Struggling to Strike a Balance Commercial Tenants in Trouble

When you walk down many large commercial thoroughfares in New York, whether it’s Fifth or Madison Aevnue in Manhattan, Kings Highway in Brooklyn or Main Street in Flushing, you’re sure to notice many more empty stores than usual—living proof of the current recession. You’ll see them on the side streets, too. Many of these stores are on the ground floor of old rental apartment buildings or in one- or two-story “taxpayers.” But others are on the ground floors of condo and co-op buildings.

For many co-op and condo buildings, rent from ground-floor commercial tenants contributes much of the buildings’ revenue. Many large condo and co-op developments have some sort of commercial tenants on the ground floor—if it’s not stores, it’s often doctors’ or dentists’ offices. However, today’s economic crisis seems to have put this arrangement, once thought of as common place, in jeopardy.

The Lay of the Land

How many New York City co-ops and condos have commercial tenants? It’s difficult to estimate, says attorney Jeffrey Schwartz, a partner at the Manhattan-based law firm of Wolf Haldenstein Adler Freeman and Herz LLP, but he estimates the number between 25 and 30 percent.

And how deeply has the recession hit some of these stores? Is it too early to say whether we can expect a further upsurge in empty storefronts in co-op and condo buildings? It’s tough to make solid predictions—and since some stores have longer leases than others, it has affected some neighborhoods more than others.

One factor in this is the 80/20 rule—a longtime ruling, only repealed in December 2007, that stipulated that 80 percent of a co-op’s revenue stream had to come from cooperators’ maintenance charges, and only 20 percent could come from other sources, such as commercial and garage rents. There are many stores that are still paying below-market rents as a result of this situation, although as their leases come due, the situation may change.


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