structures or land within its zoning districts.

2. Does the restriction place an undue burden on interstate commerce? The Opinion considers the following factors: (i) whether the ordinance operates evenhandedly on interstate commerce versus local commerce; and (ii) whether the ordinance effectuates a legitimate local public interest.

The Opinion uses the public welfare argument to address the first factor. Such public welfare issues include concerns for the health, safety and welfare of the public driving, walking and parking in heavy traffic in concentrated areas. The rational-basis test (a standard of review used to determine whether a law is rationally related to a legitimate government interest) is applied to the second factor. The Opinion finds that the purpose of the ordinance is rationally related to a legitimate public purpose. The Opinion also states that no evidence of undue burdens has been presented outweighing the local benefits.

3. Does the restriction deny equal protection of the law to retail businesses? Because the zoning ordinance does not target a suspect classification (such as race, alienage or religion) the Opinion concludes that the same rational-basis test applied in item 2, above, applies here.

4. Does the ordinance violate due process? The Opinion finds that a grocery store size limitation within structures of a certain size does not deprive retailers from all reasonable uses of their land. Therefore, the ordinance is not a deprivation of property without due process of law.

These recent attempts to restrict big box retailers from entering markets are not limited to the west coast. In October 1999, the City of Rockville, Maryland, voted to enact a six-month moratorium (until April 10, 2000) on use permits for single-use retail stores consisting of 60,000 square feet or more. During this time, the City's staff is reviewing the goals for the redevelopment of Rockville Pike and the existing conditions on Rockville Pike to determine whether big box use is appropriate and the long-term reuse implications if the big box retail trend changes. The moratorium came on the heels of Costco's proposal to develop a 135,000 square foot box in an existing retail center located on Rockville Pike.

The owner of the proposed site had already shut down several stores in the center to allow for the new development of the Costco store. The property is properly zoned for retail use. Costco's plans for its building were to avoid the typical warehouse look and to camouflage the structure behind a ring of other retail stores built around the perimeter of the property.

This moratorium is a controversial matter. Opponents of big box retail point to many practical issues, such as traffic impact, pedestrian flow, aesthetics, parking and reuse implications to support the restrictions.

Proponents have similarly compelling arguments against the restrictions. They argue that by limiting competition in the retail industry, higher prices will result and these higher prices will be passed on to consumers. Also, limiting local government's ability to make local land use decisions may reduce opportunities for economic development. Finally, there is the consumer's right to the choice of where to shop. Supporters of big box retailers ask: "Would a similar moratorium be imposed in a down market?"

Perhaps the most important question is whether restrictions on a property owner's use (when the property is already zoned for such a use) is an infringement on that owner's property rights; and further, whether such restrictions could be interpreted as "taking" without just compensation. This question will surely arise as big box retailers encounter more resistance from local communities. In addition to the typical due diligence performed during the site selection process, retailers must now, more than ever, take into account the local political climate relating to the development of big box retail before committing to a new site.

Ms. Cook is an associate in Holland & Knight's Real Estate Group in the Washington, D.C., office. She can be reached at 202-457-7034, and at acook@hklaw.com.