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A New Tool to Fight Commercial Space Vacancies

David Bogoslaw in Building Operations on December 22, 2017

New York City

Commercial Leases
Dec. 22, 2017

Pinched by online shopping and the resulting decline of brick-and-mortar retail stores, many co-op and condo boards have been scrambling to lease their commercial space. A growing trend is for boards to sign 99-year leases with investor groups. But is peace of mind that comes with a long-term lease worth the risk of losing out on potential future revenue? 

A co-op that gives someone a 99-year lease is “giving away the future value of the retail income stream which could be theirs, which could be much more than whatever the cash infusion they’re getting today is,” says Adelaide Polsinelli, principal and senior managing director at Eastern Consolidated, a commercial brokerage. She advises against settling for a flat rent – even as high as $1 million a year – for the next 99 years when the space could be worth much more in 50 or even 20 years. 

Polsinelli concedes that some co-op boards may feel they don’t have the capacity to lease the space and manage the tenants, which is why they would welcome an investor who’s “going to take that off their plate.” If a board wants relief from the daily headaches of managing commercial space, a managing agent could handle those, she says, while a good broker would be able to lease the space after vetting tenants to the co-op’s liking, mitigating any risks. 

“Usually, once you give up your right and assign a 99-year lease to a third party, that third party can put whoever he wants in there,” she warns. “It depends on what your agreement is with him. Before engaging in this relationship, a board should put the lease out for bid to make sure they are getting a competitive price for the lease and not leaving money on the table.”

Co-ops should, at the very least, protect themselves by negotiating Consumer Price Index increases and rent resets into long-term commercial leases, Polsinelli says, and they should never agree to a flat rent for the term of the lease. The lease agreement should also specify what would happen in the event of a default, she adds, because if the operator can’t get tenants and the space is vacant, it makes the building look bad. Under the agreement, an investor that defaults should be required to “relinquish control of the space back to the co-op and forfeit the security deposit,” she says. That will allow the co-op to find tenants at the lessee’s expense. 

“When you give away control of the ‘face’ of the co-op to an entity that has no vested interest in any other part of the property, you’re giving away more than just the value of the retail,” she says. “It can have an impact on the value of the apartments above.” 

In the end, the solution to the problem of vacant commercial space might be much simpler than negotiating a complex 99-year lease. It might just be a matter of lowering the rent. “If a space is reasonably priced,” says Ira Meister, president of the management firm Matthew Adam Properties, “it rents.”

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