It's Time To Be Flexible With Commercial Tenants

When the restaurant that occupies the ground floor of a 240-unit Murray Hill co-op got shut down in the early stages of the COVID-19 pandemic, Andy Leight, the senior vice president of operations at AKAM, arranged for it to defer its rent payments for a couple of months.

When the same establishment asked to remove a windowpane to create a portal for takeout orders, the co-op again granted the request. After the state lifted restrictions on outdoor dining, the co-op then allowed the restaurant to offer al fresco dining in its expansive Privately Owned Public Space alongside the building.

All that flexibility and accommodation paid off. The restaurant remains afloat while many others have folded, and it has squared up the back rent it owed. “Their success is helpful to us,” Leight says. “Because, obviously, if the tenant leaves, you have an inherent lost-income cost there. And who knows, in this climate, how long you’re going to sit out with an empty space?”

Co-op and condo boards across the city that lease commercial spaces are facing similar scenarios. The question becomes: How should they respond when their commercial leaseholders, trying to remain viable with a fraction of their former revenue, can no longer afford to pay the rent?

“A lot of people are paying slower or not at all,” says Carl Cesarano, a principal at the accounting firm Cesarano & Khan, noting that in one building he audits, only half of the commercial tenants are keeping up right now. Michael Mintz, the founder and CEO of the management company MD Squared Property Group, adds, “We have had a bunch of buildings that have commercial tenants – retail, specifically – who have not been paying because of COVID-related factors.”

Consequently, the accountant and the property manager have been strategizing with the boards for ways to plug the financial gaps and perhaps even jimmy the buildings into better fiscal health for the long term. Cesarano says the first step he takes is to re-examine the current budget and re-evaluate its priorities.

“The assumptions and assertions that were in those original budgets have changed,” he says. “You do all your due diligence at first. Loads of it. See what we can cut. See how we can fix our budget. See if maybe we have room to raise other charges. Then I look in the bank at what’s not segregated. You’re going down the line.”

Optional capital projects, for instance, may have to be postponed or even canceled. “We’re not going to be loosey-goosey,” Cesarano says. “We don’t have the luxury of saying, ‘We didn’t get all the bids.’ Everything has to be really tight.” He also encourages boards to approach vendors for concessions or discounts and to motivate resident slackers to catch up on their maintenance or common charges. “I wouldn’t leave any stone unturned,” he says. “Anything we can reduce, we want to reduce it.”