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Commercial tenants' pandemic financial troubles have had a devastating effect on co-op and condo budgets.
AUTHORMark Hoffman, President, Hoffman Management
Most co-ops and condos have a fairly simple financial formula of expenses being matched to revenue. But when a catastrophic event occurs, this calculation explodes. You recently dealt with this at one of your buildings, which you had to bring back from the brink.
This co-op is located on the Upper West Side with approximately 150 apartments and four retail spaces. Its annual budget is about $3.6 million, of which $1.3 million is generated through store rental revenue. Obviously when the pandemic hit, it was a major shockwave and all the retail tenants stopped paying rent. So it pretty much was a seismic event.
What steps did the building take to deal with this?
First, we analyzed each store tenant’s financial situation and ability to meet their rental obligation. Thankfully, one of those four was an AAA [Federal Credit Union] tenant, so we took a fairly hard line approach with them. We gave them a deferral of rent just for the first two months of the pandemic, and that was paid back over the next 12-month period, and so we were able to keep that revenue source in place. The other three stores became more of a challenge. One was a restaurant, and the two others were smaller types of tenancy. All of them stopped paying rent.
When that happened, where did the co-op find revenue?
We were initially looking at a possible 20% increase in maintenance if the stores continued not paying rent. Through the negotiation process we were able to restructure a new lease with the restaurant. Obviously we gave it a lot of free rent, but they paid some of the back rent and some of the tax pass-throughs. With the other two tenants, we did not restructure their leases, but we took less rent. And so when we started the year we were hoping to have an approximate $265,000 cash flow before the pandemic, and through the various negotiations and maneuvers that we undertook, incredibly enough, we got to a breakeven.
So there were no maintenance increases. How is next year’s budget looking?
We actually just adopted our budget because this building’s fiscal year is from June 1 to May 31. There is no maintenance increase, and we actually have a projected cash flow of $165,000.
What about the underlying mortgage?
In addition to negotiating the leases, we were able to do a couple other things. One of them was a refinancing of the building’s underlying mortgage, which was actually coming due in a year anyway.
But the building did have to pay a penalty?
It was very small, just a 0.1% penalty. But we were able to shift from an amortizing loan to an interest-only loan, and through that process we saved $155,000 a year on debt service. We were able to get an incredibly cheap rate, 2.85% for 10 years. And this way we’re able to pay principal whenever we choose. We can pay up to 10% of the loan every year if we so choose. So that was a major positive event that saved us quite a bit of money. In addition, I was able to rework the staff schedule. Through rescheduling — not even eliminating positions but just rescheduling — I was able to save about $50,000.
Did the building get a Paycheck Protection Program loan?
Yes, because of the problems that we had with our retail revenue stream. We applied in the second round and were able to obtain a $195,000 loan.
So, at the end of the day, the co-op sounds as if it’s in very good shape financially.
There could be an argument that it’s in even better shape than it was, with the recasting of the loan. We were able to extend two of the leases to February 2022. So we’ll see what happens with the re-renting or if the tenants decide to stay. But certainly for the next 12 months, I would say, yes, we’re on very solid footing.
For other co-ops facing the same kind of catastrophic events, do you have any advice you’d like to share with them?
You always have to maintain calm and be composed. There’s always a solution to the problem. I had to do a lot of hand-holding with the board through the process. There was actually a change of the board in the middle of all this because several board members were opposed to offering new leases to the tenants during this pandemic. And it turned out that there was a shareholder vote and they voted a new board in, which worked with me to continue the process and put all these pieces of the puzzle together. So it was an incredible ending.