Mind the Gap

With all the empty storefronts you see, how are co-ops managing their commercial space today?

You have to be proactive and plan long-term if you’re going to keep them rented, and today, the marketplace for retail rentals is especially challenging. There are more vacancies, and when a tenant moves out, co-ops can really feel the pinch. They’ve counted on that income in their budget, and suddenly it’s gone.

Aren’t long-term sponsor leases for commercial space coming to an end?

Correct. Many of these leases date back to when the co-ops were first converted in the late ’80s. A number of buildings have been watching that expiration date approach, and for many of them, it will be the first time they’re actually going to control that space.

What steps should boards be taking? There are a number of moving parts and variables that require strategic thinking. First, boards need to familiarize themselves with the space, which they might not have even looked at in 30 years. If they want to continue to lease it out, they should learn the rental value and explore its potential uses. Similarly, boards that are considering selling the space need to know what the potential sale value is.

How do they determine that?

We advise hiring an appraisal company, which is different from a real estate broker, who can provide a detailed formal report, whether you’re planning to lease or sell. That way, the board can make an informed decision about how to proceed, and it can share that information with shareholders.

Are there other options to consider?

Absolutely. They could divide the space and take part of it back for the building to use – for example, to expand the lobby. If they decide to lease it out, we advise boards to hire a real estate broker who can help them learn about that submarket, the types of tenants out there, and what they typically look or ask for when renting space.

In the meantime, boards face losing a source of income while the space sits empty.

It’s not always possible to have the lease expire on one day and have a new tenant start paying rent the next. Sometimes there’s a gap, which means an income source that’s been factored into your budget goes away for a period of time. Anticipating and accounting for that short-fall is something we would work on with boards. Another factor to consider is that there are costs involved in leasing out space. You may have to put in new storefronts or building systems or restrooms, all of which can be very expensive. So it requires working with an architect to understand what those costs are and maybe even bidding the work out. The upside, though, is that sometimes with sponsor leases, they’re paying less than market rate, so when you do find a new tenant, you’ll have more income than before.

So the takeaway here is confronting the future and then planning for it?

Yes. It requires putting the right team of professionals in place well in advance to help boards decide how they want to proceed and put that plan in motion. Ideally, you end up securing new tenants at a rent everyone’s happy with. You sign the lease, put it in a drawer, and the checks come in so you can keep your budget running smoothly.