Commercial Tenants Do They Make Good Neighbors?

If you're shopping for a new co-op or condo, it's a good idea to get a sense of who your neighbors would be before you make a

decision to buy. The wrong neighbors could lower the value of your real estate investment and, if you're subletting, make it hard to keep tenants. While doing your homework, be sure to get to know any commercial tenants in the building. The convenience of a commercial neighbor like a restaurant, garage, dry cleaner or retail space could be offset by nuisance factors that you never even thought of until after you bought the apartment.

Defining a nuisance

Every store of any type can be good or bad depending on the owners, their interest in the building and its residents and their intent to adhere to the requirements of the lease, house rules and general rules of proper conduct and decency, says Irwin Cohen, president of A. Michael Tyler Realty Corp., a residential real estate management firm in Manhattan. Good stores are non-food related such as fashion and clothing, antiques, giftware, card shops, furniture and imports, small pharmacies, Cohen explains. Less good are generally environmentally impacting establishments such as bars and pubs, dry cleaners, groceries, coffee shops, restaurants, take-out food facilities and bakeries.

The definition of nuisance will vary from person to person. One resident might be bothered by the aroma of garlic wafting up from the Italian restaurant downstairs, while another welcomes it. But some general rules hold true. For example, light sleepers probably wouldn't want to live directly over a busy parking garage. Noise from the garage elevator disrupts my sleep as well as that of my guests, says one co-op resident who lives in a building that rents part of the basement to a company that operates a public garage. The garage opens every day at 5:30 a.m. and closes at 2:00 a.m. The garage also has a large illuminated sign that shines into my bedroom window.

Unfortunately this individual was advised by legal counsel that if the garage and sign were already there when he moved in, he would have an extremely weak case if he decided to go up against either the garage operator or the co-op corporation. Another consideration is that a majority of the residents, whose apartments are not as near to the hustle and bustle of the garage, might see it as an asset to the building rather than as a nuisance.

However, the majority of residents at a ten-unit condo in Tribeca agreed that the disadvantages of having a dry cleaning facility right downstairs far outweigh any benefits. Worries about the safety of chemicals used by the plant prompted a lawsuit by residents. At the center of the controversy is the cleaning solvent perchloroethylene. Despite its 60-year record of safety, environmentalists have described the chemical as an unsafe and potentially cancer-causing toxin.

For the time being Justice Joan B. Lobis has declined to bar the use of the chemical at the contested dry-cleaning store. About 1,400 of the 1,700 dry-cleaning stores in New York City are located in apartment buildings; and the plant in question uses brand-new, state-of-the-art equipment that is entirely self-contained and does not vent. But the condo residents aren't convinced. I'm all for small business, says Robert Morrison, the condo board president. He's just chosen the wrong place. However William Sei ffb tz, director of the Neighborhood Cleaners Association, an organization that represents dry cleaners in ten Eastern states, maintains that having a dry cleaners on the premises, or nearby, is a matter of convenience and something that many New Yorkers have come to expect. In apartment houses, Seitz says, you have the shoe repair, the hardware store, the dry cleaner.

Weighing the Pros and Cons

Carmen Lee Shue, president of Lee Shue Realty, a Manhattan real estate brokerage firm, plays up the convenience factor to prospective buyers. You shouldn't have to walk ten blocks in a snow storm to buy a head of lettuce, she says. People lead very hectic lives, and it's nice to have certain amenities within walking distance. Having commercial tenantssuch as banks, supermarkets and drycleanersright in the building certainly makes the apartment more desirable and can be beneficial when purchasing or selling an apartment.

According to Shue, it's up to the prospective buyer to visit the various stores and make sure that they provide the services that they want. Some of the things to look for are the cleanliness of the store, the quality of the merchandise on display and the responsiveness of the employees. The prospective purchaser can obtain this information by interviewing shoppers who visit these stores, homeowners and the board. However, if you like the apartment, the neighborhood and the building in which you are contemplating purchasing the apartment, negative feedback about a certain store in the building should not dissuade you from purchasing the apartment. Remember that in most neighborhoods there are competing stores within walking distance.

The prospective purchaser should also ask the board if there are recent or ongoing lawsuits involving the board or commercial tenants and whether the tenants are paying their rents in a timely fashion. Most of the information can be obtained when the prospective purchaser and his attorney receive the financial statements, Shue adds. It might be difficult to get some of the information. You just have to ask around and speak to the board.

Another advantage enjoyed by buildings that have commercial tenants, points out Pat Goldwater, vice president of management at Aptek, a residential real estate management firm in Manhattan, is that the extra revenue derived from renting the space helps supplement the income generated from maintenance charges, adding to the building's operating budget. In some cases, people get to know the building because of the commercial tenants. This can result in recognition and prestige that, in turn, can affect the resale value.

Goldwater manages a number of residential properties that house restaurants, retail shops, dry cleaners, travel agents, garages and more. I have the whole gamut, she says. One big advantage to having commercial neighbors is that they're open later hours, or sometimes even 24 hours; so there's always someone around to dissuade potential intruders. The disadvantages include noisy garbage pick-ups at odd hours and the chance that the building will wind up with an unsatisfactory tenant who doesn't follow guidelines or live up to standards of cleanliness.

Behind the Scenes

There are additional behind-the-scene factors that need to be considered before making the decision to buy in a building that has commercial tenants. If you're looking at a co-op, Cohen explains, you should find out whether the commercial space is owned by the co-op, who controls the leases, or if they're controlled by the sponsor under separate leases or master leases. Or are the stores themselves shareholders with special proprietary leases as in a cond-op? If you're looking at a condo, you need to ask whether the stores are individually owned as M-real property,' or if they're under lease control of the condo association.

Cohen also suggests that buyers examine the financial statements to ensure that income falls within the 80/20 rule of the Internal Revenue Code. IRS Code Section 216, known as the 80/20 rule, states that in orde ffb r to retain homeowners' tax deductions on mortgage interest, no more than 20 percent of a co-op's annual income can come from sources other than shareholders.

Cohen also recommends asking other in-depth questions. For example, what is the remaining term of the store's lease, and what would happen to monthly maintenance costs or common charges if the store vacates? What is the present rent, per square foot, of the store compared to the maintenance or common charges, per square foot, of the residential units? And is the rental rate of the store consistent with rates in the area? In other words, is there potential for higher rental, upon lease expiration, to add income to the co-op or condo? The buyer should also determine how the store's presence affects insurance costs, and whether the store is paying the co-op or condo for any premium (or excessive premium) because of its presence.

Potential buyers should also ask if the store is responsible for payment of a pro rata share of real estate taxes as a benefit to the co-op (or, if located in a condo, is it paying its own real estate taxes). And, does the store pay for water and sewer costs? Does it have separate metering? Or does the co-op or condo pay; and, if so, does the store reimburse for usage or its pro rata share? What is the credit worthiness of the store? Is it a long-term tenant or a newly acquired entity without a proven track record? Does the store impose an additional labor burden on the building's operating staff; and, if so, is it reimbursing the co-op or condo for these costs? Is the store responsible for maintaining common areas (sidewalks, refuse collection, lighting, etc.); and, if not, does it reimburse the co-op or condo?

Rarely a Concern

Stuart Rosenthal, an appraiser with Manhattan-based Rosenthal Appraisal Co., Inc., has not found units in properties that have commercial tenants to be less desirable to lenders or prospective buyers in the Manhattan marketplace. I haven't found negative feedback from lenders or buyers, he says. It's quite common to have commercial neighbors. In neighborhoods like Tribeca or Soho, having a well-established gallery or some other type of commercial unit on the first floor would have a positive impact on the building.

The only time there might be a concern, Rosenthal explains, is if the proximity to the commercial tenant would impact negatively on the quality of life of its neighbors. For instance, if the buyer is looking at a second floor apartment directly over a busy restaurant or loud tavern; or if the unit were above a dry-cleaners that was emitting noxious fumes. Rosenthal adds that there are plenty of dry cleaners in residential buildings and this is not viewed as a problem because they have to adhere to stringent regulations set by the city. The bottom line question the buyer needs to answer before purchasing in a building that has commercial tenants is whether the commercial space is being used for something that's likely to be considered a health or safety violation.

Ms. Mosher is Associate Editor of The Cooperator.

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