Commercial Revenue: Not Is Not the Time to Play Hardball

After more than two years of living with COVID-19, co-ops continue to face challenges managing their finances, especially buildings with commercial tenants. It’s very hard to navigate the landscape these days. We work with one co-op in Queens that has 24 commercial units. The annual rent revenue was in excess of $1 million, which was cut in half after a lot of the stores, which were nonessential businesses, closed down. The board had to find a way to make up the shortfall in order to balance the budget.

Making a list, checking it twice. We looked at everything very carefully, separating wish-list items from things that were priorities and seeing which expenses could be cut. One thing that was integral to the process was refinancing the mortgage. The interest rate went from 3.87% to 2.85%, which saves about $40,000 a year on the operating side and allowed the co-op to put some money in the reserve fund. The second thing was dealing with utility costs, which are getting out of control. The delivery rate alone has increased nearly 30%. Since we envisioned prices going up, the board shopped around for alternative energy service companies and found a supplier that locked in the delivery rates for electricity and natural gas until 2023. That was a lifesaver in helping the building’s budget.

Let’s make a deal. That still left the issue of the commercial tenants and their rents. That was the real tricky part, because each business has had different issues. The board had to decide whether it was going to play hardball or work as business partners with its commercial tenants, which would mean absorbing some of their financial problems. We’ve worked out a number of different deals. The board did forgive rent in the cases where restaurants were shut down and they had no income at all. Some of the lease models were remodeled to give the smaller operations more flexible terms to help them stay in business. One of those was having retailers pay the co-op a certain percentage of the rent. It doesn’t have to be a long-term deal, but it does give the businesses some breathing room. The other option is linking the rent to the retail price index, as opposed to the consumer price index. So the deals weren’t cookie-cutter, but a combination of different approaches.

Success stories. The good news is that all the businesses are back up and running. There are no empty retail stores at this point. It was the board’s opinion that if it had played hardball, a lot of the tenants would have left, as there were certainly other buildings offering very aggressive and competitive deals. The co-op was also smart to do the mortgage refinance. Rates are around 6% now, far from the 2.85% the co-op was able to get in late 2021.

Staying eagle-eyed. But there are a lot of challenges ahead. Even though the co-op has stabilized rents from the commercial tenants, it’s still dealing with record inflation. So the budget has to be a living, breathing thing. The board is going to have to look at it in real-time all the time — and keep tweaking and augmenting as needed. It is only doing projects that are the most important and required under the local laws, and it makes sure to get competitive bids for projects that can’t be delayed. Everything has to be really tight. You can’t leave any stone unturned. Any costs that can be reduced, you reduce. Any ancillary revenue you can raise, you want to raise it. That’s the bottom line.