When the pandemic began, Eneslow Shoes and Orthotics operated four stores in the city. Now there are only three left – two in Manhattan and one in Little Neck, Queens – and early next year owner Robert Schwartz believes he will only operate one. just one.
The problem: a mismatch between income and rent.
“Our revenues have fallen by about 70% since we reopened,” said Schwartz, who was among the speakers at a recent Manhattan Chamber of Commerce town hall on the commercial rent crisis. “Rent was 10% [of revenue] and now it’s 50%.
Meanwhile, GFP Properties only collects about 70% of its pre-pandemic rent from the 2,800 tenants in its portfolio of 54 office buildings in Manhattan.
Co-Managing Director Eric Gural has made deals with restaurants in his storefronts and negotiated terms with some of his hardest hit tenants, including the large number of theater-related companies with leases in his buildings near Broadway.
“The way we look at it, we don’t want to bankrupt anyone, but we don’t want to be bankrupt,” he said.
Governor Andrew Cuomo imposed a moratorium on evictions of commercial tenants at the start of the economic shutdown and recently extended until January. But a crisis is deepening as many retailers and some office tenants have stopped paying, racking up large rent bills.
Landlords say they are negotiating to help their tenants. Store owners say owners are not accommodating enough.
Small business advocates say the commercial rental market is simply not working and needs structural reform both for the pandemic and for the long term. The New York Real Estate Board notes that rents are dropping sharply.
Meanwhile, tenants’ lawyers say some landlords are looking to get around the moratorium by filing actions in the state’s Supreme Court rather than civil court, which is overwhelmed by the pandemic and where business disputes are typically litigated. .
“When I started helping tenants, we had some success with rent discounts, reductions and extensions in the future,” said Debra Guzov, a time-giving commercial litigation lawyer. to help Manhattan Chamber of Commerce members with rent issues. “Now I see more aggressive tactics from the owners.”
“We will do what is right”
REBNY says members, like GFP, work with their tenants in the same way as Gural’s cabinet.
Gural allows its restaurants to pay around 10% of their sales in rent. Tenants in the theater were able to pay rent for several months using money from their federal paycheck protection program. But now they have no more income, so they are not asked to pay, instead they tap into security deposits and often just take deferrals.
When there is new federal funds or when Broadway reopens, Gural expects to speak to his tenants, review their finances, and make a plan for the rent owed.
“We will not collect every penny we are owed,” he said. “But we’ll do what’s right.”
GFP is able to be accommodating as its finances are strong and its banks have been willing to waive the provisions on lease change approvals as long as Gural generally keeps them informed. The company has not defaulted on any of its loans, Gural said.
Despite REBNY’s confidence in approaching its members, a monthly Hospitality Alliance survey shows that more than half of restaurants have not received any relief from their owners.
Retailers like Schwartz recognize that homeowners have mortgages and banks holding the strings for many transactions. But the sharp rise in rents in recent years in New York City has made many skeptics of homeowners’ claims that the market will adjust.
Natasha Amott, owner of Whisk NYC kitchenware store, was billed out of her location on Bedford Avenue in Williamsburg after 10 years because other tenants were willing to pay much more rent than she could to afford. She’s been keeping an eye on what’s going on at her old location and notes that rents in the area have declined somewhat but are still outside her price range.
“We are all wondering if rents will drop enough in the long run,” she said. “I don’t think the market on its own will come close enough to affordability.”
Pandemic reveals “endemic problem”
His point is echoed by Columbia law professor Tim Wu and lawmakers proposing sweeping changes to laws regulating commercial leases.
“Rents have to come down for the city to recover, and there is an endemic problem with rent rigidity,” Wu said as mayor of the Manhattan Chamber of Commerce. “Rents remain high even when economic conditions do not support them.
Wu cites several reasons for this market failure.
Because commercial leases are typically 10 years, landlords are willing to leave space vacant while waiting for an economic recovery or a tenant willing to pay more.
Meanwhile, many mortgages contain minimum rent provisions. Many mortgages are securitized, which means it takes the approval of thousands of institutions holding a portion of the loans to change terms. Lowering the rent will reduce the value of buildings, which some owners will not accept, often out of pride.
REBNY maintains that the market is adjusting. “Rents were going down before COVID,” said Paimaan Lodhi, senior vice president of policy and planning at REBNY.
A report released last month by real estate company CBRE found that ask for rents for a commercial space fell to $ 659 per square foot in the third quarter of this year, down 12.8% year-on-year and the lowest since 2011.
Invoices to pay rent bills
Yet some lawmakers, including State Senator Brad Holyman and City Council Member Keith Powers, both Democrats from Manhattan, are proposing legislation to help small tenants.
They are proposing a plan called Save Our Storefronts, or SOS, in which the state would use $ 500 million from the federal bailout to help pay rent for tenants who contribute a percentage of income, up to 30%. The owners would agree to reduce the payments by 20% and the state would pay the rest.
Another very controversial idea would also be to impose a vacancy tax to penalize landowners who retain space in the hope of higher rents.
Two other ideas are to eliminate lease provisions holding tenants personally responsible for amounts owed and to establish that the pandemic is an unforeseeable event and to eliminate performance penalties in leases.
A better option, according to REBNY, is a workplace salvage bill being considered by Congress to provide billions of dollars to cover rent and operating expenses. It’s unclear how much support the bill, sponsored by Sen. Steve Daines (R-Montana), has among Democrats.
The idea of the vacancy tax is anathema to building owners.
“Homeowners already pay a tax when space is vacant and it’s called property taxes,” Lodhi said. “It’s like imposing a tax on the unemployed to motivate them to look for work.”
‘Need to have a conversation’
While it’s not clear how many homeowners are trying to get around the moratorium on evictions, Guzov says she is looking for a growing number of examples.
Traditionally, disputes are resolved in civil court, which is grappling with COVID proceedings and a huge backlog. Instead, she says, lawyers look to the state’s Supreme Court where they file either a breach of contract action for non-payment of rent or an eviction decision with what’s known as an action for expulsion.
“These tools are being used to circumvent the moratorium and the delays suffered by landlord-tenant courts,” Guzov said.
For example, in July 1276 Lex Owner LLC filed an eviction action against the company Sleepy’s Mattress to free up their space in the mid-rise residential building at this Upper East Side address. David Rosenbaum, the owner’s lawyer, did not respond to requests for comment.
Lawyers representing the real estate companies note that the state and city have issued a series of standstill orders that often have different rules – and that under the Cuomo administration’s state order, the tenants are only protected if they have been affected by the pandemic.
Even after the crisis is over, tenants like Amott will continue to push for permanent changes that would offer small businesses lower rents and most importantly protect them from steep rent increases.
“We need to have a conversation about land trusts (where the space is owned by nonprofits offering affordable rents), spaces reserved for small businesses and tenants so as not to be burdened by all the tax increases land, ”she said.