Maintenance Fees for Some Co-ops Rise to Cover Lost Commercial Rent

As the coronavirus devastates New York’s retail economy, making it hard for stores to pay

As the coronavirus devastates New York’s retail economy, making it hard for stores to pay rent, co-op buildings with ground-floor stores are losing a vital source of income. Already stressed co-op shareholders have had to pick up the slack, in some cases with maintenance charges increasing by as much as 40 percent.

“It’s a huge problem,” said Michael Wolfe, the president of Midboro Management, who added that residents are grumbling about the extra costs, as they also struggle with reduced work, furloughs and layoffs.

But Mr. Wolfe said that most residents realize that “anything is better than a vacancy,” adding that co-ops would face long odds at finding replacement tenants during the pandemic.

Also driving the decision to accommodate stores rather than evict them, is a desire to preserve the convenience of having on-site shops, board members say. Other co-ops want to preserve jobs of employees who have become like family members after years of operating businesses under the same roof, like at 230 West 105th Street, a 14-story co-op at Broadway in the Manhattan Valley neighborhood.

Its board has hiked maintenance fees 15 percent, which for a one-bedroom means a jump to about $1,400 from $1,200 a month, to make up for rent breaks and discounts offered to the four stores that ring the prewar building’s base. That aid, which is benefiting a clothing store, coffee shop, deli and cobbler, is the equivalent of as much as a 50-percent rent cut, according to the board.

“One shareholder called the move unconscionable,” said Robert Chasen, the treasurer of the 70-unit doorman building, which because of the pandemic postponed its annual meeting from its usual time in May to November. According to Mr. Chasen, about half of the apartments in the building are occupied by people on fixed incomes or who are working-class.

“But most neighbors say they are supportive,” he said. “These stores contribute to our neighborhood.”

The co-op’s largess, however, may only be postponing the inevitable. “Our business has been severely, severely, severely impacted and may still have to close,” said Carolina Conigliaro, whose father, Fernando Andrade, owns the cobbler shop, named Andrade Shoe Repair.

Speaking on behalf of her father, an Ecuadorean immigrant who speaks limited English, Ms. Conigliaro said that a drop in commuters has led to a decline in requests for repairs of heels, holes and zippers. Revenue is now often as little as $40 per day, she added, down from highs of as much as $1,400 per day before the coronavirus slammed New York.

“We have never seen anything so heartbreaking,” added Ms. Conigliaro about the shop, which has leased space in the co-op for four years, and which was located a block away for 32 years before that.

Rents cuts are only one consideration. A punishing retail climate, in which workers and tourists are staying home and not shopping, is occurring at the same time as a major shift in store ownership for many co-ops that were created in the 1980s.

Because of the complicated methods by which co-ops are created, third-party landlords often control buildings’ storefronts under long-term master leases. Co-op apartments upstairs usually receive some of the retail rent money. But the amount is usually just a trickle compared with what the landlords rake in, lawyers say.

Many of the master leases date to the 1980s when many of the buildings converted from rentals to co-ops, and after exhausting all of their renewal options, the firms that own those master leases are preparing to relinquish them — allowing many co-ops to finally take over their retail square footage.

The timing is less than ideal, said Jeffrey Reich, a real estate attorney with Schwartz Sladkus Reich Greenberg Atlas, a New York firm, and a co-op adviser. “These buildings wanted their retail back for years and now no one wants it,” Mr. Reich said. “It really is ironic.”

The retail economy had been deteriorating even before the pandemic because of steeps rents and competition from online shopping. In the third quarter, which ended in September, asking rents in Manhattan’s main shopping areas fell to $659 a square foot, the lowest rate in nine years, according to the real estate firm CBRE. And the number of available ground-floor storefronts in Manhattan increased to 254 in the third quarter from 235 in the second quarter, representing a new record, CBRE said.

Only about a quarter of the hundreds of co-ops in Manhattan are anchored by storefronts, and managing agents estimate that even with recent turnovers, co-op boards still control only about half of the shop-lined buildings.

For boards that have long been salivating about the thought of recapturing their retail spaces and getting a boost in revenue, the dismal market statistics can be daunting.

“Frustrating is how I would put it,” said Charles Sullivan, the president of the board at 201 West 16th Street, a 110-unit co-op at Seventh Avenue in Chelsea that will reclaim its storefront on Jan. 1, 2021, after four lease extensions.

The handover has been a long time coming.

In 1980, five years before the buff-brick 20-story building went co-op, an entity affiliated with the department store Barneys New York (once based across the street) snapped up No. 201’s retail berth, leasing it from the original owner of the building, according to Ed Lewis, the board’s treasurer. The lease has changed hands a couple times since then.

In recent years, No. 201’s corner-wrapping 4,300-square-foot space has been familiar as the home to an outpost of Williams-Sonoma, the home-furnishings chain, which declined to pursue a new lease with the co-op.

And it’s not like other tenants are beating down the door. There haven’t been any takers since the space hit the market last March, just before the Covid crisis, said Mr. Sullivan, who said the board may hedge its bets and renovate the space to make two stores out of the large space.

The board declined to share the asking rent. But “it is much, much less than it was in 2015, 2017 and January 2020, ”said Mr. Lewis, who added, “we won’t be stupid about the pricing, but we will be flexible.” Banks, pharmacies and doctors offices are under consideration.

If shareholders won’t see an immediate upside, co-ops like No. 201 are still well-positioned, they say. Collecting all the rent, instead of just a portion of it, will make them better off.

And tax laws are more favorable than before. Rules that once limited retail revenue in a co-op to 20 percent of a co-op’s total revenues were relaxed in 2007.

But there’s still that nagging issue of attracting and retaining tenants, a concern that has gripped 140 Nassau Street, a wine-red landmark at Beekman Street in the Financial District. The 42-unit co-op, which has four retail spaces, including an eyebrow-threading shop, a hair salon, a dry cleaners and a bank branch, has decided to lower rents and raise maintenance fees as an act of good will. A committee is studying the exact amounts now.

“We have chosen to consider this a catastrophe of global proportions,” said Dr. Raphael Santore, the dentist who serves as board president. “We are going to take the compassionate road even if it will cost us.”

Even co-ops that have had relatively good luck enlisting retail tenants are being cautious. Consider 260 West End Avenue, a 74-unit building at West 72nd Street that went co-op in 1979 and, a year later, signed over its five retail units to the building’s sponsor, which appears to have controlled the storefronts until this year. In recent years, the co-op had been receiving about $50,000 a year in retail rents.

Before the master lease for those shops expired last month, the co-op secured commitments from four of the five existing tenants, which include a diner, dry cleaners, salon, deli and shoe repair shop.

Out of sensitivity for an ongoing process, Liz Osur-Marcal, the co-op’s treasurer, declined to say which tenant was leaving despite an offer of a “beyond generous” rent. Those staying inked shorter-than-usual five-year leases, added Ms. Osur-Marcal, who will tuck the rents into a reserve fund at her “very conservative” building. (The rents are lower than the co-op originally sought a year ago when negotiations began.)

“Some shareholders were contentious. They wanted rents to go down right away,” she said. But the save-now strategy is in part to protect against the soon-to-be-empty space. And of course, leases are no guarantee of future rents.

Still, the co-op is grateful for some occupancy. “I’m not the kind of woman who uses the word,” Ms. Osur-Marcal said, “but I am blessed.”

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