When a Co-op's Commercial Tenant Suffers, Everything Is on the Table

Gerard Picaso, a senior managing director at Halstead Management, has had a ringside seat as commercial enterprises in co-ops and condos have taken a beating during the coronavirus pandemic. As soon as one of his buildings’ commercial units had to close, Picaso began operating on the assumption that it wouldn’t be able to pay the rent. He crunched the numbers to determine how much to assess shareholders and unit-owners to ensure that all essential operating expenses would be covered going forward, including real estate taxes.

In one of his buildings, two commercial tenants simply walked away. “They said: ‘We’re done. We’re not going to reopen. Here’s the keys,’” Picaso recalls, noting that one of those tenants had been operating a couture clothing shop for more than 40 years. In addition to financial challenges, the shop owner was concerned about her vulnerability to COVID-19. Once she reopened, she noted, people would be traipsing in and out, touching things, and she was uncomfortable with having to monitor mask wearing.

Meanwhile, many commercial tenants who are sticking it out are asking to renegotiate leases, which requires some quick footwork by co-op and condo boards and their managers. “Now,” Picaso says, “commercial tenants are saying to you, ‘Look, I can go across the street to the empty store there. They are asking 30% less than what I’m paying now.’” As a result, he has been hammering out new lease agreements that provide incentives for staying put. “Nobody knows what’s going to happen,” he says. “It’s a very unstable market.”

In his own lease renegotiations with commercial tenants, Michael Mintz, the founder and CEO of the management company MD Squared Property Group, notes that concessions need to go both ways. “We have been willing to give some relief in terms of rent for the periods of time that they were closed,” Mintz says, “as long as going forward they continue to pay. Usually we wanted some additional security or we wanted an extension of the lease term. It’s not really fair to condo and co-op boards if the retailers get too much.”

Luckily, Mintz says, most of his buildings had built up such healthy reserve funds that they have been able to forgo maintenance increases or assessments to cover lost income from commercial rents. Instead, they have tapped into lines of credit, capital reserves or other discretionary savings to compensate for the shortfalls. “They have the cash to carry themselves through,” he says, but there are limits. “If this goes through to the beginning or middle of next year, we’ll be in a much worse place.”

Some boards have gotten creative. One of Mintz’s buildings, which has a ground-floor commercial tenant shuttered by the pandemic, entered into an agreement with the restaurant next door to allow it to temporarily occupy the tenant’s sidewalk space for outdoor dining. “So it’s bringing in some income for that space while the retail is not paying,” he says.

On a positive note, mortgage rates are near record lows. Carl Cesarano, a principal at the accounting firm Cesarano & Khan, believes that co-ops in a position to refinance their underlying mortgges should consider doing that to replenish their capital reserves and benefit from the lower interest rates. “Every building is different,” he says. “We’re acting according to each building’s particular situation. And I don’t think anything is off the table at this point. You’re going to have to do what you have to do to be viable.”