NYC’s Commercial Rent Control Debate Is Back, Vexing CRE

Renewed discussion of the commercial rent cap has put the real estate industry on high alert, and opponents are rushing to replace a regulation they say would harm both businesses and the city.

New York City Hall

“It’s not just, ‘Oh, rents are capped, boo hoo’ … That penalizes new entrepreneurs,” said Basha Gerhards, senior vice president of planning for New York’s Real Estate Board. and lowers the tax over time, and that’s problematic. “

Stephen Levin, a member of the New York City Council, introduced a law called. is known Introduced in 1796, in 2019, which would create a system for registering and regulating commercial rents and would apply to retail stores of SF 10,000 and below, manufacturing facilities of SF 25,000 and smaller and offices of SF 10,000 or less. The rules wThis must be approved annually by a seven-member Commercial Rental Policy Committee appointed by the Mayor.

More than 20 council members support the concept, which was the subject of a council hearing last week. Real estate companies claim that doing so would hinder small business growth, lower property value, and hurt the city’s recovery. With rental caps, landlords would avoid smaller operators and opt for larger providers with better creditworthiness, argues REBNY. Some say the city council does not have the constitutional authority to make such laws and it is immediately subject to legal challenge.

“Seventy-five people testified against the commercial rent brake, we hope that was well received,” said Gerhards.

Instead, REBNY is pushing for the abolition of commercial rental tax, which is a 3.9% gross rent tax paid by commercial tenants below 96th Street in Manhattan who have paid $ 250,000 or more in rent . It also suggests removing regulations for small businesses to allow easier and faster approval and licensing, and to move the city council to a tax break policy that incentivizes landlords, old businesses and businesses owned by women, colored people, immigrants, artists and new entrepreneurs in their buildings.

Commercial rents have plummeted in recent years, a trend that accelerated during the coronavirus pandemic. Only 1.3 million SF of retail space was rented per CBRE in the second quarter of the year, 60% less than in the same period last year, when about 3.3 million This corresponds to a decrease of 10.7% compared to the previous year.

But these declines followed years in which rents rose at breakneck pace; Across the city, average retail rents rose 22% between 2007 and 2017, according to an analysis by the New York City Comptroller.

And in some neighborhoods, the increases have been even more dramatic – SoHo’s average rent more than doubled from $ 60 per SF in 2007 to $ 126 in 2017. In the Upper East Side, average retail rents rose 87% from $ 79 per SF to $ 146 per year The analysis.

“It doesn’t interfere with an existing lease, but it takes away the incentive for landlords to rent to multinational chains that have deep pockets,” Levin told The Real Deal of his proposal. “It takes away the incentive for them to reserve space to wait for a chain of stores.”

Neither Levin nor Councilor Ben Kallos, a co-sponsor of the bill, were available for comment.

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Bisnow / Mark F. Bonner

Alfresco dining in New York City

But Manhattan Chamber of Commerce president Jessica Walker said it would hurt rather than help smaller businesses.

“If the bill is passed, it would put small businesses at a disadvantage, as landlords would have to overcome so many hurdles to work with small businesses that it would not be an incentive,” Walker told Bisnow. “After the crisis we are in a rental market and there are great offers for small businesses. It’s really hard to justify this legislation right now. “

Small businesses are disproportionately affected by the public health crisis. In April, LISC NYC, a community development nonprofit, conducted a survey of minority-owned small businesses in the five boroughs and found that three-quarters of these types of businesses fear they will be forced to close if they do not have immediate funding Getting support.

With the city’s ban on commercial evacuation in place until January, many people cannot be kicked out – although landlords can still demand judgments against tenants who have not paid the rent, they sometimes incur enormous debts that eventually become due.

Walker said, however, that legislation preventing rents from rising rapidly does not address the issue at hand.

“This misses the point that small businesses need now – businesses need customers,” she said. “Rent can be a big problem [but the focus should be] more about lease negotiations and trying to find out how to work with landlords. “

Alexander Lycoyannis, a litigation and appeals officer at Rosenberg & Estis, argues that there is no provision in the New York Constitution that allows the city’s legislature to put a rent cap; it must be done at the state level.

“If this law were passed there would be an immediate legal challenge,” he said. “[Legislators] see this as an opportunity to politically control the currently depressed commercial rent level and keep it low and prevent the free market from allowing it to rise. “

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Courtesy of the Manhattan Chamber of Commerce

Jessica Walker, President of the Manhattan Chamber of Commerce

The panel that represents restaurant owners in the city, the NYC Hospitality Alliance, said some of its members supported the policy, arguing that huge rent increases have destroyed independent restaurants and nightclubs. Rent regulation could “mitigate displacement” in gentrification areas, the group’s managing director, Andrew Rigie, wrote in an email.

He added members have also said landlords have significant influence in lease negotiations and “a level playing field” is required. Still, he said the group worked through different perspectives before deciding on a position.

“We have also heard from members of our industry who oppose this policy and have made compelling arguments that such a policy can encourage landlords to invest less in the maintenance and modernization of the properties in which businesses are located Incentivizing investment and new developments that have supported deter the growth and success of hospitality companies and may eliminate tenant improvements by landlords that make it difficult for new chefs / restaurateurs and undercapitalized entrepreneurs to open new restaurants, ”he said. “It could also curb the decline in retail rents and landlord contributions in the Covid-19 market.”

Undoubtedly, due to free market forces, shifts have created opportunities for some tenants. Some smaller retailers and e-commerce operators have taken the chance to get hold of space at a lower cost than in previous years. Some retailers and restaurateurs have even bought their own retail properties as prices have come down.

“Ultimately, the council is a legislative body, it has to make a decision,” said Gerhard’s terrible idea, or to listen to a noisy minority? “