Open Letter to the Governor
Dear Governor Newsom,
We met many years ago, when we were doing startups in retail — you were doing PlumpJack and my wife and I had created Petroglyph. Since those days I have worked at Netflix and Adobe and, most recently, had built a new retail startup in San Francisco called Neomodern (on Union Street). After 3 years of growing that business I ended up shutting down in April, I couldn’t continue in the new pandemic environment.
Jennifer, my ex-wife who has been running Petroglyph and our 6 locations for the last decade, is suddenly facing 6 leases in 4 counties — and even with a PPP loan can project forward and see the business cannot make it far into Q3. The rent is crippling. She doesn’t just need a loan: it’s likely it couldn’t be repaid. She asked me to help her close some locations in trying to salvage a few— but I’m resisting. What an unnecessary loss of jobs and value to communities. And it’s a negative cycle as more and more local shops close, the flavor of downtowns, gone. Los Gatos. Santa Cruz. Roseville. Willow Glen…
Obviously bricks-and-mortar retail is getting hammered, and commercial real-estate will be crippled for at least many years, possibly never being what it has been. The pre-covid rent expense to the small businesses is suddenly disproportionate to the anticipated revenues, post-covid. Commercial property owners’ values face a tectonic shift. They have their own expenses and even if they could afford to be flexible, they aren’t motivated to do so with a binding commercial lease. Their obligations to banks force their hands.
To get through this, small business has to be in partnership with their landlords. Before everything shuts down, in weeks to months, they must form collaborative relationships for their mutual survival. We don’t know what commercial real-estate is going to be worth in the new age — each emptying space making the surrounding spaces less valuable — a negative network effect. Perhaps the way to figure it out is to reverse engineer the values: let businesses try to make as much money as they can in spaces, and over time you can see what locations (and thus buildings) are worth.
If you want to save communities, I think it will take an act from government to mandate a simultaneous amendment to commercial leases that puts landlords and tenants in a collaborative state — with rents defined as a percentage of sales (perhaps the percentage it had been in the prior 12 months). But it can’t be on property owners alone. It would also necessitate corresponding support from the banks, to support the landlord’s position — and write off an adjustment for the buildings’ new value, and a recalibration of property owners’ taxes and loans. The goal is to keep retailers operating, keep landlords getting paid, keep banks receiving cash flow, recalibrating the system and not letting the engine spin down — We all want the spaces to stay occupied and let communities keep their restaurants and stores; instead of putting the burden on retailers as is happening now, and create a rippling collapse, let landlords and banks share the new economics fairly, and they all recognize their necessary inter-dependence.
I don’t know how to make this happen, and it’s certainly complicated, but if something doesn’t happen quickly the bankruptcies and unemployment will accelerate and the engine will spin down. Yours is the kind of leadership small business could use — to avoid thousands of lawsuits and liquidations. You always struck me as a cool and creative guy. Something has to happen right away. This isn’t a handout. It’s a broad structural shift. I really don’t want to see Petroglyph close suddenly, after 27 fantastic years.
I know you’re trying to navigate these already-insane waters. But small business owners need help quickly.