New York's Cooperative and Condominium Community

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Budgeting Challenges for Co-ops With Commercial Spaces

Andrew Freedland, Partner, Herrick Feinstein in Legal/Financial

New York City

Co-op boards with commercial spaces have long relied on income from their leases to business entities as a source of revenue to fund their building operations. However, over the years, particularly in the wake of the pandemic and shifting market dynamics, vacancies have emerged. There are increasing challenges in attracting quality, long-term tenants willing to pay competitive rents. A significant factor contributing to this is the shift to online shopping. With the ability to reach a broad audience online, businesses have reconsidered the need for physical retail spaces. This change is impacting the demand for commercial spaces in co-op buildings.

Meeting a budget shortfall. As a result of these changes, co-op boards are faced with the daunting task of balancing budgets amid shrinking income from commercial spaces. With the market for these spaces tightening and rents decreasing, co-op boards must explore viable solutions to maintain financial stability. There is a market for commercial space. The issue is that the market is tighter. The market also may be bringing a rent that's lower. If a tenant leaves but the options available for attracting a new tenant to the commercial space are positive, the board may want to tap into a healthy reserve fund to float the building for a few months. The building will want to simultaneously work with a broker to bring a strong commercial candidate into the building. 

Maintenance increases versus assessments. If the co-op can't get a tenant three, four or five  months down the road, the board may consider doing an assessment to cover the shortfall. A board can also increase maintenance charges for residential shareholders. If a co-op signs a long-term lease with a commercial tenant where the rent reduction is significant, a permanent increase in maintenance may be necessary. For example, if a departing tenant paid $25,000 a month and the change in the market means the rent has dropped to $15,000 or $17,000 a month, an increase in maintenance may be needed to cover that shortfall. However, if it takes several months to find a new tenant to pay a competitive rent that doesn't represent a significant rent reduction, a temporary assessment might be a more appropriate solution to cover the shortfall. Navigating the challenges requires a nuanced approach, considering the specific circumstances of each co-op building, the duration of the lease, and the overall economic atmosphere. 

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