Upper hand. When sponsors convert buildings with substantial commercial space, they often hold the lease for that space as master tenant and, in the offering plan, dictate terms that give them significant rights that can cause problems when the board gains control. We represent a large co-op near Central Park with several retail spaces where the sponsor, who had complete control over who it could sublet to, was leasing to a tobacco store and a gym. There was excessive sidewalk traffic with people loitering about and loud music blaring from the gym. What’s more, the building, which was converted in the mid-80s, was locked into a 50-year lease with the sponsor. While it had built-in rent increases, the calculations were 38 years old and definitely favored the sponsor.
A better deal. The building also has a parking garage, and early on the board took advantage of the federal Condominium and Cooperative Protection and Abuse Act. That allows boards to terminate the master lease for spaces that are primarily used by residents once the sponsor loses control of the board. So the garage was carved out of the master lease and the board hired an operator to run it. Now the revenue is 20% higher than what the building received under the master lease.
To be continued. As for the gym and the tobacco store, the sponsor who originally held the master lease sold it to another company, and we’re now trying to resolve the noise and traffic issues. There have been overtures from the new master tenant about an extension of the lease, which could benefit the board; for example, it could change the formula for rent increases so that they are calculated each year. There’s also the option for the board to take all the spaces back and lease it to commercial tenants of its own choosing, or even convert the commercial space to residential. The board is locked in for another 12 years, but it’s not too soon so start considering how to best use the space and maximize the benefits.