How rising costs and red tape squeeze small businesses out of downtown Santa Cruz

For nine years, Scott Zankman and Nicole Rimedio have run their fine-jewelry shop, Variance, in a bright storefront off of Pacific Avenue in downtown Santa Cruz. It’s been a good home, but new challenges have led them to consider uprooting and moving somewhere else. 

They’d prefer to stay downtown, but a mix of factors including climbing rents, parking difficulties, ongoing construction of hundreds of new housing units, and rising commercial vacancies has the husband-and-wife team seriously considering whether to relocate to a place like the Westside when their lease comes up for renewal next year. 

“There is a significant amount of potential downtown and we want to be a part of that, but it feels very hit or miss,” said Zankman. 

Opening a storefront in downtown Santa Cruz requires more financial and emotional endurance than most small businesses have, local owners say. While downtown offers high visibility in the city’s commercial center, there are substantial hurdles that make getting and staying open difficult. High rents and skyrocketing construction costs to update aging buildings in the area deter many small business owners. Long waits to navigate the city’s often confusing and congested permitting system can add agonizing months of lost rent and revenue before a business even opens its doors. 

The push to fill empty commercial spaces downtown might be ramping up now that the city approved a pilot project last month for Pacific Avenue that includes mandatory registration for properties that sit empty for longer than two years, with potential fines for negligent owners. The initiative is part of a broader stimulus package aimed at revitalizing the city’s flagging downtown corridor. 

However, with the number of new and long-term vacancies drawing concern from community members about the future of downtown, and more commercial space in new multistory developments coming online over the next decade, some business owners would like to see more support and lower financial barriers for small local businesses in order to help fill those empty storefronts.

For instance, Rimedio said she’d like to see a return to programs like free street parking during the holidays and on Sundays, which she believes would help encourage foot traffic.

“There’s been a lot of emphasis on bringing people downtown via events [like the Downtown Wine Walks], but that’s not really great for our business in our experience,” said Rimedio. “We’d like to see more initiatives encouraging shopping downtown.”

Beyond parking issues, many of the buildings along Pacific Avenue and adjacent streets are older, and require remodeling. The responsibility for paying for updates typically falls to the business owner – not the property owner – and with construction costs at an all-time high, even modest changes can be a dealbreaker for prospective business owners. With many currently vacant storefronts requiring extensive upgrades that can easily run to hundreds of thousands of dollars, some owners said they’d prefer to take their business’ physical location elsewhere – or keep their idea in their back pocket for a more fiscally favorable time in the future. 

Latin American chef Diego Felix moved to Santa Cruz from Buenos Aires, Argentina, 10 years ago and established two businesses: a fine-dining pop-up, Colectivo Felix, and Fonda Felix, a kitchen that sells empanadas to-go on the Westside and wholesale to breweries and wineries throughout the county. 

For the past four years, he has been actively looking for a space downtown to open a food and drink business, but has so far been deterred by investment costs that are well outside of his budget. 

Felix has pursued ideas ranging from a high-end Santa Cruz-inspired Argentinian restaurant in partnership with his brother-in-law, Brad Briske, the chef and owner of Home restaurant in Soquel, to a walk-in storefront for Fonda Felix’s popular empanadas. He’s looked at several spaces in the downtown area with rents that ranged from $3,000 to $6,000 per month. All of them needed to be remodeled to suit his needs, with a minimum estimate of about $100,000. 

That’s too great of a gamble for him. “For a small business, it’s not worth it,” said Felix. 

Monthly rent below $2,000 would be reasonable for his restaurant ideas, he said, and for the cost of improvements to not fall solely to business owners. “As a chef and cultural promoter, not having a physical space to share that with the community is a bummer. But if that’s the price, I can live without it,” said Felix. 

He believes that the city and community need to find a way to make opening a business in downtown more affordable if they want Santa Cruz’s culture to flourish. “Downtown needs new business and businesses need downtown. It’s both,” said Felix. “How do they merge together without demanding so much money from one side? How do we close that gap?”

Even after signing a lease, new businesses face what can often be their most substantial hurdle: obtaining necessary permits. The process typically takes at least six months, but can stretch into years. Navigating this process ranges from time-consuming to maddening, according to owners, especially for food and drink businesses that require additional levels of inspections and certifications. This issue is widespread throughout the city and isn’t unique to downtown, but the concentration of older buildings in the area that require construction – and, therefore, building permits – compound an already tough process.  

Max Turigliatto, who reopened former Westside Santa Cruz dive bar the Watering Hole as neighborhood pub Mission West in 2020, signed a lease for the former The Poet & The Patriot Irish pub on Cedar Street in January 2023. He aimed to renovate the dated interior into a cocktail lounge with a New Orleans vibe called the Alley Oop that would complement the Kuumbwa Jazz Center next door. 

Originally, Turigliatto had hoped to welcome guests in February 2024. But building upgrades has so far pushed his opening day by more than a year and a half and added more than $300,000 in construction costs to his original budget, forcing him to search for additional financing. Those renovations included adding an Americans with Disabilities Act-compliant ramp inside the front entry – for which he had to remove 12 seats – and reducing the lounge’s total capacity from 65 to 50 people to comply with fire code regulations. While these updates were the result of state mandates, he feels the city could have found creative solutions to maintain ADA-accessibility that were less impactful. 

The reduction of seats and capacity means a loss of about $1 million in annual revenue, he estimated. “It literally changed my entire business model,” he said. “It affects your menu, your loans, everything.”

The process has been arduous for Turigliatto, who believes that the stress and financial burden of starting a business in Santa Cruz is a deterrent for other entrepreneurs, especially in downtown, where rents can be higher and the buildings are often older. 

“You’d be lucky to open in a year and a half if there’s any substantial kind of remodel. Two or more years is probably more realistic,” said Turigliatto. He said he’s grateful for guidance from his architect, Bill Kempf, a 30-year veteran in the industry, whose expertise helped reduce the number of revisions for his permits, saving him time and money for resubmissions. “But not everyone has Bill. Clearly, even with his tremendous guidance, it’s still been a long journey,” Turigliatto said. He hopes to be open by the end of 2025, but wasn’t able to give an exact date. 

Turigliatto feels that the city’s focus has been pulled toward larger building projects in the area and away from supporting small businesses. He’d like to see more tangible support from the city, such as an assigned liaison who could advocate for a business owner throughout the process of opening. These liaisons already exist in other communities, including Santa Clara and Walnut Creek. 

Opening a new business should be a shared, vested interest between business owners and the city, said Turigliatto. “I think right now [the city’s Economic Development department] is doing a solid job at the macro level. Their support falls short at the micro level,” he said. “What makes a town a town isn’t the big buildings, it’s the locally owned businesses that give a town its culture.” 

While reporting this story, several business owners who had experienced challenging situations with the city told Lookout that they were unwilling to publicly speak about their experiences out of fear of retribution in the form of delayed or denied permits. 

The widely held belief that the city retaliates against business owners who criticize the permitting process is “absolutely not true,” said Economic Development Manager Rebecca Unitt. 

The economic development team’s role is to be a resource for businesses, and there are no repercussions for criticism; in fact, they welcome feedback so they can work to find solutions, said Unitt. “We know that it’s challenging and can be confusing. We want to hear when those issues come up, the sooner the better,” she said.

The city is working on three new programs to ameliorate the permit process, including one that is already available. 

In April, the city began offering review meetings with a planner before an owner applies for a planning or building permit. The planner can give feedback that will ideally reduce the number of times the application has to be revised, thereby shortening the formal review process, said Unitt. 

Within the next year, the city plans to roll out two support services aimed at decreasing the cost and length of time it takes to secure permits by up to three months and several thousand dollars. 

The city is targeting this fall to launch a new online permitting system that will give staff and applicants more visibility into where their permits are, streamline payments and integrate the process among departments. The planning and building departments’ current technology has been in use since 2008, and is so old that it’s no longer supported by its own software. Using the software is confusing and adds unnecessary wait times, business owners said. 

The new online permitting system was originally slated to launch in April, but it has taken more time than anticipated to integrate all of the permits that the city provides. “We want to make sure it’s a good rollout when it is ready to get out there,” said Unitt. 

The city is also considering eliminating use permits – which certify that the business complies with zoning and community standards – for certain types of businesses, including restaurants that serve alcohol, art galleries, gyms and services like hair salons, in downtown in order to stimulate the area. Obtaining a use permit is one of the first steps for these types of businesses. It typically takes at least three months, and costs $3,500 to $4,000. If the new system is approved, these businesses could quickly obtain a simple “over the counter” zoning clearance, which costs $331. 

Economic Development will present a proposal to the city council at its Tuesday meeting that includes other ideas to further reduce permit hurdles. If the proposal is approved, it will take six months to a year to enact. 

“We’re looking at all the opportunities to reduce the timeline that it takes for businesses to get started, because time is money,” said Unitt. “We’re rethinking what types of businesses that we want to see in our downtown, make the process easier and reduce costs so that businesses can get operating as soon as they can, and we can enjoy them.”

The city already has a dedicated liaison to help businesses navigate permits, building codes and ordinances. It also can help connect property owners with tenants, and offers subsidized rent for new businesses through the Downtown Pops! Program. 

Variance’s Zankman and Rimedio acknowledge the improvements and efforts city officials are making, but they still believe the city needs to be doing more for small business owners like themselves. 

“We would like to see more support for what’s already here,” said Rimedio, explaining that it sometimes feels like the city is more focused on what’s coming than what’s already in existence. “Santa Cruz is a destination. There’s a ‘one-of-a-kindness’ here, but that needs to be emphasized more.”

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FOR THE RECORD: This story has been updated to correct an error in the spelling of Scott Zankman’s name and the name of his business, Variance.

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