What's In a Name? Making Commercial Space Work

Lots of co-op and condo buildings in the city play host to one or more permanent guests on their ground floors; sometimes it's a mom-and-pop hardware store, or maybe a row of sleek, upscale boutique clothing stores. Humble or haute, commercial tenants can be a valuable source of income for residential buildings; but there's more to making a success of the arrangement than just hanging a "Store For Rent" sign in the window of your building's available space and waiting for prospective tenants to bite. This is not just a regular landlord-tenant relationship; you have a responsibility to residents and shareholders to determine how a commercial tenant might impact the value of your property.

"It's not the same as a landlord just doing it for money," says Abbey Goldstein of the Kew Gardens-based law firm of Goldstein and Greenlaw, LLP. "The co-op wants to reap the benefits of the tenant moving in, [but that can't happen] if the tenant coming in is going to compromise the quality of life."

So how can your board protect itself, keep the best interest of the building in mind, and foster a healthy landlord-tenant relationship with a commercial business at the same time? Here are some important points to consider if your building is home to a commercial guest.

The Best Business

Clearly, the kind of commercial tenant you have in your building is determined by the relative cost of square footage in your neighborhood, the tone already set by other adjacent businesses, and what will work best for the shareholders in your building.

According to Faith Hope Consolo, vice chairman of Garrick-Aug Worldwide, Ltd., a commercial space broker based in Manhattan, "The most appropriate tenant depends on the neighborhood; whether they're in a purely residential area like the Upper East or West Side, and whether that neighborhood has become gentrified lately. The neighborhood defines the type of tenant, and so does the building."

While the best type of business for your building may differ from the best business for the larger (or smaller) co-op down the street, there are some basic considerations boards must take into account, whether they're negotiating or renewing a lease with a grocery store, restaurant, doctor's office, or dog groomer.

When negotiating with a prospective tenant, "The most important thing a co-op should know is the exact nature of the tenant's proposed business," says attorney Eric B. Schultz of Mineola, N.Y. "First and foremost," he says, "determine whether the commercial use is compatible with the nature of the cooperators and neighborhood needs." For instance, says Schultz, the businesses suited to a large residential co-op off of Third Ave. in Manhattan would be different than for a small condo in Forest Hills, which may limit itself to few doctors' offices. By taking on a commercial tenant, Schultz says, you should be "doing a service not only to tenants, but to the community at large."

According to Goldstein, commercial tenants should be good neighbors. "Buildings will want to accommodate their own residents," he says. Goldstein also recommends spelling out provisions in a tenant's lease that "clearly limit the extent of what [the tenant] can do with the space. It behooves a co-op or condo to closely monitor who is coming in."

For instance, says Goldstein, if you're going to rent to a dry cleaner, find out if the business plans to vent fluids into the air, and how other units in the building will be affected. Many residents may not want to share space with a business that uses chemicals on the premises. Marc H. Schneider, of Counsel at Rosenberg & Fortuna, LLP in Garden City, N.Y., mentions the idea of having a satellite dry cleaner - which collects clothing but actually cleans it elsewhere - with limited hours during the day. In this case, residents would probably consider this convenience, and they wouldn't have to worry about chemicals or ventilation.

Schultz also advises doing some thorough research into the past history of the business: Has it ever been bankrupt? Who was the last landlord? Why did the business relocate? You want to make sure the tenant will be as good a neighbor as the shareholders themselves. In general, you want a fiscally responsible tenant that fits into the building and neighborhood.

Every business brings with it its own set of considerations. For instance, because of the nature of what they do, restaurants, says Schultz, will always present health issues. "No matter where they are, in cleanest buildings and neighborhoods, [restaurants may] attract vermin. Odors can be disturbing, and hours can vary - and any business that doesn't keep itself clean and presentable can detract from the attractiveness of the building."

Professional Perspective

As volunteer board members, you may not be completely familiar with all the nuances involved in renting out commercial space. If you've got questions, it's always a good idea to consult with a professional.

Depending on how you want to handle getting the word out on your available rental, "A building can hire a broker, or the tenant may come by word-of-mouth," says Schneider. If you're at the beginning stages of the process and you're still deciding what type of business would be a good match for your building, a broker can provide you with an overview of options.

"If a board is smart," says Consolo, "they'll hire a good broker - a retail specialist - who will be able to take their space out to the market so they'll have a choice of tenants. [That way they won't] waste a lot of time with inquiries from people who aren't qualified. A retail specialist has a pool of retailers from which to draw. We take a whole blockfront and upgrade the retail space, and we know the tenant mix - what's going to work well for the building and work well for the neighborhood."

A broker specializing in commercial tenant leasing will also help you work around the fact that you can't rent to just any tenant that seems like a good potential fit. The laws and ordinances of your neighborhood may dictate whom you can and cannot choose as a tenant. For example, according to Schneider, commercial space in Great Neck is limited to single professionals with a discreet support staff, so a dentist in a building there can't merge his or her practice with the one next door. If you are intent on changing the use of a space, says Schneider, you can apply for a variance with the city. Your broker will work with your board and your attorney, consulting on everything from what clauses should be incorporated into the lease to what impact Sephora or a Banana Republic will have on your building and surrounding neighborhood.

More Food for Thought

Another issue residential buildings invariably face is the 80/20 rule. Simply stated, provisions of Section 216 of the Internal Revenue Code require that 80 percent of a co-op or condo's total revenue must come from the tenant stockholders. This means that no more than 20 percent can come from your commercial tenant. Goldstein advises that for this tax issue, it's best to consult with your accountant to make absolutely sure you are in compliance. Otherwise, your building could forfeit valuable tax credits and refunds.

Your building's managing agent is another source of information. According to Schultz, "The managing agent is a licensed real estate broker, and may be the best idea, since they have the best understanding of the needs of the building, the structure, the board, and the nature of tenants."

Signing The Lease

Beyond all the debate over whether an orthodontist or a taxidermist is the most appropriate tenant for your building is the issue of closing the deal and inking the lease. This is where your board and residents' requirements and stipulations are committed to legally binding print; from when your tenant's rent is due to what kind of signage they're allowed to put in their (or your, depending on how you look at it) windows.

"The economic performance [required of the tenant] is in the lease," says Consolo. "When they pay their rent, when the taxes are paid, when their extra charges are paid, and whether they've got a few days grace period [when paying rent]. The other part of performance is design criteria. Boards [should] be very stringent on how a store looks. You can even have a newsstand that looks well, if they don't paste paper signs to the windows and have uniform signage. If you set design criteria, you have to make that an addendum to the lease. You'll see that the stores look better, and the overall sales in those stores will be better, too."

Your board must also make sure that a commercial lease is written to provide the best protection possible for you - as the landlord - should trouble arise. Special clauses may be your only way to safeguard against major repercussions, should you and your tenant have a legal dispute. "A well-drafted lease eliminates a lot of problems," says Schneider, and adds that boards are wise to "put a provision [in the lease] entitling the co-op to legal fees in a dispute."

Also include sections outlining which - if any - utilities the tenant is responsible for. Schneider says it's important to determine from the start if the tenant will be responsible for its own electric, water, and other utilities, and this should be spelled out clearly in the lease.

"Most [landlords] will take a security deposit," says Schneider, but you "might also require move-in deposits, subject to other rules and restrictions." Any restrictions must be put in the lease.

Consolo concurs. "A good, credit-rated tenant - not necessarily just a national or international one - that's well-financed will certainly help the value of the building, because they'll be less likely to close their doors in challenging times. It's good to have a prospective tenant who can post a significant security deposit, so the board can feel comfortable that their income stream won't be interrupted during the lease term."

And what if you need to terminate the tenant's lease? Schultz points out that boards should make clear whether a lease could be ended with or without cause. "Many businesses will want an option they can execute at end-of-term, and the co-op can be stuck with them," says Schultz. "This often happens with laundry contracts - they get a five-year term that can be renewed by the company, and the board can only get rid of them by cause. It can be very difficult." Goldstein outlines a classic scenario: a board is under financial pressure and is glad to have a new tenant come in. "But when it gives a lease that doesn't put reasonable restraint on a tenant, you have limited recourse," he says. "Be aware before you sign the lease, and guard against problems."

Aside from obligations to your building and whatever utilities are included in a tenant's rent, commercial tenants run more or less autonomously, covered by their own insurance, which is usually part of the lease.

"If [the tenants] have a problem, they have to be responsible," says Consolo. "They have their own plate-glass insurance, their own fire coverage, casualty, liability, and so forth. And the board sets the requirements, whether it be three, five, 10, or 20 million [dollars-worth of coverage]. Whatever the amount the board feels is necessary."

A Peaceable Kingdom

While your relationship with your building's commercial tenant is somewhat different than how you deal with residents, it's important to make sure everyone who is part of the building - including the board, commercial tenant (or tenants), resident shareholders, and managing agent - can coexist in relative peace. "Communication is the best way to maintain harmony between co-op landlords and commercial tenants. Clearly, you'd want to discuss any issues you have with your tenant, and you want your tenant to be able to do the same in reverse," Schneider says.

"From the inception of the negotiations, the co-op's managing agent must be involved in planning, work with the attorney to draft the contract so the managing agent, board, tenant and attorney are all on same page as to rights and responsibility," says Schultz. The managing agent treats the commercial tenant basically like any other tenant - collecting rent, making sure the premises are used properly, and dealing with any complaints.

"You have to set the tone for the tenants," says Consolo. "Remember, they're just the guest in a building. They don't own, and they have to add to the intrinsic value of the building, because it's at the residents' front door - it can have either a negative or a positive impact."

At the end of the day, inviting commercial tenants to share your property is one way to maintain your building's cash flow while providing a home for valuable resources and services. The ticket to enhancing rather than eroding value - both real and perceived - with commercial tenants is a combination of caution, negotiation, and cooperation.

Stephanie Mannino is a freelance writer based in New Jersey. Additional reporting by Hannah Fons.

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Comments

  • capitaleyo2@yahoo.com on Monday, May 17, 2010 11:09 PM
    Do you know of any cooperative renting to an Aids Program Association. There are questions as to the impact this would have on the value of the property, any comments?