The coronavirus pandemic has upended a longstanding premise of New York City co-op and condo economics: commercial space that was once viewed as a cherished cash cow has, virtually overnight, become an albatross. With many businesses shuttered or struggling, co-op and condo boards have seen a sharp drop in rental income from their commercial tenants. That drop, in turn, is forcing many boards to choose between two distasteful options: impose a short-term assessment, or raise residents’ monthly charges.
“It used to be that having a commercial unit was a boon to the residential units,” Leni Morrison Cummins, a member at the law firm Cozen O’Connor, tells The Real Deal. “Coronavirus has sort of shifted that paradigm. If you have 15% of the building not paying, that means the other 85% has to pick that up.”
For every co-op shareholder and condo unit-owner, the biggest question is: How much will I be out of pocket if payments stop coming from retail units? “If the commercial tenant is not paying, then the corporation (effectively, all shareholders) must make up the entire shortfall,” says Jonathan Canter, a partner at the law firm Kramer Levin Naftalis & Frankel. “So a default could threaten a double hit to the residents – having to carry the commercial space’s share of the building’s taxes, and the loss of income that may be keeping monthly expenses affordable.”
Jim Goldstick, a vice president at the property management company Charles H. Greenthal, says that among the co-ops he manages that have lost commercial income during the pandemic, the increase in out-of-pocket costs for shareholders ranges from 10% to 20%. Goldstick says he’s encouraging those co-op boards to make up for their budget shortfalls through assessments rather than increasing maintenance, which is a more permanent levy. High maintenance can also drag down apartment values, with a negative impact on sales.
For Maxwell-Kates, which manages co-ops with commercial tenants in the Flatiron District, Midtown East and the Upper East and Upper West Side, the loss of steady retail income has prompted a 50% increase in the number of buildings refinancing their mortgages, says Max Freedman, the company’s chief executive. “The only other option is to put through an assessment, which is very painful, especially during this time,” he says. “Without retail tenants … it trickles down, and it adversely affects everyone else in the building.”
Freedman recalls one co-op where commercial rent accounted for about 30% of the building’s budget. Of the property’s five retail tenants, only one, a liquor store, remained open after the pandemic hit. In that case, the board successfully applied for three months of mortgage relief from its lender. For its four shuttered tenants, the board agreed to reduce rent for April, May and June and defer the balance of rent owed.
Mark Hakim, of counsel at the law firm Schwartz Sladkus Reich Greenberg Atlas, has represented co-op boards in similar predicaments. He says the emphasis is on negotiating an agreement with retail tenants because the last thing any board wants is a vacancy and no income. “How quickly are you going to get a new diner in there, for God’s sake?” Hakim says. “That space will sit vacant for years. If you’re a co-op, find a way to work with them.”
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