Commercial Spaces: Is Your Co-op Sitting on Gold?

Regardless, co-ops with expiring commercial-space leases can earn substantially more than before. There are pitfalls, such as taxes, finding good tenants, construction to customize spaces, and contract issues. So boards seeking to upgrade their buildings' retail spaces to market rate face a complicated task. But a cross-section of professionals agrees that a set of specific steps can help you in this new arena.

Today, we look at the first step, which, according to James Goldstick, vice president of marketing at Mark Greenberg Real Estate, is to determine your financial goals. "Is it to keep revenue as high as possible to keep maintenance down? Or do you need a big chunk of money for capital improvements, so that you don't have to refinance the mortgage or levy an assessment?"

"Boards should not look at any lease individually but develop a comprehensive plan for the entire building," says Dennis DePaola, executive vice president of Orsid Realty. "Look at everything from the size of the spaces, the possibility of combining them, and lease-termination dates. If you're depending on this income for a large portion of your operating revenue, it could be detrimental to have a vacant space for a prolonged period, so some buildings would rather have smaller spaces with staggered terminations."

Once you have an overall plan, examine your leases. "There are two types of leasing scenarios," says Goldstick. "One is where the co-op leases the entire commercial unit to one investor, who pays the co-op a fixed amount of rent each year, and that investor sublets each individual store or office to another tenant. And the second scenario is [where] the co-op leases the stores or offices directly."

Either way, the first thing to look for is how many years the lease or leases have left. Says Polsinelli: "The next board could come in and suddenly find there's only a year left on a lease." Conversely, boards may find that a lease has ten years left on it, "and so the board says, 'I don't have to pay attention to it.' But the lessee can't necessarily optimize the value of the retail space, since he or she can't rent it for longer than ten years. And it doesn't make sense [for the lessee] to put in capital improvements if [the lessee] can't amortize them over a long period of time." This, she says, presents an opportunity to negotiate. "You can say, 'Give us back the lease, we'll pay you a nominal amount upfront or a portion of what we go out to the market with.'"

Boards and their attorneys also need to check the proprietary lease and any other pertinent governing documents. "Look at those [leasing] documents, and look at the governing documents," says Seth Kobay, president of Majestic Property Management. "Then, if you have a readily marketable space, the first thing to do is look for a broker."

Your existing management company could serve that purpose, suggests DePaola, who notes, "There may be something in your agreement with the managing agent as to what happens when space becomes available." Saying "there are pluses and minuses" to using either your management company or an independent commercial broker, he argues that, "a managing agent may have a much longer view of the relationship" with the co-op and will be aligned with the co-op's long-term goals and nature. "It's in [a commercial broker's] best interest to get a deal done ASAP. They'll say, 'This is the best dollar [amount] and the tenant passes our tests.'"

"A co-op must be careful when hiring a manager to do a leasing agent's job," counters Polsinelli. "This is not to say some managing agents will not do as good a job in leasing a space. However, most may be limited in their ability to access the wide variety of retailers that a leasing broker has daily contact with in their regular course of business," she says. "A reputable broker will present respectable tenants who will thrive harmoniously with the co-op and add value to the overall property."

Whoever you go with, that person will need to do a market analysis and prepare a report for the board. "With a lot of these old buildings," says Kobay, "the configuration of basements can be all over the place. We had a building where a restaurant was getting deliveries through a [sidewalk] trapdoor that led through a tight corridor to a basement space." Sometime afterward, "there was a vacant retail space on the ground floor. Eventually it got rented. And we found the [basement] corridor was now going to run right up to a portion of the space the new tenant was taking." In order for the restaurant to continue taking deliveries through the trapdoor, "we had to section off [part] of the corridor, so now there was one door for one tenant and another for the other."

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Illustration by Enrico Miguel Thomas