The residents of Confucius Plaza, a 762-unit low-income co-op in Chinatown, had already been hit hard by the business downturn in Lower Manhattan since the terrorist attacks of September 11, 2001. But they never expected that one of their biggest financial problems would come from within their own building.
Quik Park, the company that operates the building's commercial parking garage, is refusing to leave. Problems with Quik Park first arose several years ago over repairs that the garage company said needed to be done. Quik Park offered to do the repairs for free as long as the building renewed its garage contract. But the building went ahead with the work. Quik Park got an injunction to stop the repairs, claiming they were preventing them from operating their business. The building got the injunction lifted and Quik Park, aware that it wasn't likely to get its lease back, stopped paying its rent in Spring of 2001, over a year before the lease was set to expire in February 2003.
Confucius Plaza took the company to court over non-payment, and when the lease was up and the garage stayed put, the building knew it had an ugly situation on its hands. "We're in prolonged litigation, the lease has expired, rent is due and nothing can happen," says David Goodman of Tudor Realty, manager of the HUD/HPD-subsidized building. "While we're aware of the fact that it's going to continue costing the co-op money until they do get possession, it's a cautionary tale."
Indeed, many property managers, boards of directors, and attorneys can tell their own version of this saga, often with shockingly similar details. The friendly neighborhood parking garage is supposed to be a nice convenience of co-op or condo living. Residents can enjoy parking without the hassle of searching out a space on the streets, the building earns substantial rental income from the operator, and the garage company can run a profitable business. It's a mutually beneficial relationship for all.
But when the lease is up and it's time for the operator to leave, suddenly that once-happy relationship can go south in a hurry, causing tremendous financial hardships for the building. The operator simply refuses to pull up shop, stops paying rent while still collecting parking fees, and the building must begin legal proceedings to try and force the tenant to go. Buildings can lose thousands of dollars in lost rent and legal fees. It's a nightmare scenario that managers and attorneys say leaves few viable options.
"If you happen to lease your place to a clinker," warns attorney Aaron Shmulewitz of Reed Smith, "get ready to have them play games with you, drag you through the courts, and legally extort money from you." Shmuelwitz is a veteran of garage disputes, battling the Chelnik parking garage family twice over unpaid rent and holdover disputes. The Chelniks operate their business in the same way as most New York garage companies; each individual garage is structured as a separate business entity, with no assets other than the garage to go after.
While the majority of operators do honor their side of the lease, it's the few bad eggs that can cause huge headaches. "Every so often you have a rogue who behaves in this fashion," says attorney Mort Rosen, a partner in Rosen & Livingston. "I find it one of the most egregious and outrageous things to do. They're literally stealing from you. But, unfortunately, in New York it's not a crime."
Buildings that are about to enter into a new parking garage lease are in the best position to avoid this situation. "The key is prevention," Rosen says. "Know who you're dealing with, get proper security [deposits], and above all, get a properly drafted 'good guy' clause." Some garage operators are notorious in the industry as holdovers and troublemakers, he notes, and managers and attorneys should be able to consult with their peers and determine which operators should be avoided at all costs.
Once those disreputable operators have been weeded out, buildings should try and get the highest possible security deposit from the garage operator. While most garage operators are used to putting up three to six months security, Rosen suggests trying to get at least a year's security at the highest rate written into the lease, since that is often the amount of time most court proceedings can drag on for.
Shmulewitz says getting a substantial personal guarantee from one of the garage principals is ideal. "You want a personal guarantee by a principal or a letter of credit posted by the operator entity," he suggests. "That creates a sum of money to go after should the shell corporation default to the building. It holds to the fire the feet of the principals. Their personal money is at stake and that makes them less likely to screw around."
One building, 1199 Park Avenue, was able to recoup $45,000 from Martin Chelnik, principal of Melcar Garage, the operator in the building that refused to leave. While it was a small amount compared to the $350,000 in lost rent, buildings without personal guarantees are often unable to get anything back from these cases. Typically, they will settle with the garage companies after a protracted legal dispute, caving in and paying them to leave so that they can begin getting rent from the new garage operator.
Rosen recommends running a credit check on the principals of the garage company. If they have assets or wealth, he recommends including a "good guy" clause in the lease that will hold the principals liable at the current market rental rate if they fail to meet the terms of the lease and vacate the premises properly. While most operators tend to balk at such terms, "You make sure that there's not going to be any discussion if they're not willing to discuss good guy clause," Rosen says. "It's up to your lawyer to make sure that you're going to get the protection you need."
For buildings faced with a deadbeat operator, litigation is the only effective option. But Rosen warns that the garages and their lawyers are well-versed in the art of delay tactics, exploiting every legal loophole to their advantage. Their goal is to stay put as long as possible while not paying rent, typically while trying to force some sort of buyout situation from the landlord. The buildings will probably win their lawsuits against the garages in the long run, but after months of legal fees and lost rent, it could be a hollow victory.
Buildings could take a "grassroots" approach to evicting the garage company. Residents can try to organize a building-wide boycott of the garage or distribute flyers to other garage customers. But it's a strain for residents to find a new place to park on a regular basis, and while parkers who come in off the street might be sympathetic, it is unlikely that they'll put their car in reverse and leave the garage. Paul Herman, managing director at Rose Associates, says one of his buildings even tried to change the locks on a garage tenant, but the police showed up and forced it to stop. Even if the garage companies aren't paying rent and are holding over on their leases, they're still tenants and afforded certain protections by the courts.