By Adelaide Polsinelli, vice chair of Compass Commercial Brokerage
Late last year, the New York City Council gave tax relief to independent storeowners in Manhattan south of 96th Street and north of Murray Street by exempting nearly 2,000 businesses from the city’s 3.9 percent commercial tax on base rent and giving hundreds more a partial tax break.
This legislation, which was strongly supported by the Real Estate Board of New York and other business groups, was created to help struggling mom-and-pops and is expected to save these businesses $10,000 a year.
In contrast, local officials today are floating ideas that they claim would protect commercial tenants but could actually end up harming retailers, property owners, and communities.
These proposals include requiring 10-year retail leases, imposing a fee or tax on the owners of vacant storefronts, and mandatory mediation and arbitration for all commercial lease renewals.
Such measures have been developed under the false assumption that retail vacancies are an epidemic on every commercial corridor throughout New York City. In fact, retail is vibrant throughout the city and local Business Improvement Districts are reporting stable vacancy rates. Retail square footage has grown by 20 percent since 2004 in Manhattan alone, according to REBNY, which also notes that between 1998 and 2017, New York City added 90,400 retail jobs.
Another misconception is that retail rents are continuing to climb when on the prime retail corridors such as Madison Avenue, retail rents have declined by 30 to 50 percent from their peak in 2015 and leveled off.
Most retailers such as restaurants, coffee shops, health clubs, dry cleaners, and other small shops are located on commercial corridors in neighborhoods where rents never spiked and have remained affordable. The argument could be made that these local businesses are being hurt more by increased costs due to wage and benefit regulations, fines from city agencies, community boards denying permits.
What also is absent from the conversation is an acknowledgement that retail nationwide is undergoing a systemic change brought about in part by the rise of online shopping. All retailers, even big box chains and malls outside of New York City, are trying to adjust to this new environment.
While the proposed Small Business Jobs Survival Act would require 10-year leases, many retailers today don’t want to commit to 10-year leases because they’re nervous about the future of the industry.
Landlords are being flexible by allowing pop-ups to give a retailer time to build a brand in a market and one- to three-year leases with options for longer term extensions. These shorter term leases limit risk for both parties.
The notion that landlords benefit from vacant storefronts also is false because owners still have to pay operating expenses and real property taxes, which have nearly doubled for properties with retail. It’s worth noting that real estate taxes contribute nearly 40 percent to the city’s entire tax base, and a vacancy tax would further hobble a property owners’ ability to adjust to a retail industry in transition.
Finally, requiring a landlord to renew a lease for an obsolete business would discourage new and creative business expansion. Instead of patronizing cutting-edge and vibrant stores and restaurants, consumers would be stuck with dinosaurs like the local DVD store or typewriter repair shop.
If a successful retailer with a thriving business model is restricted from expanding or effectively relocating because other spaces are being artificially controlled, their natural growth will be stifled.
The landlord, who in many cases is also a smaller, mom-and-pop-type owner, wouldn’t be able to attract a startup or growing business that would better serve the local community.