Are NYC Legislators Turning Their Backs on Retail Landlords?

NEW YORK CITY–One might draw the conclusion, given recent news items, that Mayor Bill de Blasio and the City Council aren’t exactly landlord-friendly. The first shoe dropped earlier this year with published reports that de Blasio wanted to tax landlords for their vacant retail space. The proposal was a sort of negative incentive to re-tenant ASAP rather than wait for top-dollar rental rates, especially when paid by national chains.

The second shoe dropped with the October hearing of a long bandied-about legislation known as the Small Business Jobs Survival Act. According to Take Back NYC, a coalition of small businesses and advocates, the move is a three-legged stool, requiring:

• A minimum 10-year lease with the right to renewal;
• Equal renegotiation terms with recourse to binding arbitration by a third party if fair terms can not be found; and
• Restrictions to prevent landlords from passing their property taxes on to small business owners. These measures, says Take Back NYC, address “the failure of the commercial lease process.” They also apply to office tenants as well.

One of the main arguments proponents advance is the protection of local mom-and-pop retailers against “the onslaught of banks on every corner and Duane Reades everywhere else,” says retail broker Mark Kapnick, who is also EVP and principal at Lee & Associates/New York. Not surprisingly, not everyone shares the proponents’ confidence in the measure.

Making it clear that he’s speaking as an individual broker and not as Lee’s formal spokesperson, Kapnick believes the two legislative moves, if they gain traction, will hurt brokers, landlords and retailers, in that order. He tells GlobeSt.com that brokers “generate our fees from transactions. So how would a broker earn a fee if the law now dictates that a landlord must keep that tenant even though he may not want to?

“Landlords choose tenants based on certain criteria,” he continues, “namely, use, credit and what that tenancy might do for the rest of the asset. Landlords want credit tenants they can use to refinance an asset and pull out some equity. If a landlord is forced to take or keep a non-credit tenant, it certainly becomes more difficult, if not impossible.”

And being taxed for long-held vacant space, “is holding a gun to their heads. It borders on Big Brother getting involved in your business. That’s not what landlords signed up for when they bought their buildings.”

As for tenants, Kapnick doesn’t buy into the theory that if left to their own devices, landlords would simply opt for chains and kick mom and pop to the curb. In a clear “if you can make it here, you can make it anywhere” moment, Kapnick points out that smaller retailers can succeed anywhere in New York if they know their merchandise and they know their customer base.

“It’s not cheap to operate in New York City,” he says, “and you have to give a lot of credit to the retailers who come in here daily and make a living. If you’re on top of your game, you already have a loyal neighborhood following, and it doesn’t matter if you’re surrounded by 800-pound gorillas. So I don’t support blocking chains from coming into a neighborhood. That’s not the answer. The two can easily coexist if properly merchandised.” Besides, he adds, local retailers almost always service customers better—and at competitive margins.

Much like nature, brokers and landlords hate vacuums, and Kapnick says it’s unlike most NAV-oriented owners to sit on vacant space. “No one I know is saying ‘I’ll just wait.’ Landlords want to make deals.”

But they want to make deals to those who bring in the highest and best use, especially at a time when so much of the retail landscape is shifting beneath our feet. “What may be hot today may not be tomorrow,” he says. “Landlords want the flexibility to decide on their own who may or may not fit that criteria. And if it means waiting for the right tenant and losing money while they wait, that should be his or her prerogative.”

All has been quiet since the October hearing, Kapnick explains, and he sees no further action before the turn of the new year. GlobeSt.com, of course, will continue to monitor the situation.