New York's Cooperative and Condominium Community

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Commercial Tenants

A Revenue Stream Dries Up

Bill Morris: Welcome to Legal Talk, a conversation about governance issues that New York co op and condo boards are tackling as we speak. I'm Bill Morris with Habitat, the magazine for New York co op and condo directors. And joining me today is Andrew Freedland, a partner at Herrick Feinstein. Welcome aboard.
Andrew Freedland: Thanks so much for having me.
Good morning, Bill. How are you?
Bill Morris: Good. Yeah, doing well. Good to see you again, Andrew. Now, as we know, the pandemic was a tough experience for co ops with commercial spaces that they lease out to various businesses. The pandemic was a wallop, but there was trouble in River City even before the pandemic.
Give us a quick history lesson on co op commercial leases, and then we'll get up into what boards need to do to address that today.
Andrew Freedland: Thanks so much. Commercial leasing certainly has been having its issues, I'd say for almost a decade at this point, now. Years ago, many co-ops that own their commercial space on the various avenues, even in the streets, relied on that income, and they still do rely on that income to fund their buildings.
The issue that many of these buildings are having is that the rents today are not what they were many years ago. The spaces are just not renting for the same amount. There are more vacancies and buildings are having issues bringing in tenants, bringing in quality tenants, bringing in tenants that are going to stay for those leases that we used to do for five, seven and ten years and getting the rents that they would like to see because the rents seem to be sliding lower and lower.
They're not falling to nothing. But they're just not what they used to be.
Bill Morris: Now is there a culprit in this trend, Andrew? Can we point at that rich guy that runs Amazon? Is that the villain here?
Andrew Freedland: He's probably, I don't want to call him a villain, but he's probably one of the issues.
If you have a, you have a retail space on, one of the major avenues, let's say you have it on 5th Avenue, Madison Avenue, even on 2nd or 3rd or Broadway on the West Side, wherever it may be, if you have a store, you can do a significant amount of online business out of that store.
You don't necessarily need stores all over New York. You could have one store and you can sell all over the city online. You can sell all over the country. You can sell all over the world. You don't need the same amount of space that you needed 10, 15 years ago.
Bill Morris: We're talking about the service economy now.
I was joking about Bezos and Amazon, but we all know the lobbies of buildings in New York are full of packages everywhere you go. Everybody's getting everything delivered. That's affecting this trend. Am I right?
Andrew Freedland: Absolutely. Absolutely. Absolutely. If you sell, let's pick and it doesn't even have to be something every day, an everyday type of item. You need toothpaste or Tylenol.
You may not necessarily be looking to go down to the pharmacy. You may be looking online and saying, I wonder how quickly they can deliver Tylenol or toothpaste to me, from a store that may be miles away from you, but it doesn't matter if they're going to get it to you in 20 minutes or even maybe in two or three hours, perhaps you don't mind.
And the same goes for even high end items. What if you want to buy, shirts or ties or shoes or whatever it may be, maybe you just jump online. You don't have to go to the store that's in your neighborhood or maybe a subway ride away. You can buy those items and have them delivered right to you.
And in many cases, they're there the same day or the next day instead of going around and going from store to store, looking for the exact item that you wanted.
Bill Morris: So this trend was beginning, let's say 10 or so years ago. The pandemic exacerbated the situation. And now today a lot of co op boards are sitting there with once valuable space on their ground floors that they can't turn into any money.
What's a board going to do? They have to have a balanced budget, right? What's the answer?
Andrew Freedland: They certainly do have to have a balanced budget. There is a market for the space. The issue is that the market is tighter. The market also may be bringing a rent that's lower. And what do you have to do?
You got to balance the budget. You're absolutely right. Either you're increasing maintenance charges to your residential shareholders in the upper floors, creating assessments, hoping that you're going to be bringing in a tenant quickly or tapping into a reserve. If you have, if your tenant leaves tomorrow morning and you don't have a tenant to come in, 30 60 days out, perhaps you're looking at the budget and saying, what should we do to balance the budget?
We're going to be out x dollars for the next few months and perhaps for a month or two, you're looking at your reserve fund saying, all right, we have a healthy reserve. Let's pull some money out of there to float us for a few months. But if you can't get a tenant three, four or five months down the road, maybe you say it's time to do an assessment to bring in that money. Or, if you can't get a tenant for even longer term, maybe it's time to increase maintenance. Although if it's a question of bringing in a new tenant, maybe you're looking more at an assessment just until you get one. If it's a question of, we had a tenant at let's say $25, 000 a month and our new market, according to the broker, who's going to be bringing somebody in for us, hopefully it's only 15 or 17, 000 a month.
Perhaps you're increasing maintenance to cover that shortfall.
Bill Morris: Now, if you increase maintenance, that's forever. An assessment, you can end it if you bring in a tenant. Do you recommend one or the other, or does it depend on the situation of the building, the neighborhood, the atmosphere, whatever?
Andrew Freedland: I think it really depends on the situation. If you have a tenant, if you have a commercial tenant that has come in and the rent has gone down. Let's say your rent went down 10, 000 a month. So that's 120, 000 for the year. You need to make up that shortfall. If you have a long term lease, I think it's time to increase maintenance.
You know that the horizon on that is however, whatever the duration of that lease is. So it's probably time to increase maintenance. If it's a question of we don't have a tenant and we're looking and we know what sort of the ballpark of the rent is going to be, maybe at that point you're looking to in the short term tap into some reserves for a few months and or pass an assessment to cover that shortfall.
Bill Morris: All right. Thank you, Andrew Friedland from Herrick Feinstein. An interesting conversation about a vexing problem for co op boards. Thank you, Andrew.
Andrew Freedland: Thanks so much.

Andrew Freedland, Partner, Herrick Feinstein

Vacancies up, rents down. Commercial leasing has been having issues for almost a decade. Years ago, many co-ops and condos relied on rental income to balance budgets, but rents today are not what they were many years ago. There are more vacancies, and buildings are having trouble bringing in quality tenants who are going to sign those five-, seven- and 10-year leases we used to see. 

Three budget options. With a tighter rental market and lower rents, what are your options to create a balanced budget? In the short term you could tap into the reserve fund, using it as a float for a few months while you try to fill the vacant commercial space. But if you still haven’t found a tenant three, four, five months down the road, a temporary assessment is a reasonable next step. If you can’t find a tenant for an even longer term, it might be time to increase maintenance or common charges.

Case by case. The solution depends on the situation. You’ve got to balance the budget, so you’ve got to be realistic about how long you think the shortfall is going to last.

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